Edgar Filing: Morningstar, Inc.

MORN_10Q_9.30.2011

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51280

MORNINGSTAR, INC.

(Exact Name of Registrant as Specified in its Charter)



Illinois		36-3297908
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

22 West Washington Street
Chicago, Illinois		60602
(Address of Principal Executive Offices)		(Zip Code)

(312) 696-6000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 28, 2011, there were 50,010,222 shares of the Company’s common stock, no par value, outstanding.

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MORNINGSTAR, INC. AND SUBSIDIARIES

INDEX



PART 1		FINANCIAL INFORMATION

	Item 1.	Unaudited Condensed Consolidated Financial Statements

			Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010

			Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010

			Unaudited Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

			Unaudited Condensed Consolidated Statement of Equity for the nine months ended September 30, 2011

			Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

			Notes to Unaudited Condensed Consolidated Financial Statements

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk

	Item 4.	Controls and Procedures


PART 2		OTHER INFORMATION

	Item 1.	Legal Proceedings

	Item 1A.	Risk Factors

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	Item 6.	Exhibits

SIGNATURE

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PART 1.	FINANCIAL INFORMATION


Item 1.	Unaudited Condensed Consolidated Financial Statements

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income



	Three months ended September 30						Nine months ended September 30
(in thousands except per share amounts)	2011			2010			2011			2010

Revenue	$	160,051		$	139,817		$	472,829		$	404,198

Operating expense (1):
Cost of goods sold	48,074			40,713			133,929			114,767
Development	13,482			12,703			39,151			35,491
Sales and marketing	27,253			22,881			80,502			69,877
General and administrative	26,431			23,462			83,255			67,211
Depreciation and amortization	10,947			9,897			31,712			28,082
Total operating expense	126,187			109,656			368,549			315,428

Operating income	33,864			30,161			104,280			88,770

Non-operating income (expense):
Interest income, net	797			512			1,142			1,692
Gain (loss) on sale of investments reclassified from other comprehensive income	(127		)	5			270			14
Other income (expense), net	(1,249		)	5,689			(1,208		)	4,342
Non-operating income (expense), net	(579		)	6,206			204			6,048

Income before income taxes and equity in net income of unconsolidated entities	33,285			36,367			104,484			94,818

Income tax expense	12,343			11,917			35,585			33,137

Equity in net income of unconsolidated entities	428			333			1,397			1,176

Consolidated net income	21,370			24,783			70,296			62,857

Net (income) loss attributable to the noncontrolling interest	10			(106		)	106			10

Net income attributable to Morningstar, Inc.	$	21,380		$	24,677		$	70,402		$	62,867

Net income per share attributable to Morningstar, Inc.:
Basic	$	0.42		$	0.50		$	1.40		$	1.27
Diluted	$	0.42		$	0.49		$	1.37		$	1.24

Dividends declared per common share	$	0.05		$	—		$	0.15		$	—

Weighted average shares outstanding:
Basic	50,278			49,401			50,082			49,157
Diluted	51,123			50,544			51,071			50,453

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	Three months ended September 30				Nine months ended September 30
	2011		2010		2011		2010
(1) Includes stock-based compensation expense of:
Cost of goods sold	$	1,117	$	960	$	3,068	$	2,582
Development	545		517		1,588		1,359
Sales and marketing	489		469		1,392		1,358
General and administrative	1,800		1,799		5,395		5,038
Total stock-based compensation expense	$	3,951	$	3,745	$	11,443	$	10,337

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income



	Three months ended September 30						Nine months ended September 30
(in thousands)	2011			2010			2011			2010

Consolidated net income	$	21,370		$	24,783		$	70,296		$	62,857

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(12,570		)	18,375			(6		)	5,634
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period	(1,871		)	634			(1,472		)	52
Reclassification of (gains) losses included in net income	81			(3		)	(171		)	(9		)
Other comprehensive income (loss)	(14,360		)	19,006			(1,649		)	5,677

Comprehensive income	7,010			43,789			68,647			68,534
Comprehensive (income) loss attributable to noncontrolling interest	(47		)	(250		)	52			(47		)
Comprehensive income attributable to Morningstar, Inc.	$	6,963		$	43,539		$	68,699		$	68,487

