UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A | ||||
Amendment No. 1 | ||||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
OR
¨ | 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)
(312) 696-6000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common stock, no par value | The NASDAQ Stock Market LLC | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 ¨
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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.
(Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | ||
(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 ¨ No x
The aggregate market value of shares of common stock held by non-affiliates of the Registrant as of June 30, 2015 was $1.5 billion. As of February 19, 2016, there were 42,911,386 shares of the Registrant's common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Definitive Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.
EXPLANATORY NOTE
On February 26, 2016, Morningstar, Inc. (the Company) filed its Annual Report on Form 10-K for the year ended December 31, 2015 with the Securities and Exchange Commission. The Company is providing Item 8 of Part II of Form 10-K in this amended filing to include the name and signature line of the independent registered public accounting firm (KPMG LLP) on its two reports contained therein. The Company is also including with this amended filing the required Exhibits 23, 31, and 32. Except as set forth above, no other changes are made to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Table of Contents
3
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Morningstar, Inc.:
We have audited the accompanying consolidated balance sheets of Morningstar, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three‑year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement Schedule II - Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Morningstar, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Morningstar, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) , and our report dated February 26, 2016, expressed an unqualified opinion on the effectiveness of Morningstar Inc.’s internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
February 26, 2016
4
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Morningstar, Inc.:
We have audited Morningstar, Inc.’s (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Morningstar, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Morningstar, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Morningstar, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and the financial statement schedule, and our report dated February 26, 2016, expressed an unqualified opinion on those consolidated financial statements and accompanying schedule.
/s/ KPMG LLP
Chicago, Illinois
February 26, 2016
5
6
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31 (in millions except per share amounts) | 2015 | 2014 | 2013 | |||||||||
Revenue | $ | 788.8 | $ | 760.1 | $ | 698.3 | ||||||
Operating expense: | ||||||||||||
Cost of revenue | 330.1 | 318.6 | 271.4 | |||||||||
Sales and marketing | 96.6 | 111.1 | 103.6 | |||||||||
General and administrative | 107.1 | 108.9 | 106.9 | |||||||||
Depreciation and amortization | 64.4 | 54.9 | 45.7 | |||||||||
Litigation settlement | — | 61.0 | — | |||||||||
Total operating expense | 598.2 | 654.5 | 527.6 | |||||||||
Operating income | 190.6 | 105.6 | 170.7 | |||||||||
Non-operating income: | ||||||||||||
Interest income, net | 1.3 | 2.1 | 2.7 | |||||||||
Gain on sale of investments, reclassified from other comprehensive income | 0.6 | 1.0 | 4.2 | |||||||||
Holding gain upon acquisition of additional ownership of equity method investments | — | 5.2 | 3.6 | |||||||||
Other income (expense), net | 1.2 | 0.1 | (3.2 | ) | ||||||||
Non-operating income, net | 3.1 | 8.4 | 7.3 | |||||||||
Income before income taxes and equity in net income of unconsolidated entities | 193.7 | 114.0 | 178.0 | |||||||||
Equity in net income of unconsolidated entities | 1.8 | — | 1.4 | |||||||||
Income tax expense | 62.7 | 35.7 | 56.0 | |||||||||
Consolidated net income | 132.8 | 78.3 | 123.4 | |||||||||
Net (income) loss attributable to noncontrolling interest | (0.2 | ) | — | 0.1 | ||||||||
Net income attributable to Morningstar, Inc. | $ | 132.6 | $ | 78.3 | $ | 123.5 | ||||||
Net income per share attributable to Morningstar, Inc.: | ||||||||||||
Basic | $ | 3.00 | $ | 1.75 | $ | 2.68 | ||||||
Diluted | $ | 3.00 | $ | 1.74 | $ | 2.66 | ||||||
Dividends per common share: | ||||||||||||
Dividends declared per common share | $ | 0.790 | $ | 0.700 | $ | 0.545 | ||||||
Dividends paid per common share | $ | 0.760 | $ | 0.680 | $ | 0.375 | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 44.2 | 44.7 | 46.2 | |||||||||
Diluted | 44.3 | 44.9 | 46.5 | |||||||||
See notes to consolidated financial statements.
