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 June 30, 2012
OR
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 July 27, 2012, there were 48,394,821 shares of the Company’s common stock, no par value, outstanding.
MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 | ||||
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 | ||||
Unaudited Condensed Consolidated Statement of Equity for the six months ended June 30, 2012 | ||||
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 | ||||
2
PART 1. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
(in thousands except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenue | $ | 165,968 | $ | 161,011 | $ | 326,727 | $ | 312,778 | ||||||||
Operating expense (1): | ||||||||||||||||
Cost of goods sold | 49,452 | 45,186 | 99,768 | 85,855 | ||||||||||||
Development | 12,442 | 13,681 | 25,807 | 25,669 | ||||||||||||
Sales and marketing | 27,373 | 26,767 | 55,699 | 53,249 | ||||||||||||
General and administrative | 24,946 | 26,207 | 53,124 | 56,824 | ||||||||||||
Depreciation and amortization | 10,619 | 10,563 | 20,794 | 20,765 | ||||||||||||
Total operating expense | 124,832 | 122,404 | 255,192 | 242,362 | ||||||||||||
Operating income | 41,136 | 38,607 | 71,535 | 70,416 | ||||||||||||
Non-operating income (expense): | ||||||||||||||||
Interest income, net | 1,260 | (179 | ) | 2,129 | 345 | |||||||||||
Other income (expense), net | (265 | ) | 188 | (475 | ) | 438 | ||||||||||
Non-operating income, net | 995 | 9 | 1,654 | 783 | ||||||||||||
Income before income taxes and equity in net income of unconsolidated entities | 42,131 | 38,616 | 73,189 | 71,199 | ||||||||||||
Income tax expense | 14,744 | 12,724 | 26,255 | 23,242 | ||||||||||||
Equity in net income of unconsolidated entities | 497 | 595 | 1,063 | 969 | ||||||||||||
Consolidated net income | 27,884 | 26,487 | 47,997 | 48,926 | ||||||||||||
Net (income) loss attributable to the noncontrolling interest | 4 | (2 | ) | 28 | 96 | |||||||||||
Net income attributable to Morningstar, Inc. | $ | 27,888 | $ | 26,485 | $ | 48,025 | $ | 49,022 | ||||||||
Net income per share attributable to Morningstar, Inc.: | ||||||||||||||||
Basic | $ | 0.57 | $ | 0.53 | $ | 0.97 | $ | 0.98 | ||||||||
Diluted | $ | 0.56 | $ | 0.52 | $ | 0.95 | $ | 0.96 | ||||||||
Dividends per common share: | ||||||||||||||||
Dividends declared per common share | $ | 0.10 | $ | 0.05 | $ | 0.20 | $ | 0.10 | ||||||||
Dividends paid per common share | $ | 0.10 | $ | 0.05 | $ | 0.20 | $ | 0.10 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 49,195 | 50,165 | 49,566 | 49,983 | ||||||||||||
Diluted | 49,856 | 51,142 | 50,296 | 51,041 | ||||||||||||
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(1) Includes stock-based compensation expense of: | ||||||||||||||||
Cost of goods sold | $ | 1,067 | $ | 1,072 | $ | 2,156 | $ | 1,951 | ||||||||
Development | 465 | 572 | 964 | 1,043 | ||||||||||||
Sales and marketing | 461 | 481 | 940 | 903 | ||||||||||||
General and administrative | 1,741 | 1,718 | 3,540 | 3,595 | ||||||||||||
Total stock-based compensation expense | $ | 3,734 | $ | 3,843 | $ | 7,600 | $ | 7,492 | ||||||||
See notes to unaudited condensed consolidated financial statements.
3
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
(in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Consolidated net income | $ | 27,884 | $ | 26,487 | $ | 47,997 | $ | 48,926 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustment | (8,743 | ) | 3,262 | (1,778 | ) | 12,564 | ||||||||||
Unrealized gains (losses) on securities: | ||||||||||||||||
Unrealized holding gains (losses) arising during period | (541 | ) | (39 | ) | 368 | 399 | ||||||||||
Reclassification of (gains) losses included in net income | (22 | ) | (211 | ) | 33 | (252 | ) | |||||||||
Other comprehensive income | (9,306 | ) | 3,012 | (1,377 | ) | 12,711 | ||||||||||
Comprehensive income | 18,578 | 29,499 | 46,620 | 61,637 | ||||||||||||
Comprehensive (income) loss attributable to noncontrolling interest | (46 | ) | (13 | ) | 61 | 99 | ||||||||||
Comprehensive income attributable to Morningstar, Inc. | $ | 18,532 | $ | 29,486 | $ | 46,681 | $ | 61,736 | ||||||||
See notes to unaudited condensed consolidated financial statements.