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets



	As of September 30			As of December 31
(in thousands except share amounts)	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	174,270		$	180,176
Investments	258,749			185,240
Accounts receivable, less allowance of $843 and $1,056, respectively	110,444			110,891
Deferred tax asset, net	3,814			2,860
Income tax receivable, net	10,045			10,459
Other	16,076			17,654
Total current assets	573,398			507,280
Property, equipment, and capitalized software, net	63,703			62,105
Investments in unconsolidated entities	24,761			24,262
Goodwill	319,367			317,661
Intangible assets, net	147,311			169,023
Other assets	5,726			5,971
Total assets	$	1,134,266		$	1,086,302

Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	42,184		$	42,680
Accrued compensation	59,908			62,404
Deferred revenue	146,877			146,267
Other	322			1,373
Total current liabilities	249,291			252,724
Accrued compensation	5,427			4,965
Deferred tax liability, net	17,490			19,975
Other long-term liabilities	25,930			27,213
Total liabilities	298,138			304,877

Equity:
Morningstar, Inc. shareholders’ equity:
Common stock, no par value, 200,000,000 shares authorized, of which 50,096,106 and 49,874,392 shares were outstanding as of September 30, 2011 and December 31, 2010, respectively	5			5
Treasury stock at cost, 832,820 shares as of September 30, 2011 and 279,456 shares as of December 31, 2010	(38,319		)	(6,641		)
Additional paid-in capital	483,822			458,426
Retained earnings	386,148			323,408
Accumulated other comprehensive income (loss):
Currency translation adjustment	4,431			4,503
Unrealized gain (loss) on available-for-sale investments	(1,016		)	615
Total accumulated other comprehensive income	3,415			5,118
Total Morningstar, Inc. shareholders’ equity	835,071			780,316
Noncontrolling interest	1,057			1,109
Total equity	836,128			781,425
Total liabilities and equity	$	1,134,266		$	1,086,302

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See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Equity

For the Nine months ended September 30, 2011



	Morningstar, Inc. Shareholders’ Equity
													Accumulated Other Comprehensive Income (Loss)
	Common Stock							Additional Paid-in Capital								Non Controlling Interests
(in thousands, except share amounts)	Shares Outstanding		Par Value		Treasury Stock			Additional Paid-in Capital		Retained Earnings						Non Controlling Interests			Total Equity

Balance as of December 31, 2010	49,874,392		$	5	$	(6,641	)	$	458,426	$	323,408		$	5,118		$	1,109		$	781,425

Net income (loss)			—		—			—		70,402			—			(106		)	70,296
Other comprehensive income (loss):
Unrealized loss on available-for-sale investments, net of income tax of $584			—		—			—		—			(1,472		)	—			(1,472		)
Reclassification of adjustments for gains included in net income, net of income tax of $98			—		—			—		—			(171		)	—			(171		)
Foreign currency translation adjustment, net			—		—			—		—			(60		)	54			(6		)
Other comprehensive income (loss), net			—		—			—		—			(1,703		)	54			(1,649		)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net	792,178		—		410			6,220		—			—			—			6,630
Stock-based compensation — restricted stock units			—		—			9,489		—			—			—			9,489
Stock-based compensation — restricted stock			—		—			1,752		—			—			—			1,752
Stock-based compensation - stock-options			—		—			202		—			—			—			202
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units			—		—			7,621		—			—			—			7,621
Common shares repurchased	(570,464	)	—		(32,088		)	—		—			—			—			(32,088		)
Dividends declared — common shares outstanding			—		—			—		(7,546		)	—			—			(7,546		)
Dividends declared — restricted stock units			—		—			112		(116		)	—			—			(4		)

Balance as of September 30, 2011	50,096,106		$	5	$	(38,319	)	$	483,822	$	386,148		$	3,415		$	1,057		$	836,128