7
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Year ended December 31 (in millions) | 2015 | 2014 | 2013 | |||||||||
Consolidated net income | $ | 132.8 | $ | 78.3 | $ | 123.4 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Foreign currency translation adjustment | (28.2 | ) | (29.8 | ) | (4.5 | ) | ||||||
Unrealized gains (losses) on securities: | ||||||||||||
Unrealized holding gains (losses) arising during period | (1.0 | ) | 0.4 | 2.4 | ||||||||
Reclassification of gains included in net income | (0.4 | ) | (0.6 | ) | (2.6 | ) | ||||||
Other comprehensive loss | (29.6 | ) | (30.0 | ) | (4.7 | ) | ||||||
Comprehensive income | 103.2 | 48.3 | 118.7 | |||||||||
Comprehensive (income) loss attributable to noncontrolling interest | (0.4 | ) | 0.1 | 0.3 | ||||||||
Comprehensive income attributable to Morningstar, Inc. | $ | 102.8 | $ | 48.4 | $ | 119.0 | ||||||
See notes to consolidated financial statements.
8
Morningstar, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31 (in millions except share amounts) | 2015 | 2014 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 207.1 | $ | 185.2 | ||||
Investments | 41.5 | 39.4 | ||||||
Accounts receivable, less allowance of $1.8 and $1.5, respectively | 139.3 | 136.7 | ||||||
Other | 22.0 | 29.5 | ||||||
Total current assets | 409.9 | 390.8 | ||||||
Property, equipment, and capitalized software, net | 134.5 | 117.6 | ||||||
Investments in unconsolidated entities | 35.6 | 28.8 | ||||||
Goodwill | 364.2 | 370.1 | ||||||
Intangible assets, net | 74.2 | 95.9 | ||||||
Other assets | 10.6 | 7.1 | ||||||
Total assets | $ | 1,029.0 | $ | 1,010.3 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 39.2 | $ | 34.3 | ||||
Accrued compensation | 80.9 | 80.5 | ||||||
Deferred revenue | 140.7 | 146.0 | ||||||
Short-term debt | 35.0 | 30.0 | ||||||
Other current liabilities | 8.6 | 3.0 | ||||||
Total current liabilities | 304.4 | 293.8 | ||||||
Accrued compensation | 8.9 | 7.9 | ||||||
Deferred tax liability, net | 19.8 | 17.0 | ||||||
Deferred rent | 25.4 | 26.4 | ||||||
Other long-term liabilities | 29.9 | 10.8 | ||||||
Total liabilities | 388.4 | 355.9 | ||||||
Equity: | ||||||||
Morningstar, Inc. shareholders’ equity: | ||||||||
Common stock, no par value, 200,000,000 shares authorized, of which 43,403,076 and 44,345,763 shares were outstanding as of December 31, 2015 and December 31, 2014, respectively | — | — | ||||||
Treasury stock at cost, 9,478,449 and 8,257,214 shares as of December 31, 2015 and December 31, 2014, respectively | (619.8 | ) | (524.3 | ) | ||||
Additional paid-in capital | 575.5 | 561.1 | ||||||
Retained earnings | 739.2 | 641.5 | ||||||
Accumulated other comprehensive loss: | ||||||||
Currency translation adjustment | (53.5 | ) | (25.1 | ) | ||||
Unrealized gain (loss) on available-for-sale investments | (1.1 | ) | 0.3 | |||||
Total accumulated other comprehensive loss | (54.6 | ) | (24.8 | ) | ||||
Total Morningstar, Inc. shareholders’ equity | 640.3 | 653.5 | ||||||
Noncontrolling interest | 0.3 | 0.9 | ||||||
Total equity | 640.6 | 654.4 | ||||||
Total liabilities and equity | $ | 1,029.0 | $ | 1,010.3 | ||||
See notes to consolidated financial statements.