4
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
As of June 30 | As of December 31 | |||||||
(in thousands except share amounts) | 2012 | 2011 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 147,499 | $ | 200,437 | ||||
Investments | 242,379 | 269,755 | ||||||
Accounts receivable, less allowance of $1,017 and $835, respectively | 117,016 | 113,312 | ||||||
Deferred tax asset, net | 4,898 | 5,104 | ||||||
Income tax receivable, net | 7,911 | 7,445 | ||||||
Other | 22,288 | 15,980 | ||||||
Total current assets | 541,991 | 612,033 | ||||||
Property, equipment, and capitalized software, net | 77,376 | 68,196 | ||||||
Investments in unconsolidated entities | 34,271 | 27,642 | ||||||
Goodwill | 316,963 | 318,492 | ||||||
Intangible assets, net | 127,377 | 139,809 | ||||||
Other assets | 7,801 | 5,912 | ||||||
Total assets | $ | 1,105,779 | $ | 1,172,084 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 45,858 | $ | 41,403 | ||||
Accrued compensation | 48,383 | 73,124 | ||||||
Deferred revenue | 167,531 | 155,494 | ||||||
Other | 367 | 612 | ||||||
Total current liabilities | 262,139 | 270,633 | ||||||
Accrued compensation | 6,483 | 5,724 | ||||||
Deferred tax liability, net | 16,183 | 15,940 | ||||||
Deferred rent | 15,199 | 14,604 | ||||||
Other long-term liabilities | 8,550 | 8,167 | ||||||
Total liabilities | 308,554 | 315,068 | ||||||
Equity: | ||||||||
Morningstar, Inc. shareholders’ equity: | ||||||||
Common stock, no par value, 200,000,000 shares authorized, of which 48,741,627 and 50,083,940 shares were outstanding as of June 30, 2012 and December 31, 2011, respectively | 5 | 5 | ||||||
Treasury stock at cost, 2,857,205 shares as of June 30, 2012 and 980,177 shares as of December 31, 2011 | (155,139 | ) | (46,701 | ) | ||||
Additional paid-in capital | 503,480 | 491,432 | ||||||
Retained earnings | 447,026 | 409,022 | ||||||
Accumulated other comprehensive income (loss): | ||||||||
Currency translation adjustment | 191 | 1,936 | ||||||
Unrealized gain (loss) on available-for-sale investments | 77 | (324 | ) | |||||
Total accumulated other comprehensive income | 268 | 1,612 | ||||||
Total Morningstar, Inc. shareholders’ equity | 795,640 | 855,370 | ||||||
Noncontrolling interest | 1,585 | 1,646 | ||||||
Total equity | 797,225 | 857,016 | ||||||
Total liabilities and equity | $ | 1,105,779 | $ | 1,172,084 | ||||
See notes to unaudited condensed consolidated financial statements.
5
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity
For the six months ended June 30, 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 | Retained Earnings | 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) | — | — | — | 48,025 | — | (28 | ) | 47,997 | |||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale investments, net of income tax of $189 | — | — | — | — | 368 | — | 368 | ||||||||||||||||||||||||
Reclassification of adjustments for losses included in net income, net of income tax of $16 | — | — | — | — | 33 | — | 33 | ||||||||||||||||||||||||
Foreign currency translation adjustment, net | — | — | — | — | (1,745 | ) | (33 | ) | (1,778 | ) | |||||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | (1,344 | ) | (33 | ) | (1,377 | ) | |||||||||||||||||||||
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net | 519,907 | — | 1,026 | (245 | ) | — | — | — | 781 | ||||||||||||||||||||||
Stock-based compensation — restricted stock units | — | — | 6,548 | — | — | — | 6,548 | ||||||||||||||||||||||||
Stock-based compensation — restricted stock | — | — | 888 | — | — | — | 888 | ||||||||||||||||||||||||
Stock-based compensation — stock-options | — | — | 164 | — | — | — | 164 | ||||||||||||||||||||||||
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units | — | — | 4,548 | — | — | — | 4,548 | ||||||||||||||||||||||||
Common shares repurchased | (1,862,220 | ) | — | (109,464 | ) | — | — | — | — | (109,464 | ) | ||||||||||||||||||||
Dividends declared — common shares outstanding | — | — | — | (9,861 | ) | — | — | (9,861 | ) | ||||||||||||||||||||||
Dividends declared — restricted stock units | — | — | 145 | (160 | ) | — | — | (15 | ) | ||||||||||||||||||||||
Balance as of June 30, 2012 | 48,741,627 | $ | 5 | $ | (155,139 | ) | $ | 503,480 | $ | 447,026 | $ | 268 | $ | 1,585 | $ | 797,225 | |||||||||||||||
See notes to unaudited condensed consolidated financial statements.