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows



	Nine months ended September 30
(in thousands)	2011			2010

Operating activities
Consolidated net income	$	70,296		$	62,857
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization	31,712			28,082
Deferred income tax expense (benefit)	(1,559		)	1,769
Stock-based compensation expense	11,443			10,337
Provision for bad debt	1,076			253
Equity in net income of unconsolidated entities	(1,397		)	(1,176		)
Excess tax benefits from stock-option exercises and vesting of restricted stock units	(7,621		)	(4,885		)
Holding gain upon acquisition of additional ownership of equity method investments	—			(5,073		)
Other, net	1,607			724
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(403		)	(7,254		)
Other assets	1,996			(2,508		)
Accounts payable and accrued liabilities	(5,275		)	2,025
Accrued compensation	(3,242		)	(2,270		)
Income taxes payable	9,442			309
Deferred revenue	618			(1,938		)
Deferred rent	(984		)	442
Other liabilities	(1,393		)	(1,384		)
Cash provided by operating activities	106,316			80,310

Investing activities
Purchases of investments	(281,698		)	(128,043		)
Proceeds from maturities and sales of investments	205,421			177,197
Capital expenditures	(14,689		)	(7,701		)
Acquisitions, net of cash acquired	300			(88,697		)
Other, net	875			830
Cash used for investing activities	(89,791		)	(46,414		)

Financing activities
Proceeds from stock-option exercises, net	6,630			5,207
Excess tax benefits from stock-option exercises and vesting of restricted stock units	7,621			4,885
Common shares repurchased	(28,526		)	—
Dividends paid	(7,539		)	—
Other, net	(363		)	(529		)
Cash provided by (used for) financing activities	(22,177		)	9,563

Effect of exchange rate changes on cash and cash equivalents	(254		)	1,917
Net increase (decrease) in cash and cash equivalents	(5,906		)	45,376
Cash and cash equivalents—beginning of period	180,176			130,496
Cash and cash equivalents—end of period	$	174,270		$	175,872

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	28,437		$	29,594
Supplemental information of non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale investments	$	(2,598	)	$	71

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See notes to unaudited condensed consolidated financial statements.

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MORNINGSTAR, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Presentation of Interim Financial Information

The accompanying condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 28, 2011.

The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

EITF: Emerging Issues Task Force

FASB: Financial Accounting Standards Board

SAB: Staff Accounting Bulletin

SEC: Securities and Exchange Commission


2.	Summary of Significant Accounting Policies

We discuss our significant accounting policies in Note 3 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 28, 2011.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. In accordance with ASU No. 2011-05, we present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) in two separate but consecutive statements, our Consolidated Statement of Income and separately, a Consolidated Statement of Comprehensive Income. We no longer present total comprehensive income in our Consolidated Statement of Equity. In addition, we now show the effects of items reclassified from OCI to net income on the face of our Consolidated Statement of Income.

Also, effective January 1, 2011, we adopted FASB ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU 2009-13 supersedes EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables and establishes the accounting and reporting guidance for arrangements when a vendor performs multiple revenue-generating activities, addresses how to separate deliverables, and specifies how to measure and allocate arrangement consideration. We are applying this guidance for revenue arrangements entered into or materially modified from January 1, 2011. The adoption of ASU 2009-13 does not significantly affect either the timing or amount of our revenue recognition.

In conjunction with the adoption of ASU 2009-13, we have updated our disclosures concerning revenue recognition, as follows:

Revenue recognition: We recognize revenue in accordance with SEC SAB Topic 13, Revenue Recognition, ASC 605-25, Revenue Recognition: Multiple Element Arrangements, and ASC 985-605, Software: Revenue Recognition.

We recognize revenue when all of the following conditions are met:


•	There is persuasive evidence of an arrangement, as evidenced by a signed contract;


•	Delivery of our products and services is a prerequisite for recognition of revenue. If arrangements include an acceptance provision, we generally begin recognizing revenue upon the receipt of customer acceptance;


•	The amount of fees to be paid by the customer is fixed or determinable; and


•	The collectibility of the fees is reasonably assured.

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We generate revenue through sales of Licensed Data, Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar Equity Research, Premium Membership fees for Morningstar.com, and a variety of other investment-related products and services. We generally structure the revenue agreements for these offerings as licenses or subscriptions. We recognize revenue from licenses and subscription sales ratably as we deliver the product or service and over the service obligation period defined by the terms of the customer contract.

