Edgar Filing: Morningstar, Inc.

MORN_10Q_03.31.2012

Table of Contents

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 March 31, 2012

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

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As of April 27, 2012, there were 49,594,723 shares of the Company’s common stock, no par value, outstanding.

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MORNINGSTAR, INC. AND SUBSIDIARIES

INDEX



PART 1		FINANCIAL INFORMATION		4

	Item 1.	Financial Statements		4

			Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011	4

			Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011	4

			Unaudited Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	4

			Unaudited Condensed Consolidated Statement of Equity for the three months ended March 31, 2012	4

			Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	5

			Notes to Unaudited Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk		28

	Item 4.	Controls and Procedures		28


PART 2		OTHER INFORMATION		29

	Item 1.	Legal Proceedings		29

	Item 1A.	Risk Factors		29

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29

	Item 6.	Exhibits		30

SIGNATURE				31

EXHIBIT INDEX

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PART 1.	FINANCIAL INFORMATION


Item 1.	Financial Statements

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income



	Three months ended March 31
(in thousands except per share amounts)	2012			2011

Revenue	$	160,759		$	151,767

Operating expense (1):
Cost of goods sold	50,316			40,669
Development	13,365			11,988
Sales and marketing	28,326			26,482
General and administrative	28,178			30,617
Depreciation and amortization	10,175			10,202
Total operating expense	130,360			119,958

Operating income	30,399			31,809

Non-operating income (expense):
Interest income, net	869			524
Other income (expense), net	(210		)	250
Non-operating income, net	659			774

Income before income taxes and equity in net income of unconsolidated entities	31,058			32,583

Income tax expense	11,511			10,518

Equity in net income of unconsolidated entities	566			374

Consolidated net income	20,113			22,439

Net loss attributable to the noncontrolling interest	24			98

Net income attributable to Morningstar, Inc.	$	20,137		$	22,537

Net income per share attributable to Morningstar, Inc.:
Basic	$	0.40		$	0.45
Diluted	$	0.40		$	0.44

Dividends per common share:
Dividends declared per common share	$	0.10		$	0.05
Dividends paid per common share	$	0.10		$	0.05

Weighted average shares outstanding:
Basic	49,938			49,800
Diluted	50,758			50,953




	Three months ended March 31
	2012		2011
(1) Includes stock-based compensation expense of:
Cost of goods sold	$	1,089	$	879
Development	499		471
Sales and marketing	479		422
General and administrative	1,799		1,877
Total stock-based compensation expense	$	3,866	$	3,649

See notes to unaudited condensed consolidated financial statements.

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income



	Three months ended March 31
(in thousands)	2012		2011

Consolidated net income	$	20,113	$	22,439

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	6,965		9,302
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period	909		438
Reclassification of (gains) losses included in net income	55		(41		)
Other comprehensive income	7,929		9,699

Comprehensive income	28,042		32,138
Comprehensive loss attributable to noncontrolling interest	107		112
Comprehensive income attributable to Morningstar, Inc.	$	28,149	$	32,250

See notes to unaudited condensed consolidated financial statements.

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets



	As of March 31			As of December 31
(in thousands except share amounts)	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	165,348		$	200,437
Investments	278,298			269,755
Accounts receivable, less allowance of $951 and $835, respectively	121,396			113,312
Deferred tax asset, net	4,570			5,104
Income tax receivable, net	3,554			7,445
Other	20,864			15,980
Total current assets	594,030			612,033
Property, equipment, and capitalized software, net	73,576			68,196
Investments in unconsolidated entities	34,943			27,642
Goodwill	322,016			318,492
Intangible assets, net	134,994			139,809
Other assets	6,826			5,912
Total assets	$	1,166,385		$	1,172,084

Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	46,032		$	41,403
Accrued compensation	39,951			73,124
Deferred revenue	171,013			155,494
Other	370			612
Total current liabilities	257,366			270,633
Accrued compensation	6,171			5,724
Deferred tax liability, net	14,556			15,940
Deferred rent	15,613			14,604
Other long-term liabilities	8,413			8,167
Total liabilities	302,119			315,068