9
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Equity
Morningstar, Inc. Shareholders’ Equity | |||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Non Controlling Interests | |||||||||||||||||||||||||||||
(in millions, except share amounts) | Shares Outstanding | Par Value | Treasury Stock | Retained Earnings | Total Equity | ||||||||||||||||||||||||||
Balance as of December 31, 2012 | 46,541,571 | $ | — | $ | (301.8 | ) | $ | 521.4 | $ | 496.4 | $ | 9.6 | $ | 1.3 | $ | 726.9 | |||||||||||||||
Net income (loss) | — | — | — | 123.5 | — | (0.1 | ) | 123.4 | |||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale investments, net of tax of $1.5 | — | — | — | — | 2.4 | — | 2.4 | ||||||||||||||||||||||||
Reclassification of adjustments for gains included in net income, net of income tax of $1.6 | — | — | — | — | (2.6 | ) | — | (2.6 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net | — | — | — | — | (4.3 | ) | (0.2 | ) | (4.5 | ) | |||||||||||||||||||||
Other comprehensive loss, net | — | — | — | — | (4.5 | ) | (0.2 | ) | (4.7 | ) | |||||||||||||||||||||
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net | 437,263 | — | 1.6 | (2.9 | ) | — | — | — | (1.3 | ) | |||||||||||||||||||||
Stock-based compensation — restricted stock units | — | — | 14.1 | — | — | — | 14.1 | ||||||||||||||||||||||||
Stock-based compensation — restricted stock | — | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||
Stock-based compensation — stock options | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units | — | — | 5.9 | — | — | — | 5.9 | ||||||||||||||||||||||||
Common shares repurchased | (2,011,411 | ) | — | (148.8 | ) | — | — | — | — | (148.8 | ) | ||||||||||||||||||||
Dividends declared — common shares outstanding | — | — | — | (25.0 | ) | — | — | (25.0 | ) | ||||||||||||||||||||||
Dividends declared — restricted stock units | — | — | 0.2 | (0.3 | ) | — | — | (0.1 | ) | ||||||||||||||||||||||
Balance as of December 31, 2013 | 44,967,423 | — | (449.0 | ) | 539.6 | 594.6 | 5.1 | 1.0 | 691.3 | ||||||||||||||||||||||
Net income | — | — | — | 78.3 | — | — | 78.3 | ||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale investments, net of tax of $0.2 | — | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||
Reclassification of adjustments for gains included in net income, net of income tax of $0.4 | — | — | — | — | (0.6 | ) | — | (0.6 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net | — | — | — | — | (29.7 | ) | (0.1 | ) | (29.8 | ) | |||||||||||||||||||||
Other comprehensive loss, net | — | — | — | — | (29.9 | ) | (0.1 | ) | (30.0 | ) | |||||||||||||||||||||
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net | 452,344 | — | 1.4 | (0.6 | ) | — | — | — | 0.8 | ||||||||||||||||||||||
Stock-based compensation — restricted stock units | — | — | 16.3 | — | — | — | 16.3 | ||||||||||||||||||||||||
Stock-based compensation — restricted stock | — | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||
Stock-based compensation — performance share awards | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||
Stock-based compensation — stock-options | — | — | 0.4 | — | — | — | 0.4 | ||||||||||||||||||||||||
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units | — | — | 4.4 | — | — | — | 4.4 | ||||||||||||||||||||||||
Common shares repurchased | (1,074,004 | ) | — | (76.7 | ) | — | — | — | — | (76.7 | ) | ||||||||||||||||||||
Dividends declared — common shares outstanding | — | — | — | (31.2 | ) | — | — | (31.2 | ) | ||||||||||||||||||||||
Dividends declared — restricted stock units | — | — | 0.1 | (0.2 | ) | — | — | (0.1 | ) | ||||||||||||||||||||||
Balance as of December 31, 2014 | 44,345,763 | — | (524.3 | ) | 561.1 | 641.5 | (24.8 | ) | 0.9 | 654.4 | |||||||||||||||||||||
Net income | — | — | — | 132.6 | — | 0.2 | 132.8 | ||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale investments, net of income tax of $0.4 | — | — | — | — | (1.0 | ) | — | (1.0 | ) | ||||||||||||||||||||||
Reclassification of adjustments for gains included in net income, net of income tax of $0.1 | — | — | — | — | (0.4 | ) | — | (0.4 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment, net | — | — | — | — | (28.4 | ) | 0.2 | (28.2 | ) | ||||||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | (29.8 | ) | 0.2 | (29.6 | ) | ||||||||||||||||||||||
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net | 298,435 | — | 1.5 | (3.2 | ) | — | — | — | (1.7 | ) | |||||||||||||||||||||
Stock-based compensation — restricted stock units | — | — | 16.1 | — | — | — | 16.1 | ||||||||||||||||||||||||
Stock-based compensation — restricted stock | — | — | 0.1 | — | — | — | 0.1 | ||||||||||||||||||||||||
Stock-based compensation — performance share awards | — | — | 1.0 | — | — | — | 1.0 | ||||||||||||||||||||||||
Stock-based compensation — stock-options | — | — | 0.2 | — | — | — | 0.2 | ||||||||||||||||||||||||
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units | — | — | 2.6 | — | — | — | 2.6 | ||||||||||||||||||||||||
Common shares repurchased | (1,241,122 | ) | (97.0 | ) | — | — | — | — | (97.0 | ) | |||||||||||||||||||||
Dividends declared — common shares outstanding | — | — | — | (34.8 | ) | — | — | (34.8 | ) | ||||||||||||||||||||||
Dividends declared — restricted stock units | — | — | (0.1 | ) | — | — | (0.1 | ) | |||||||||||||||||||||||
Purchase of remaining interest in majority-owned investment | — | — | (2.4 | ) | — | — | (1.0 | ) | (3.4 | ) | |||||||||||||||||||||
Balance as of December 31, 2015 | 43,403,076 | $ | — | $ | (619.8 | ) | $ | 575.5 | $ | 739.2 | $ | (54.6 | ) | $ | 0.3 | $ | 640.6 | ||||||||||||||
See notes to consolidated financial statements.