We also generate revenue from Internet advertising, primarily from “impression-based” contracts. For advertisers who use our cost-per-impression pricing, we charge fees each time we display their ads on our site.

Investment Consulting includes a broad range of services. Pricing for the consulting services is based on the scope of work and the level of service required, and includes asset-based fees for work we perform that involves investment management or acting as a subadvisor to investment portfolios. In arrangements that involve asset-based fees, we generally invoice clients quarterly in arrears based on average assets for the quarter. We recognize asset-based fees once the fees are fixed and determinable assuming all other revenue recognition criteria are met.

Our Retirement Solutions offerings help retirement plan participants plan and invest for retirement. We offer these services both through retirement plan providers (typically third-party asset management companies that offer proprietary mutual funds) and directly to plan sponsors (employers that offer retirement plans to their employees). For our Retirement Solutions offerings, we provide both a hosted solution as well as proprietary installed software advice solution. Clients can integrate the installed customized software into their existing systems to help investors accumulate wealth, transition into retirement, and manage income during retirement. The revenue arrangements for Retirement Solutions generally extend over multiple years. Our contracts may include one-time setup fees, implementation fees, technology licensing and maintenance fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. Upon customer acceptance, we recognize revenue ratably over the term of the agreement. We recognize asset-based fees and variable fees in excess of any minimum once the value is fixed and determinable.

Some of our revenue arrangements with our customers combine multiple products and services. These products and services may be provided at different points in time or over different time periods within the same arrangement. We allocate fees to the separate deliverables based on the deliverables’ relative selling price, which is generally based on the price we charge when the same deliverable is sold separately.

We record taxes imposed on revenue-producing transactions (such as sales, use, value-added, and some excise taxes) on a net basis; therefore, we exclude such taxes from revenue in our Consolidated Statements of Income.

Deferred revenue represents the portion of subscriptions billed or collected in advance of the service being provided, which we expect to recognize as revenue in future periods. Certain arrangements may have cancellation or refund provisions. If we make a refund, it typically reflects the amount collected from a customer for which we have not yet provided services. The refund therefore results in a reduction of deferred revenue.

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3.	Acquisitions, Goodwill, and Other Intangible Assets

2011 Acquisitions

We did not complete any acquisitions in the first nine months of 2011.

2010 Acquisitions

The table below summarizes the acquisitions completed during 2010. As of September 30, 2011, we did not make any significant changes to the purchase price allocations for the acquisitions that occurred in 2010. Additional information concerning these acquisitions can be found in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on February 28, 2011.



Acquisition	Description	Date of Acquisition	Purchase Price*
Footnoted business of Financial Fineprint Inc.	Footnoted is a highly regarded blog for professional money managers, analysts, and sophisticated individual investors. Footnoted Pro, a service for institutional investors, provides insight on actionable items and trends in SEC filings.	February 1, 2010	Not separately disclosed
Aegis Equities Research	A leading provider of independent equity research in Sydney, Australia.	April 1, 2010	$10.3 million
Old Broad Street Research Ltd.	A premier provider of fund research, ratings, and investment consulting services in the United Kingdom.	April 12, 2010	$16.8 million
Realpoint, LLC	A Nationally Recognized Statistical Rating Organization (NRSRO) that specializes in structured finance.	May 3, 2010	$38.4 million in cash and 199,174 shares of restricted stock (valued at approximately $10 million as of the date the acquisition was announced in March 2010)
Morningstar Danmark A/S (Morningstar Denmark)	Acquisition of the 75% ownership interest not previously owned by Morningstar, bringing our ownership to 100%.	July 1, 2010	$14.6 million
Seeds Group	A leading provider of investment consulting services and fund research in France.	July 1, 2010	Not separately disclosed
Annuity Intelligence business of Advanced Sales and Marketing Corporation	The Annuity Intelligence business provides a web-based service that leverages a proprietary database of more than 1,000 variable annuities that includes "plain-English" translations of complex but important information found in prospectuses and other public filings.	November 1, 2010	$14.1 million

____________________________________________

* Total purchase price, less cash acquired, subject to post-closing adjustments.