Equity:
Morningstar, Inc. shareholders’ equity:
Common stock, no par value, 200,000,000 shares authorized, of which 49,895,998 and 50,083,940 shares were outstanding as of March 31, 2012 and December 31, 2011, respectively	5			5
Treasury stock at cost, 1,419,936 shares as of March 31, 2012 and 980,177 shares as of December 31, 2011	(73,476		)	(46,701		)
Additional paid-in capital	502,488			491,432
Retained earnings	424,086			409,022
Accumulated other comprehensive income (loss):
Currency translation adjustment	8,984			1,936
Unrealized gain (loss) on available-for-sale investments	640			(324		)
Total accumulated other comprehensive income	9,624			1,612
Total Morningstar, Inc. shareholders’ equity	862,727			855,370
Noncontrolling interest	1,539			1,646
Total equity	864,266			857,016
Total liabilities and equity	$	1,166,385		$	1,172,084

See notes to unaudited condensed consolidated financial statements.

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Equity

For the three months ended March 31, 2012



	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, 2011	50,083,940		$	5	$	(46,701	)	$	491,432	$	409,022		$	1,612	$	1,646		$	857,016

Net income (loss)			—		—			—		20,137			—		(24		)	20,113
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments, net of income tax of $503			—		—			—		—			909		—			909
Reclassification of adjustments for losses included in net income, net of income tax of $31			—		—			—		—			55		—			55
Foreign currency translation adjustment, net			—		—			—		—			7,048		(83		)	6,965
Other comprehensive income (loss), net			—		—			—		—			8,012		(83		)	7,929
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net	253,963		—		103			3,803		—			—		—			3,906
Stock-based compensation — restricted stock units			—		—			3,278		—			—		—			3,278
Stock-based compensation — restricted stock			—		—			444		—			—		—			444
Stock-based compensation — stock-options			—		—			144		—			—		—			144
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units			—		—			3,313		—			—		—			3,313
Common shares repurchased	(441,905	)	—		(26,878		)	—		—			—		—			(26,878		)
Dividends declared — common shares outstanding			—		—			—		(4,998		)	—		—			(4,998		)
Dividends declared — restricted stock units			—		—			74		(75		)	—		—			(1		)

Balance as of March 31, 2012	49,895,998		$	5	$	(73,476	)	$	502,488	$	424,086		$	9,624	$	1,539		$	864,266

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows



	Three months ended March 31
(in thousands)	2012			2011

Operating activities
Consolidated net income	$	20,113		$	22,439
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization	10,175			10,202
Deferred income taxes	(1,453		)	(677		)
Stock-based compensation expense	3,866			3,649
Provision for bad debt	525			285
Equity in net income of unconsolidated entities	(566		)	(374		)
Excess tax benefits from stock-option exercises and vesting of restricted stock units	(3,313		)	(4,122		)
Other, net	310			(512		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(7,439		)	(3,357		)
Other assets	(3,758		)	1,453
Accounts payable and accrued liabilities	703			(2,600		)
Accrued compensation	(35,168		)	(26,876		)
Income taxes—current	7,369			5,297
Deferred revenue	14,165			9,847
Deferred rent	716			(399		)
Other liabilities	(621		)	91
Cash provided by operating activities	5,624			14,346

Investing activities
Purchases of investments	(344,391		)	(67,352		)
Proceeds from maturities and sales of investments	338,146			62,359
Capital expenditures	(8,994		)	(5,037		)
Purchases of cost method investments	(6,750		)	—
Other, net	9			(14		)
Cash used for investing activities	(21,980		)	(10,044		)