6
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Six months ended June 30 | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Operating activities | ||||||||
Consolidated net income | $ | 47,997 | $ | 48,926 | ||||
Adjustments to reconcile consolidated net income to net cash flows from operating activities: | ||||||||
Depreciation and amortization | 20,794 | 20,765 | ||||||
Deferred income taxes | 299 | 454 | ||||||
Stock-based compensation expense | 7,600 | 7,492 | ||||||
Provision for bad debt | 717 | 530 | ||||||
Equity in net income of unconsolidated entities | (1,063 | ) | (969 | ) | ||||
Excess tax benefits from stock-option exercises and vesting of restricted stock units | (4,548 | ) | (6,171 | ) | ||||
Other, net | 745 | (547 | ) | |||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable | (4,394 | ) | 617 | |||||
Other assets | (3,640 | ) | 608 | |||||
Accounts payable and accrued liabilities | 652 | (5,260 | ) | |||||
Accrued compensation | (26,920 | ) | (14,528 | ) | ||||
Income taxes—current | 4,525 | 2,742 | ||||||
Deferred revenue | 12,333 | 8,197 | ||||||
Deferred rent | 468 | (657 | ) | |||||
Other liabilities | (776 | ) | (1,043 | ) | ||||
Cash provided by operating activities | 54,789 | 61,156 | ||||||
Investing activities | ||||||||
Purchases of investments | (133,888 | ) | (198,647 | ) | ||||
Proceeds from maturities and sales of investments | 161,523 | 150,360 | ||||||
Capital expenditures | (17,922 | ) | (8,418 | ) | ||||
Acquisitions, net of cash acquired | — | 569 | ||||||
Purchases of cost method investments | (6,750 | ) | — | |||||
Other, net | — | 785 | ||||||
Cash provided by (used for) investing activities | 2,963 | (55,351 | ) | |||||
Financing activities | ||||||||
Proceeds from stock-option exercises, net | 781 | 4,652 | ||||||
Excess tax benefits from stock-option exercises and vesting of restricted stock units | 4,548 | 6,171 | ||||||
Common shares repurchased | (105,439 | ) | (109 | ) | ||||
Dividends paid | (10,004 | ) | (5,011 | ) | ||||
Other, net | (20 | ) | (214 | ) | ||||
Cash provided by (used for) financing activities | (110,134 | ) | 5,489 | |||||
Effect of exchange rate changes on cash and cash equivalents | (556 | ) | 3,553 | |||||
Net increase (decrease) in cash and cash equivalents | (52,938 | ) | 14,847 | |||||
Cash and cash equivalents—beginning of period | 200,437 | 180,176 | ||||||
Cash and cash equivalents—end of period | $ | 147,499 | $ | 195,023 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 21,405 | $ | 21,104 | ||||
Supplemental information of non-cash investing and financing activities: | ||||||||
Unrealized gain on available-for-sale investments | $ | 606 | $ | 220 | ||||
See notes to unaudited condensed consolidated financial statements.