10
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31 (in millions) | 2015 | 2014 | 2013 | |||||||||
Operating activities | ||||||||||||
Consolidated net income | $ | 132.8 | $ | 78.3 | $ | 123.4 | ||||||
Adjustments to reconcile consolidated net income to net cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 64.4 | 54.9 | 45.7 | |||||||||
Deferred income taxes | 2.9 | 3.0 | (1.1 | ) | ||||||||
Stock-based compensation expense | 17.4 | 17.6 | 15.0 | |||||||||
Provision for bad debt | 0.5 | 0.5 | 0.8 | |||||||||
Equity in net income of unconsolidated entities | (1.8 | ) | — | (1.4 | ) | |||||||
Excess tax benefits from stock-option exercises and vesting of restricted stock units | (2.6 | ) | (4.4 | ) | (5.9 | ) | ||||||
Gain on sale of cost-method investment | — | (0.4 | ) | — | ||||||||
Holding gain upon acquisition of additional ownership of equity-method investments | — | (5.2 | ) | (3.6 | ) | |||||||
Other, net | (1.1 | ) | (0.7 | ) | (1.8 | ) | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||
Accounts receivable | (6.9 | ) | (25.9 | ) | (1.6 | ) | ||||||
Other assets | 0.7 | (5.3 | ) | (2.3 | ) | |||||||
Accounts payable and accrued liabilities | 4.7 | (2.0 | ) | (1.2 | ) | |||||||
Accrued compensation | 7.0 | 19.5 | 3.2 | |||||||||
Income taxes—current | 10.1 | 2.3 | 16.8 | |||||||||
Deferred revenue | 10.6 | (1.7 | ) | 3.7 | ||||||||
Deferred rent | (0.3 | ) | 3.0 | (1.5 | ) | |||||||
Other liabilities | 0.5 | (1.3 | ) | (1.5 | ) | |||||||
Cash provided by operating activities | 238.9 | 132.2 | 186.7 | |||||||||
Investing activities | ||||||||||||
Purchases of investments | (34.7 | ) | (20.4 | ) | (140.1 | ) | ||||||
Proceeds from maturities and sales of investments | 30.0 | 111.6 | 171.2 | |||||||||
Capital expenditures | (57.3 | ) | (58.3 | ) | (33.6 | ) | ||||||
Acquisitions, net of cash acquired | (11.1 | ) | (64.4 | ) | (11.1 | ) | ||||||
Proceeds from sale of a business, net | — | — | 1.0 | |||||||||
Purchases of equity- and cost-method investments | (6.2 | ) | — | (2.8 | ) | |||||||
Other, net | (0.2 | ) | 0.3 | 0.5 | ||||||||
Cash used for investing activities | (79.5 | ) | (31.2 | ) | (14.9 | ) | ||||||
Financing activities | ||||||||||||
Common shares repurchased | (97.0 | ) | (76.7 | ) | (153.5 | ) | ||||||
Dividends paid | (33.7 | ) | (30.5 | ) | (17.4 | ) | ||||||
Proceeds from short-term debt | 50.0 | 30.0 | — | |||||||||
Repayment of short-term debt | (45.0 | ) | — | — | ||||||||
Proceeds from stock-option exercises | 3.9 | 6.6 | 4.5 | |||||||||
Employee taxes withheld for restricted stock units | (5.6 | ) | (5.8 | ) | (5.8 | ) | ||||||
Excess tax benefits from stock-option exercises and vesting of restricted stock units | 2.6 | 4.4 | 5.9 | |||||||||
Other, net | (0.1 | ) | 0.3 | (0.1 | ) | |||||||
Cash used for financing activities | (124.9 | ) | (71.7 | ) | (166.4 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (12.6 | ) | (12.3 | ) | (1.1 | ) | ||||||
Net increase in cash and cash equivalents | 21.9 | 17.0 | 4.3 | |||||||||
Cash and cash equivalents—beginning of period | 185.2 | 168.2 | 163.9 | |||||||||
Cash and cash equivalents—end of period | $ | 207.1 | $ | 185.2 | $ | 168.2 | ||||||
2015 | 2014 | 2013 | ||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for income taxes | $ | 50.1 | $ | 30.4 | $ | 40.4 | ||||||
Cash paid for interest | $ | 0.4 | $ | 0.3 | $ | — | ||||||
Supplemental information of non-cash investing and financing activities: | ||||||||||||
Unrealized gain (loss) on available-for-sale investments | $ | 2.0 | $ | (0.4 | ) | $ | (0.3 | ) | ||||
Software obtained under long-term financing arrangement | $ | 5.3 | $ | — | $ | 4.9 | ||||||
See notes to consolidated financial statements.
11
MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business |