Financing activities
Proceeds from stock-option exercises, net	3,906			4,921
Excess tax benefits from stock-option exercises and vesting of restricted stock units	3,313			4,122
Common shares repurchased	(23,033		)	—
Dividends paid	(5,012		)	(2,494		)
Other, net	(17		)	(214		)
Cash provided by (used for) financing activities	(20,843		)	6,335

Effect of exchange rate changes on cash and cash equivalents	2,110			2,561
Net increase (decrease) in cash and cash equivalents	(35,089		)	13,198
Cash and cash equivalents—beginning of period	200,437			180,176
Cash and cash equivalents—end of period	$	165,348		$	193,374

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	5,553		$	6,962
Supplemental information of non-cash investing and financing activities:
Unrealized gain on available-for-sale investments	$	1,498		$	609

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, 2011, filed with the SEC on February 24, 2012.

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

FASB: Financial Accounting Standards Board

SEC: Securities and Exchange Commission


2.	Summary of Significant Accounting Policies

We discuss our significant accounting policies in Note 2 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012.

In addition, effective January 1, 2012, we adopted FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of ASU No. 2011-04 did not have a material impact on our Consolidated Financial Statements.


3.	Goodwill and Other Intangible Assets

Goodwill

The following table shows the changes in our goodwill balances from December 31, 2011 to March 31, 2012:



	($000)
Balance as of December 31, 2011	$	318,492
Net change, primarily currency translation	3,524
Balance as of March 31, 2012	$	322,016

We did not record any significant impairment losses in the first quarter of 2012 or 2011. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets:



	As of March 31, 2012								As of December 31, 2011
($000)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)
Intellectual property	$	32,331	$	(21,214	)	$	11,117	9	$	32,293	$	(20,455	)	$	11,838	9
Customer-related assets	135,888		(56,268		)	79,620		12	134,396		(52,611		)	81,785		12
Supplier relationships	240		(87		)	153		20	240		(84		)	156		20
Technology-based assets	81,240		(37,523		)	43,717		9	80,694		(35,130		)	45,564		9
Non-competition agreement	1,766		(1,379		)	387		4	1,751		(1,285		)	466		4
Total intangible assets	$	251,465	$	(116,471	)	$	134,994	10	$	249,374	$	(109,565	)	$	139,809	10

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



	Three months ended March 31
($000)	2012		2011
Amortization expense	$	6,055	$	6,513

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

We expect intangible amortization expense for 2012 and subsequent years as follows:



	($000)
2012	$	24,040
2013	21,319
2014	20,064
2015	19,192
2016	14,570
2017	9,967

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

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



	Three months ended March 31
(in thousands, except per share amounts)	2012			2011

Basic net income per share attributable to Morningstar, Inc.:
Net income attributable to Morningstar, Inc.:	$	20,137		$	22,537
Less: Distributed earnings available to participating securities	(16		)	(10		)
Less: Undistributed earnings available to participating securities	(46		)	(79		)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	$	20,075		$	22,448

Weighted average common shares outstanding	49,938			49,800

Basic net income per share attributable to Morningstar, Inc.	$	0.40		$	0.45

Diluted net income per share attributable to Morningstar, Inc.:
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	$	20,075		$	22,448
Add: Undistributed earnings allocated to participating securities	46			79
Less: Undistributed earnings reallocated to participating securities	(45		)	(78		)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders	$	20,076		$	22,449

Weighted average common shares outstanding	49,938			49,800
Net effect of dilutive stock options and restricted stock units	820			1,153
Weighted average common shares outstanding for computing diluted income per share	50,758			50,953

Diluted net income per share attributable to Morningstar, Inc.	$	0.40		$	0.44

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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 Morningstar Data (formerly Licensed Data), Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, and Morningstar Principia. Morningstar Data is a set of investment data spanning all of our investment databases, including real-time pricing and commodity 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 Direct is a web-based institutional research platform. Morningstar.com includes both Premium Memberships and Internet advertising sales. 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 distribute through several channels. We sell Morningstar Equity Research to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.