7
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 June 30, 2012:
($000) | |||
Balance as of December 31, 2011 | $ | 318,492 | |
Net change, primarily currency translation | (1,529 | ) | |
Balance as of June 30, 2012 | $ | 316,963 | |
We did not record any significant impairment losses in the first half 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 June 30, 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 | $ | 32,073 | $ | (21,671 | ) | $ | 10,402 | 9 | $ | 32,293 | $ | (20,455 | ) | $ | 11,838 | 9 | ||||||||||||||
Customer-related assets | 134,059 | (58,926 | ) | 75,133 | 12 | 134,396 | (52,611 | ) | 81,785 | 12 | ||||||||||||||||||||
Supplier relationships | 240 | (90 | ) | 150 | 20 | 240 | (84 | ) | 156 | 20 | ||||||||||||||||||||
Technology-based assets | 80,723 | (39,345 | ) | 41,378 | 9 | 80,694 | (35,130 | ) | 45,564 | 9 | ||||||||||||||||||||
Non-competition agreement | 1,750 | (1,436 | ) | 314 | 4 | 1,751 | (1,285 | ) | 466 | 4 | ||||||||||||||||||||
Total intangible assets | $ | 248,845 | $ | (121,468 | ) | $ | 127,377 | 10 | $ | 249,374 | $ | (109,565 | ) | $ | 139,809 | 10 | ||||||||||||||
The following table summarizes our amortization expense related to intangible assets:
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
($000) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Amortization expense | $ | 5,976 | $ | 6,632 | $ | 12,031 | $ | 13,145 | ||||||||
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 | $ | 23,766 | ||
2013 | 21,086 | |||
2014 | 19,859 | |||
2015 | 18,998 | |||
2016 | 14,393 | |||
2017 | 9,839 | |||
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 June 30 | Six months ended June 30 | |||||||||||||||
(in thousands, except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Basic net income per share attributable to Morningstar, Inc.: | ||||||||||||||||
Net income attributable to Morningstar, Inc.: | $ | 27,888 | $ | 26,485 | $ | 48,025 | $ | 49,022 | ||||||||
Less: Distributed earnings available to participating securities | (12 | ) | (8 | ) | (27 | ) | (17 | ) | ||||||||
Less: Undistributed earnings available to participating securities | (53 | ) | (72 | ) | (88 | ) | (131 | ) | ||||||||
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders | $ | 27,823 | $ | 26,405 | $ | 47,910 | $ | 48,874 | ||||||||
Weighted average common shares outstanding | 49,195 | 50,165 | 49,566 | 49,983 | ||||||||||||
Basic net income per share attributable to Morningstar, Inc. | $ | 0.57 | $ | 0.53 | $ | 0.97 | $ | 0.98 | ||||||||
Diluted net income per share attributable to Morningstar, Inc.: | ||||||||||||||||
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders | $ | 27,823 | $ | 26,405 | $ | 47,910 | $ | 48,874 | ||||||||
Add: Undistributed earnings allocated to participating securities | 53 | 72 | 88 | 131 | ||||||||||||
Less: Undistributed earnings reallocated to participating securities | (53 | ) | (70 | ) | (87 | ) | (129 | ) | ||||||||
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders | $ | 27,823 | $ | 26,407 | $ | 47,911 | $ | 48,876 | ||||||||
Weighted average common shares outstanding | 49,195 | 50,165 | 49,566 | 49,983 | ||||||||||||
Net effect of dilutive stock options and restricted stock units | 661 | 977 | 730 | 1,058 | ||||||||||||
Weighted average common shares outstanding for computing diluted income per share | 49,856 | 51,142 | 50,296 | 51,041 | ||||||||||||
Diluted net income per share attributable to Morningstar, Inc. | $ | 0.56 | $ | 0.52 | $ | 0.95 | $ | 0.96 | ||||||||
8
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.