Morningstar, Inc. and its subsidiaries (Morningstar, we, our), provides independent investment research for investors around the world. We offer an extensive line of products and services for financial advisors, asset managers, retirement plan providers and sponsors, and individual investors. We have operations in 27 countries.
2. Summary of Significant Accounting Policies
The acronyms that appear in these Notes to our 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 |
SEC | Securities and Exchange Commission |
Principles of Consolidation. We conduct our business operations through wholly owned or majority-owned operating subsidiaries. The accompanying consolidated financial statements include the accounts of Morningstar, Inc. and our subsidiaries. We consolidate assets, liabilities, and results of operations of subsidiaries in which we have a controlling interest and eliminate all significant intercompany accounts and transactions.
We account and report the noncontrolling (minority) interest in our Consolidated Financial Statements in accordance with FASB ASC 810, Consolidation. A noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company. We report the noncontrolling interest in our Consolidated Balance Sheet within equity separate from the shareholders' equity attributable to Morningstar, Inc. In addition, we present the net income (loss) and comprehensive income (loss) attributable to Morningstar, Inc.'s shareholders and the noncontrolling interest in our Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Equity.
We account for investments in entities in which we exercise significant influence, but do not control, using the equity method.
As part of our investment management operations, we manage certain funds outside of the United States that are considered variable interest entities. For the majority of these variable interest entities, we do not have a variable interest in them. In cases where we do have a variable interest, we are not the primary beneficiary. Accordingly, we do not consolidate any of these variable interest entities.
Comprehensive Income. In accordance with ASU No. 2011-05, Presentation of Comprehensive Income, 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 Statements of Income and separately, our Consolidated Statements of Comprehensive Income. In addition, effective January 1, 2013, we adopted FASB ASU No. 2013-02, Comprehensive Income (Topic 220). We show the effects of items reclassified out of each component of accumulated other comprehensive income to net income on the face of the financial statement along with net income.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. Actual results may differ from these estimates.
Reclassifications. Certain amounts reported in prior years have been reclassified to conform to the current year presentation.
12
Separately, as a result of our move to a more centralized structure in 2013 (including new positions created, changes in focus for some existing roles, and the refinement of employee cost categorizations as we moved to a more centralized structure), approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. These changes added approximately $14 million of compensation expense to cost of revenue in 2014 versus 2013, and reduced the compensation expense included in the sales and marketing and general and administrative categories by approximately $8 million and $6 million, respectively, in the same period. These changes did not affect total operating expense or operating income for any of the periods presented.
Cash and Cash Equivalents. Cash and cash equivalents consists of cash and investments with original maturities of three months or less. We state them at cost, which approximates fair value. We state the portion of our cash equivalents that are invested in money market funds at fair value, as these funds are actively traded and have quoted market prices.
Investments. We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments into three categories: held-to-maturity, trading, and available-for-sale.