The Investment Information segment also includes Morningstar Credit Research and Morningstar Structured Credit Ratings. Morningstar Structured Credit Ratings is provided by Morningstar Credit Ratings, LLC, a Nationally Recognized Statistical Rating Organization specializing in structured finance. It offers securities ratings, research, surveillance services, and data to help institutional investors identify risk in commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS).

We also offer a variety of financial communications and newsletters, other institutional and advisor software,

and investment indexes.


•	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 Advisory Services (formerly 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, exchange-traded fund, and stock portfolios tailored to meet a range of investment time horizons and risk levels that financial advisors can use for their clients' taxable and tax-deferred accounts. In addition, we offer Managed Portfolios through our subsidiary Ibbotson Australia which provides asset management services primarily to institutional clients and individual investors.

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.

The following tables present information about our operating segments and by geographical area:



	Three months ended March 31, 2012
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	126,925	$	33,834	$	—		$	160,759
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	93,438		15,953		6,928			116,319
Stock-based compensation expense	2,559		551		756			3,866
Depreciation and amortization	2,244		39		7,892			10,175
Operating income (loss)	$	28,684	$	17,291	$	(15,576	)	$	30,399

U.S. capital expenditures								$	7,397
Non-U.S. capital expenditures								$	1,597

	Three months ended March 31, 2011
($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	120,399	$	31,368	$	—		$	151,767
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	83,763		13,838		8,506			106,107
Stock-based compensation expense	2,470		442		737			3,649
Depreciation and amortization	1,859		42		8,301			10,202
Operating income (loss)	$	32,307	$	17,046	$	(17,544	)	$	31,809

U.S. capital expenditures								$	1,930
Non-U.S. capital expenditures								$	3,107



	As of March 31, 2012
($000)	Investment Information		Investment Management		Corporate Items		Total
Goodwill	$	280,320	$	41,696	$	—	$	322,016



	As of December 31, 2011
($000)	Investment Information		Investment Management		Corporate Items		Total
Goodwill	$	277,059	$	41,433	$	—	$	318,492



External revenue by geographical area
	Three months ended March 31
($000)	2012		2011
United States	$	114,469	$	108,181
United Kingdom	13,736		12,847
Europe, excluding the United Kingdom	12,055		11,580
Australia	9,348		9,293
Canada	7,350		6,617
Asia, excluding Japan	2,369		2,064
Japan	979		931
Other	453		254
Total Non-U.S.	46,290		43,586

Total	$	160,759	$	151,767



Long-lived assets by geographical area
	As of March 31		As of December 31
($000)	2012		2011
United States	$	49,769	$	44,572
United Kingdom	7,967		7,512
Europe, excluding the United Kingdom	2,826		2,629
Australia	1,384		1,415
Canada	2,063		2,076
Asia, excluding Japan	9,282		9,656
Japan	240		282
Other	45		54
Total Non-U.S.	23,807		23,624

Total	$	73,576	$	68,196


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 March 31		As of December 31
($000)	2012		2011
Available-for-sale	$	255,195	$	247,917
Held-to-maturity	17,023		16,347
Trading securities	6,080		5,491
Total	$	278,298	$	269,755

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 March 31, 2012									As of December 31, 2011
($000)	Cost		Unrealized Gain		Unrealized Loss			Fair Value		Cost		Unrealized Gain		Unrealized Loss			Fair Value
Available-for-sale:
Government obligations	$	116,672	$	69	$	(430	)	$	116,311	$	139,099	$	72	$	(402	)	$	138,769
Corporate bonds	91,259		62		(241		)	91,080		61,589		14		(280		)	61,323
Commercial paper	28,117		6		(6		)	28,117		29,964		2		(7		)	29,959
Equity securities and exchange-traded funds	8,839		808		(221		)	9,426		8,461		368		(558		)	8,271
Mutual funds	9,304		988		(31		)	10,261		9,298		363		(66		)	9,595
Total	$	254,191	$	1,933	$	(929	)	255,195		$	248,411	$	819	$	(1,313	)	$	247,917