9
The following tables present information about our operating segments and by geographical area:
Three months ended June 30, 2012 | ||||||||||||||||
($000) | Investment Information | Investment Management | Corporate Items | Total | ||||||||||||
External revenue | $ | 134,749 | $ | 31,219 | $ | — | $ | 165,968 | ||||||||
Operating expense, excluding stock-based compensation expense, depreciation, and amortization | 86,915 | 17,179 | 6,385 | 110,479 | ||||||||||||
Stock-based compensation expense | 2,531 | 529 | 674 | 3,734 | ||||||||||||
Depreciation and amortization | 2,300 | 38 | 8,281 | 10,619 | ||||||||||||
Operating income (loss) | $ | 43,003 | $ | 13,473 | $ | (15,340 | ) | $ | 41,136 | |||||||
U.S. capital expenditures | $ | 6,818 | ||||||||||||||
Non-U.S. capital expenditures | $ | 2,110 | ||||||||||||||
Three months ended June 30, 2011 | ||||||||||||||||
($000) | Investment Information | Investment Management | Corporate Items | Total | ||||||||||||
External revenue | $ | 128,116 | $ | 32,895 | $ | — | $ | 161,011 | ||||||||
Operating expense, excluding stock-based compensation expense, depreciation, and amortization | 86,484 | 13,833 | 7,681 | 107,998 | ||||||||||||
Stock-based compensation expense | 2,488 | 531 | 824 | 3,843 | ||||||||||||
Depreciation and amortization | 2,047 | 40 | 8,476 | 10,563 | ||||||||||||
Operating income (loss) | $ | 37,097 | $ | 18,491 | $ | (16,981 | ) | $ | 38,607 | |||||||
U.S. capital expenditures | $ | 1,593 | ||||||||||||||
Non-U.S. capital expenditures | $ | 1,788 | ||||||||||||||
Six months ended June 30, 2012 | ||||||||||||||||
($000) | Investment Information | Investment Management | Corporate Items | Total | ||||||||||||
External revenue | $ | 261,674 | $ | 65,053 | $ | — | $ | 326,727 | ||||||||
Operating expense, excluding stock-based compensation expense, depreciation, and amortization | 180,353 | 33,132 | 13,313 | 226,798 | ||||||||||||
Stock-based compensation expense | 5,090 | 1,080 | 1,430 | 7,600 | ||||||||||||
Depreciation and amortization | 4,544 | 77 | 16,173 | 20,794 | ||||||||||||
Operating income (loss) | $ | 71,687 | $ | 30,764 | $ | (30,916 | ) | $ | 71,535 | |||||||
U.S. capital expenditures | $ | 14,215 | ||||||||||||||
Non-U.S. capital expenditures | $ | 3,707 | ||||||||||||||
10
Six months ended June 30, 2011 | ||||||||||||||||
($000) | Investment Information | Investment Management | Corporate Items | Total | ||||||||||||
External revenue | $ | 248,515 | $ | 64,263 | $ | — | $ | 312,778 | ||||||||
Operating expense, excluding stock-based compensation expense, depreciation, and amortization | 170,247 | 27,671 | 16,187 | 214,105 | ||||||||||||
Stock-based compensation expense | 4,958 | 973 | 1,561 | 7,492 | ||||||||||||
Depreciation and amortization | 3,906 | 82 | 16,777 | 20,765 | ||||||||||||
Operating income (loss) | $ | 69,404 | $ | 35,537 | $ | (34,525 | ) | $ | 70,416 | |||||||
U.S. capital expenditures | $ | 3,523 | ||||||||||||||
Non-U.S. capital expenditures | $ | 4,895 | ||||||||||||||
As of June 30, 2012 | ||||||||||||||||
($000) | Investment Information | Investment Management | Corporate Items | Total | ||||||||||||
Goodwill | $ | 275,568 | $ | 41,395 | $ | — | $ | 316,963 | ||||||||
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 June 30 | Six months ended June 30 | |||||||||||||||
($000) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
United States | $ | 117,952 | $ | 113,424 | $ | 232,421 | $ | 221,605 | ||||||||
United Kingdom | 14,714 | 13,947 | 28,450 | 26,794 | ||||||||||||
Europe, excluding the United Kingdom | 12,281 | 12,561 | 24,336 | 24,141 | ||||||||||||
Australia | 9,791 | 10,693 | 19,139 | 19,986 | ||||||||||||
Canada | 7,397 | 6,784 | 14,747 | 13,401 | ||||||||||||
Asia, excluding Japan | 2,366 | 2,338 | 4,735 | 4,402 | ||||||||||||
Japan | 986 | 959 | 1,965 | 1,890 | ||||||||||||
Other | 481 | 305 | 934 | 559 | ||||||||||||
Total Non-U.S. | 48,016 | 47,587 | 94,306 | 91,173 | ||||||||||||