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Goodwill

The following table shows the changes in our goodwill balances from December 31, 2010 to September 30, 2011:



	($000)
Balance as of December 31, 2010	$	317,661
Adjustments to 2010 acquisitions	1,387
Other, primarily currency translation	319
Balance as of September 30, 2011	$	319,367

We did not record any impairment losses in the third quarter of 2011 and 2010, respectively. We perform our annual impairment reviews in the fourth quarter.

The following table summarizes our intangible assets:



	As of September 30, 2011								As of December 31, 2010
($000)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)
Intellectual property	$	31,979	$	(18,529	)	$	13,450	9	$	33,990	$	(15,970	)	$	18,020	10
Customer-related assets	135,025		(49,548		)	85,477		12	130,675		(39,951		)	90,724		11
Supplier relationships	240		(81		)	159		20	240		(72		)	168		20
Technology-based assets	80,597		(32,916		)	47,681		9	78,651		(25,682		)	52,969		9
Non-competition agreement	1,724		(1,180		)	544		4	1,751		(909		)	842		4
Intangible assets related to acquisitions with preliminary purchase price allocations	—		—			—		—	6,407		(107		)	6,300		10
Total intangible assets	$	249,565	$	(102,254	)	$	147,311	10	$	251,714	$	(82,691	)	$	169,023	10

The following table summarizes our amortization expense related to intangible assets:



	Three months ended September 30				Nine months ended September 30
($000)	2011		2010		2011		2010
Amortization expense	$	6,894	$	6,219	$	20,039	$	17,535

We amortize intangible assets using the straight-line method over their expected economic useful lives.

We expect intangible amortization expense for 2011 and subsequent years as follows:



	($000)
2011	$	26,287
2012	23,874
2013	21,217
2014	19,989
2015	19,118
2016	14,527

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Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, changes in the estimated average useful life, and currency translations.


4.	Income Per Share

We compute income per share based on the two-class method, in accordance with FASB ASC 260-10-45-59A, Participating Securities and the Two Class Method. We issued restricted shares in conjunction with the Realpoint acquisition. Because the restricted shares contain nonforfeitable rights to dividends, they meet the criteria of a participating security. Under the two-class method, earnings are allocated between common stock and participating securities. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. We reduce our reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.

ASC 260-10-45-59A requires the dilutive effect of participating securities to be calculated using the more dilutive of the treasury stock or the two-class method. We have determined the two-class method to be the more dilutive of the two methods. As such, we adjusted the earnings allocated to common stock shareholders in the basic earnings per share calculation for the reallocation of undistributed earnings to participating securities to calculate diluted earnings per share.

The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

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	Three months ended September 30						Nine months ended September 30
(in thousands, except per share amounts)	2011			2010			2011			2010

Basic net income per share attributable to Morningstar, Inc.:
Net income attributable to Morningstar, Inc.:	$	21,380		$	24,677		$	70,402		$	62,867
Less: Distributed earnings available to participating securities	(8		)	(10		)	(25		)	(10		)
Less: Undistributed earnings available to participating securities	(57		)	(89		)	(189		)	(242		)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	$	21,315		$	24,578		$	70,188		$	62,615

Weighted average common shares outstanding	50,278			49,401			50,082			49,157

Basic net income per share attributable to Morningstar, Inc.	$	0.42		$	0.50		$	1.40		$	1.27

Diluted net income per share attributable to Morningstar, Inc.:
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	$	21,315		$	24,578		$	70,188		$	62,615
Add: Undistributed earnings allocated to participating securities	57			89			189			242
Less: Undistributed earnings reallocated to participating securities	(56		)	(87		)	(186		)	(236		)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders	$	21,316		$	24,580		$	70,191		$	62,621

Weighted average common shares outstanding	50,278			49,401			50,082			49,157
Net effect of dilutive stock options and restricted stock units	845			1,143			989			1,296
Weighted average common shares outstanding for computing diluted income per share	51,123			50,544			51,071			50,453

Diluted net income per share attributable to Morningstar, Inc.	$	0.42		$	0.49		$	1.37		$	1.24

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5.	Segment and Geographical Area Information

Morningstar has two operating segments:


•	Investment Information. The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.