Held-to-maturity:
Certificates of deposit	$	17,023	$	—	$	—		$	17,023	$	16,347	$	—	$	—		$	16,347

As of March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011. 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 March 31, 2012				As of December 31, 2011
($000)	Cost		Fair Value		Cost		Fair Value
Available-for-sale:
Due in one year or less	$	166,640	$	166,276	$	155,651	$	155,247
Due in one to two years	69,408		69,232		75,001		74,804
Equity securities, exchange-traded funds, and mutual funds	18,143		19,687		17,759		17,866
Total	$	254,191	$	255,195	$	248,411	$	247,917

Held-to-maturity:
Due in one year or less	$	17,018	$	17,018	$	16,342	$	16,342
Due in one to three years	5		5		5		5
Total	$	17,023	$	17,023	$	16,347	$	16,347

As of March 31, 2012 and December 31, 2011, 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.

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:



	Three months ended March 31
($000)	2012			2011
Realized gains	$	212		$	64
Realized losses	(298		)	—
Realized gains (losses), net	$	(86	)	$	64

We determine realized gains and losses using the specific identification method.

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



	Three months ended March 31
($000)	2012		2011
Unrealized gains, net	$	428	$	45

The fair value of our assets subject to fair value measurements and that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement, are as follows:



	Fair Value		Fair Value Measurements as of March 31, 2012
	as of		Using Fair Value Hierarchy
($000)	March 31, 2012		Level 1		Level 2		Level 3
Available-for-sale investments
Government obligations	$	116,311	$	—	$	116,311	$	—
Corporate bonds	91,080		—		91,080		—
Commercial paper	28,117		—		28,117		—
Equity securities and exchange-traded funds	9,426		9,426		—		—
Mutual funds	10,261		10,261		—		—
Trading securities	6,080		6,080		—		—
Cash equivalents	14,979		14,979		—		—
Total	$	276,254	$	40,746	$	235,508	$	—



	Fair Value		Fair Value Measurements as of December 31, 2011
	as of		Using Fair Value Hierarchy
($000)	December 31, 2011		Level 1		Level 2		Level 3
Available-for-sale investments
Government obligations	$	138,769	$	—	$	138,769	$	—
Corporate bonds	61,323		—		61,323		—
Commercial paper	29,959		—		29,959		—
Equity securities and exchange-traded funds	8,271		8,271		—		—
Mutual funds	9,595		9,595		—		—
Trading securities	5,491		5,491		—		—
Cash equivalents	30,818		30,818		—		—
Total	$	284,226	$	54,175	$	230,051	$	—


Level 1:	Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.


Level 2:	Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.


Level 3:	Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Based on our analysis of the nature and risks of our investments in equity securities and mutual funds, we have determined that presenting these investment categories each in the aggregate is appropriate.

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from observable market data. We did not hold any securities categorized as Level 3 as of March 31, 2012 or December 31, 2011.


7.	Investments in Unconsolidated Entities

Our investments in unconsolidated entities consist primarily of the following:



	As of March 31		As of December 31
($000)	2012		2011
Investment in MJKK	$	20,172	$	19,662
Other equity method investments	2,801		2,807
Investments accounted for using the cost method	11,970		5,173
Total investments in unconsolidated entities	$	34,943	$	27,642

Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s shares are traded on the Osaka Stock Exchange, “Hercules Market,” using the ticker 4765. We account for our investment in MJKK using the equity method. The following table summarizes our ownership percentage in MJKK and the market value of this investment based on MJKK’s publicly quoted share price:



	As of March 31			As of December 31
	2012			2011
Morningstar’s approximate ownership of MJKK	33		%	33		%

Approximate market value of Morningstar’s ownership in MJKK:
Japanese yen (¥000)	¥	3,366,418		¥	2,797,704
Equivalent U.S. dollars ($000)	$	40,936		$	36,146

Other Equity Method Investments. As of March 31, 2012 and December 31, 2011, other equity method investments consist of our investment in Morningstar Sweden AB (Morningstar Sweden) and YCharts, Inc. (YCharts). Morningstar Sweden develops and markets products and services customized for its respective market. Our ownership interest in Morningstar Sweden was approximately 24% as of March 31, 2012 and December 31, 2011. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 20% as of March 31, 2012 and December 31, 2011.