Total | $ | 165,968 | $ | 161,011 | $ | 326,727 | $ | 312,778 | ||||||||
11
Long-lived assets by geographical area | ||||||||
As of June 30 | As of December 31 | |||||||
($000) | 2012 | 2011 | ||||||
United States | $ | 53,941 | $ | 44,572 | ||||
United Kingdom | 7,422 | 7,512 | ||||||
Europe, excluding the United Kingdom | 2,543 | 2,629 | ||||||
Australia | 1,550 | 1,415 | ||||||
Canada | 1,914 | 2,076 | ||||||
Asia, excluding Japan | 9,757 | 9,656 | ||||||
Japan | 216 | 282 | ||||||
Other | 33 | 54 | ||||||
Total Non-U.S. | 23,435 | 23,624 | ||||||
Total | $ | 77,376 | $ | 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 June 30 | As of December 31 | |||||||
($000) | 2012 | 2011 | ||||||
Available-for-sale | $ | 217,478 | $ | 247,917 | ||||
Held-to-maturity | 19,717 | 16,347 | ||||||
Trading securities | 5,184 | 5,491 | ||||||
Total | $ | 242,379 | $ | 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 June 30, 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 | $ | 82,317 | $ | 53 | $ | (571 | ) | $ | 81,799 | $ | 139,099 | $ | 72 | $ | (402 | ) | $ | 138,769 | ||||||||||||||
Corporate bonds | 78,476 | 38 | (351 | ) | 78,163 | 61,589 | 14 | (280 | ) | 61,323 | ||||||||||||||||||||||
Commercial paper | 17,138 | 1 | (3 | ) | 17,136 | 29,964 | 2 | (7 | ) | 29,959 | ||||||||||||||||||||||
Equity securities and exchange-traded funds | 29,080 | 827 | (421 | ) | 29,486 | 8,461 | 368 | (558 | ) | 8,271 | ||||||||||||||||||||||
Mutual funds | 10,355 | 623 | (84 | ) | 10,894 | 9,298 | 363 | (66 | ) | 9,595 | ||||||||||||||||||||||
Total | $ | 217,366 | $ | 1,542 | $ | (1,430 | ) | $ | 217,478 | $ | 248,411 | $ | 819 | $ | (1,313 | ) | $ | 247,917 | ||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||||||||||
Certificates of deposit | $ | 19,717 | $ | — | $ | — | $ | 19,717 | $ | 16,347 | $ | — | $ | — | $ | 16,347 | ||||||||||||||||
As of June 30, 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 June 30, 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 June 30, 2012 | As of December 31, 2011 | |||||||||||||||
($000) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Available-for-sale: | ||||||||||||||||
Due in one year or less | $ | 141,562 | $ | 140,928 | $ | 155,651 | $ | 155,247 | ||||||||
Due in one to two years | 36,369 | 36,170 | 75,001 | 74,804 | ||||||||||||
Equity securities, exchange-traded funds, and mutual funds | 39,435 | 40,380 | 17,759 | 17,866 | ||||||||||||
Total | $ | 217,366 | $ | 217,478 | $ | 248,411 | $ | 247,917 | ||||||||
Held-to-maturity: | ||||||||||||||||
Due in one year or less | $ | 19,712 | $ | 19,712 | $ | 16,342 | $ | 16,342 | ||||||||
Due in one to three years | 5 | 5 | 5 | 5 | ||||||||||||
Total | $ | 19,717 | $ | 19,717 | $ | 16,347 | $ | 16,347 | ||||||||
As of June 30, 2012 and December 31, 2011, held-to-maturity investments included a $1,500,000 and a $1,600,000 certificate of deposit, respectively, held primarily as collateral against a bank guarantee 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:
Six months ended June 30 | ||||||||
($000) | 2012 | 2011 | ||||||
Realized gains | $ | 470 | $ | 397 | ||||
Realized losses | (519 | ) | — | |||||
Realized gains (losses), net | $ | (49 | ) | $ | 397 | |||
We determine realized gains and losses using the specific identification method.
The following table shows the net unrealized gains (losses) on trading securities as recorded in our Condensed Consolidated Statements of Income:
Six months ended June 30 | ||||||||
($000) | 2012 | 2011 | ||||||
Unrealized gains (losses), net | $ | 156 | $ | (9 | ) | |||
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 June 30, 2012 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
($000) | June 30, 2012 | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale investments: | ||||||||||||||||
Government obligations | $ | 81,799 | $ | — | $ | 81,799 | $ | — | ||||||||
Corporate bonds | 78,163 | — | 78,163 | — | ||||||||||||