The largest products in this segment based on revenue are Licensed Data, Morningstar Advisor Workstation (including Morningstar Office), Morningstar.com, Morningstar Direct, Morningstar Integrated Web Tools (formerly Morningstar Site Builder), and Morningstar Principia. Licensed Data is a set of investment data spanning all of our investment databases, including real-time pricing data, and is available through electronic data feeds. Advisor Workstation is a web-based investment planning system for advisors. Advisor Workstation is available in two editions: Morningstar Office for independent financial advisors and an enterprise edition for financial advisors affiliated with larger firms. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Direct is a web-based institutional research platform. Morningstar Integrated Web Tools is a set of services that helps institutional clients build customized websites or enhance their existing sites with Morningstar’s online tools and components. Principia is our CD-ROM-based investment research and planning software for advisors.

The Investment Information segment also includes Morningstar Equity Research, which we sell to other companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.


•	Investment Management. The Investment Management segment includes all of our asset management operations, which earn the majority of their revenue from asset-based fees.

The key products and services in this segment based on revenue are Investment Consulting, which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Solutions, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund, ETF, and stock portfolios tailored to meet a range of investment time horizons, risk levels, and investment strategies that financial advisors can use for their clients’ taxable and tax-deferred accounts.

Our segment accounting policies are the same as those described in Note 2, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s ability to generate cash flow. This information is one of the criteria used by our chief operating decision maker in determining how to allocate resources to each segment. We include capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions in the Corporate Items category. Our segment disclosures are consistent with the business segment information provided to our chief operating decision maker on a recurring basis; for that reason, we don’t present balance sheet information by segment. We disclose goodwill by segment in accordance with the requirements of FASB ASC 350-20-50, Intangibles - Goodwill - Disclosure.

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The following tables show selected segment data for the three and nine months ended September 30, 2011 and 2010:



	Three months ended September 30, 2011
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	125,804	$	34,247	$	—		$	160,051
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	89,652		15,587		6,050			111,289
Stock-based compensation expense	2,609		556		786			3,951
Depreciation and amortization	2,117		42		8,788			10,947
Operating income (loss)	$	31,426	$	18,062	$	(15,624	)	$	33,864

U.S. capital expenditures								$	4,560
Non-U.S. capital expenditures								$	1,711

U.S. revenue								$	112,790
Non-U.S. revenue								$	47,261



	Three months ended September 30, 2010
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	112,055	$	27,762	$	—		$	139,817
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	75,129		13,670		7,215			96,014
Stock-based compensation expense	2,326		525		894			3,745
Depreciation and amortization	1,789		44		8,064			9,897
Operating income (loss)	$	32,811	$	13,523	$	(16,173	)	$	30,161

U.S. capital expenditures								$	1,975
Non-U.S. capital expenditures								$	1,887

U.S. revenue								$	99,933
Non-U.S. revenue								$	39,884



	Nine months ended September 30, 2011
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	374,319	$	98,510	$	—		$	472,829
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	259,899		43,258		22,237			325,394
Stock-based compensation expense	7,567		1,529		2,347			11,443
Depreciation and amortization	6,023		124		25,565			31,712
Operating income (loss)	$	100,830	$	53,599	$	(50,149	)	$	104,280

U.S. capital expenditures								$	8,084
Non-U.S. capital expenditures								$	6,605

U.S. revenue								$	334,395
Non-U.S. revenue								$	138,434

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	Nine months ended September 30, 2010
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	324,600	$	79,598	$	—		$	404,198
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	217,559		36,768		22,682			277,009
Stock-based compensation expense	5,926		1,557		2,854			10,337
Depreciation and amortization	5,016		136		22,930			28,082
Operating income (loss)	$	96,099	$	41,137	$	(48,466	)	$	88,770

U.S. capital expenditures								$	3,607
Non-U.S. capital expenditures								$	4,094