We did not record any impairment losses on our equity method investments in the first three months of 2012 or 2011.

Cost Method Investments. As of March 31, 2012 and December 31, 2011, our cost method investments consist of minority investments in Pitchbook Data, Inc. (Pitchbook) and Bundle Corporation (Bundle). As of March 31, 2012, our cost method investments also include HelloWallet LLC (HelloWallet). Pitchbook offers detailed data and information about private equity transactions, investors, companies, limited partners, and service providers. Bundle is a social media company dedicated to helping people make smarter spending and saving choices. HelloWallet is a provider of personalized financial guidance to employees of Fortune 1000 companies. We paid approximately $6,750,000 for the minority equity stake in HelloWallet in the first quarter of 2012. We did not record any impairment losses on our cost method investments in the first three months of 2012 or 2011.

Table of Contents


8.	Liability for Vacant Office Space

We include our liability for vacant office space in "Accounts payable and accrued liabilities" and "Other long-term liabilities", as appropriate, on our Condensed Consolidated Balance Sheets. The following table shows the change in our liability for vacant office space from December 31, 2011 to March 31, 2012:



Liability for vacant office space	($000)
Balance as of December 31, 2011	$	919
Reduction of liability for lease and other related payments	(327		)
Balance as of March 31, 2012	$	592


9.	Stock-Based Compensation

Stock-Based Compensation Plans

Our shareholders approved the Morningstar 2011 Stock Incentive Plan (the 2011 Plan) on May 17, 2011. As of that date we stopped granting awards under the Morningstar 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan amended and restated the Morningstar 1993 Stock Option Plan, the Morningstar 2000 Stock Option Plan, and the Morningstar 2001 Stock Option Plan.

The 2011 Plan provides for a variety of stock-based awards, including, among other things, stock options, restricted stock units and restricted stock. We granted stock options, restricted stock units and restricted stock under the 2004 Plan.

All of our employees and our non-employee directors are eligible for awards under the 2011 Plan.

Grants awarded under the 2011 Plan or the 2004 Plan that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or shares withheld by us in connection with the exercise of options, will be available for awards under the 2011 Plan. Any shares subject to awards under the 2011 Plan, but not under the 2004 Plan, that are withheld by us in connection with the payment of any required income tax withholding will be available for awards under the 2011 Plan.

The following table summarizes the number of shares available for future grants under our 2011 Plan:



		As of March 31
(000)		2012
Shares available for future grants		4,989

Accounting for Stock-Based Compensation Awards

The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded in the three months ended March 31, 2012 and March 31, 2011:



	Three months ended March 31
($000)	2012		2011
Restricted stock units	$	3,278	$	2,785
Restricted stock	444		864
Stock options	144		—
Total stock-based compensation expense	$	3,866	$	3,649

Income tax benefit related to the stock-based compensation expense	$	930	$	725

The following table summarizes the amount of unrecognized stock-based compensation expense as of March 31, 2012 and the expected number of months over which the expense will be recognized:



	Unrecognized stock-based compensation expense ($000)		Expected amortization period (months)
Restricted stock units	$	23,868	30
Restricted stock	5,475		37
Stock options	1,705		36
Total unrecognized stock-based compensation expense	$	31,048	32

In accordance with FASB ASC 718, Compensation—Stock Compensation, we estimate forfeitures of employee stock-based awards and recognize compensation cost only for those awards expected to vest. Because our largest annual equity grants typically have vesting dates in the second quarter, we adjust the stock-based compensation expense at that time to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.