U.S. revenue								$	291,529
Non-U.S. revenue								$	112,669



	As of September 30, 2011
($000)	Investment Information		Investment Management		Corporate Items		Total
Goodwill	$	277,246	$	42,121	$	—	$	319,367

U.S. long-lived assets							$	41,066
Non-U.S. long-lived assets							$	22,637



	As of December 31, 2010
($000)	Investment Information		Investment Management		Corporate Items		Total
Goodwill	$	275,611	$	42,050	$	—	$	317,661

U.S. long-lived assets							$	39,496
Non-U.S. long-lived assets							$	22,609


6.	Investments and Fair Value Measurements

We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments in three categories: available-for-sale, held-to-maturity, and trading. We monitor the concentration, diversification, maturity, and liquidity of our investment portfolio, which is primarily invested in fixed-income securities, and classify our investment portfolio as shown below:



	As of September 30		As of December 31
($000)	2011		2010
Available-for-sale	$	238,990	$	173,072
Held-to-maturity	14,813		7,476
Trading securities	4,946		4,692
Total	$	258,749	$	185,240

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The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:



	As of September 30, 2011									As of December 31, 2010
($000)	Cost		Unrealized Gain		Unrealized Loss			Fair Value		Cost		Unrealized Gain		Unrealized Loss			Fair Value
Available-for-sale:
Government obligations	$	122,991	$	54	$	(186	)	$	122,859	$	113,597	$	36	$	(56	)	$	113,577
Corporate bonds	65,079		27		(293		)	64,813		42,839		63		(24		)	42,878
Commercial paper	34,941		2		(18		)	34,925		2,994		—		(3		)	2,991
Equity securities and exchange-traded funds	8,411		203		(1,197		)	7,417		4,510		418		(6		)	4,922
Mutual funds	9,180		45		(249		)	8,976		8,146		558		—			8,704
Total	$	240,602	$	331	$	(1,943	)	238,990		$	172,086	$	1,075	$	(89	)	$	173,072

Held-to-maturity:
Certificates of deposit	$	14,813	$	—	$	—		$	14,813	$	7,476	$	—	$	—		$	7,476

As of September 30, 2011 and December 31, 2010, investments with unrealized losses for greater than a 12-month period were not material to the Condensed Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of September 30, 2011 and December 31, 2010. The expected maturities of certain fixed-income securities may differ from their contractual maturities because some of these holdings have call features that allow the issuers the right to prepay obligations without penalties.



	As of September 30, 2011				As of December 31, 2010
($000)	Cost		Fair Value		Cost		Fair Value
Available-for-sale:
Due in one year or less	$	177,348	$	177,124	$	85,990	$	85,964
Due in one to three years	45,663		45,473		73,440		73,482
Equity securities, exchange-traded funds, and mutual funds	17,591		16,393		12,656		13,626
Total	$	240,602	$	238,990	$	172,086	$	173,072

Held-to-maturity:
Due in one year or less	$	14,808	$	14,808	$	7,223	$	7,223
Due in one to three years	5		5		253		253
Total	$	14,813	$	14,813	$	7,476	$	7,476

Held-to-maturity investments include a $1,600,000 certificate of deposit held as collateral against two bank guarantees for our office lease in Australia.

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The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Condensed Consolidated Statements of Income:



	Nine months ended September 30
($000)	2011		2010
Realized gains	$	270	$	17
Realized losses	—		(3		)
Realized gains, net	$	270	$	14

The following table shows the net unrealized loss on trading securities as recorded in our Condensed Consolidated Statements of Income:



	Nine months ended September 30
($000)	2011		2010
Unrealized loss, net	$	810	$	75

The fair value of our assets subject to fair value measurements and the necessary disclosures are as follows:



	Fair Value		Fair Value Measurements as of September 30, 2011
	as of		Using Fair Value Hierarchy
($000)	September 30, 2011		Level 1		Level 2		Level 3
Available-for-sale investments
Government obligations	$	122,859	$	—	$	122,859	$	—
Corporate bonds	64,813		—		64,813		—
Commercial paper	34,925		—		34,925		—