Restricted Stock Units

Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units to employees vest ratably over a four-year period. Restricted stock units granted to non-employee directors vest ratably over a three-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit.

We measure the fair value of our restricted stock units on the date of grant based on the closing market price of the underlying common stock on the day prior to grant. We amortize that value to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

The following table summarizes restricted stock unit activity during the first three months of 2012:



Restricted Stock Units (RSUs)	Unvested		Vested but Deferred	Total		Weighted Average Grant Date Value per RSU
RSUs outstanding—December 31, 2011	741,043		20,076	761,119		$	50.66
Granted	666		—	666		59.98
Dividend equivalents	1,278		—	1,278		50.66
Vested	(9,879	)	—	(9,879	)	52.94
Vested but deferred	—		—	—		—
Issued	—		—	—		—
Forfeited	(8,765	)	—	(8,765	)	43.76
RSUs outstanding—March 31, 2012	724,343		20,076	744,419		50.72

Restricted Stock

In conjunction with the Realpoint acquisition in May 2010, we issued 199,174 shares of restricted stock to the selling employee-shareholders under the 2004 Stock Incentive Plan. The restricted stock vests ratably over a five-year period from the acquisition date and may be subject to forfeiture if the holder terminates his or her employment during the vesting period.

Because of the terms of the restricted stock agreements prepared in conjunction with the Realpoint acquisition, we account for the grant of restricted stock as stock-based compensation expense and not as part of the acquisition consideration.

We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on the day prior to the grant. We amortize the fair value of $9,363,000 to stock-based compensation expense over the vesting period. The stock-based compensation expense recorded in the first three months of 2011 included approximately $396,000 of expense recognized upon the accelerated vesting of a restricted stock grant. We have assumed that all of the remaining restricted stock will ultimately vest, and therefore we have not incorporated a forfeiture rate for purposes of determining the stock-based compensation expense.

Stock Options

Stock options granted to employees vest ratably over a four-year period. Grants to our non-employee directors vest ratably over a three-year period. All grants expire 10 years after the date of grant. Almost all of the options granted under the 2004 Stock Incentive Plan have a premium feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant. Options granted under the 2011 Plan have an exercise price equal to the fair market value on the grant date.

In May 2011, we granted 86,106 stock options under the 2004 Stock Incentive Plan. In November 2011, we granted 6,095 stock options under the 2011 Plan. We estimated the fair value of the options on the date of grant using a Black-Scholes option-pricing model. The weighted average fair value of options granted during 2011 was $23.81 per share, based on the following assumptions:



Assumptions for Black-Scholes Option Pricing Model
Expected life (years):	7.4
Volatility factor:	35.1	%
Dividend yield:	0.35	%
Interest rate:	2.87	%

The following tables summarize stock option activity in the first three months of 2012 for our various stock option grants. The first table includes activity for options granted at an exercise price below the fair value per share of our common stock on the grant date; the second table includes activity for all other option grants.



Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date	Underlying Shares		Weighted Average Exercise Price
Options outstanding—December 31, 2011	398,859		$	19.72
Granted	—		—
Canceled	(300	)	14.70
Exercised	(23,038	)	19.92
Options outstanding—March 31, 2012	375,521		19.92

Options exercisable—March 31, 2012	375,521		$	19.92



All Other Option Grants, Excluding Activity Shown Above	Underlying Shares		Weighted Average Exercise Price
Options outstanding—December 31, 2011	818,552		$	22.76
Granted	—		—
Canceled	(7,563	)	10.09
Exercised	(224,194	)	15.81
Options outstanding—March 31, 2012	586,795		25.73

Options exercisable—March 31, 2012	494,594		$	19.82

The following table summarizes the total intrinsic value (difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised:



	Three months ended March 31
($000)	2012		2011
Intrinsic value of options exercised	$	10,905