• | Held-to-maturity: We classify certain investments, primarily certificates of deposit, as held-to-maturity securities, based on our intent and ability to hold these securities to maturity. We record held-to-maturity investments at amortized cost in our Consolidated Balance Sheets. |
• | Trading: We classify certain other investments, primarily equity securities, as trading securities, primarily to satisfy the requirements of one of our wholly owned subsidiaries, which is a registered broker-dealer. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair value in our Consolidated Balance Sheets. |
• | Available-for-sale: Investments not considered held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities primarily consist of equity securities, exchange-traded funds, and mutual funds. We report unrealized gains and losses for available-for-sale securities as other comprehensive income (loss), net of related income taxes. We record these securities at their fair value in our Consolidated Balance Sheets. |
Fair Value Measurements. We follow FASB ASC 820, Fair Value Measurements. FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances and does not require any new fair value measurements.
FASB ASC 820 uses a fair value hierarchy based on three broad levels of valuation inputs:
• | Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities that the company has 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. |
We provide additional information about our cash equivalents and investments that are subject to valuation under FASB ASC 820 in Note 6.
13
Concentration of Credit Risk. No single customer is large enough to pose a significant credit risk to our operations or financial condition. For the years ended December 31, 2015, 2014, and 2013, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of accounts receivable.
Property, Equipment, and Depreciation. We state property and equipment at historical cost, net of accumulated depreciation. We depreciate property and equipment primarily using the straight-line method based on the useful life of the asset, which ranges from three to seven years. We amortize leasehold improvements over the lease term or their useful lives, whichever is shorter.
Computer Software and Internal Product Development Costs. We capitalize certain costs in accordance with FASB ASC 350-40, Internal-Use Software, FASB ASC 350-50, Website Development Costs, and FASB ASC 985, Software. Internal product development costs mainly consist of employee costs for developing new web-based products and certain major enhancements of existing products. We amortize these costs on a straight-line basis over the estimated economic life, which is generally three to five years. We include capitalized software development costs related to projects that have not been placed into service in our construction in progress balance.
The table below summarizes our capitalized software development costs for the past three years:
(in millions) | 2015 | 2014 | 2013 | |||||||||
Capitalized software development costs | $ | 21.8 | $ | 18.8 | $ | 8.1 | ||||||
Business Combinations. Over the past several years, we have acquired companies that complement our business operations. For each acquisition, we allocate the purchase price to the assets acquired, liabilities assumed, and goodwill. We follow FASB ASC 805, Business Combinations. We recognize and measure the fair value of the acquired operation as a whole, as well as the assets acquired and liabilities assumed, at their full fair values as of the date we obtain control, regardless of the percentage ownership in the acquired operation or how the acquisition was achieved. We expense direct costs related to the business combination, such as advisory, accounting, legal, valuation, and other professional fees, as incurred. We recognize restructuring costs, including severance and relocation for employees of the acquired entity, as post-combination expenses unless the target entity meets the criteria of FASB ASC 420, Exit or Disposal Cost Obligations, on the acquisition date.
As part of the purchase price allocation, we follow the requirements of FASB ASC 740, Income Taxes. This includes establishing deferred tax assets or liabilities reflecting the difference between the values assigned for financial statement purposes and income tax purposes. In certain acquisitions, the goodwill resulting from the purchase price allocation may not be deductible for income tax purposes. FASB ASC 740 prohibits recognition of a deferred tax asset or liability for temporary differences in goodwill if goodwill is not amortizable and deductible for tax purposes.
Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2015, 2014, and 2013. We did not record any impairment losses in 2015, 2014, or 2013.
Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to 25 years. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We did not record any impairment losses in 2015, 2014, or 2013.
14
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 has taken place. If arrangements include an acceptance provision, we generally begin recognizing revenue when we receive 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. |
We generate revenue through sales of Morningstar Data, Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar Research, Premium Membership subscriptions for Morningstar.com, our structured credit research and ratings offerings, 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. For new-issue ratings and analysis for commercial mortgage- backed securities (CMBS), we charge asset-based fees that are paid by the issuer on the rated balance of the transaction and recognize the revenue immediately upon issuance.
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.
Our Investment Advisory business includes a broad range of services. Pricing for consulting services is based on the scope of work and the level of service provided, 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 Workplace 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 Workplace 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 Workplace 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 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 licenses or 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.
15
Sales Commissions. Through December 31, 2013, we paid sales commissions based on a formula driven by the total contract value of sales opportunities closed, with any subsequent adjustments (such as clawbacks for contract cancellations) reflected in future commission payouts. We considered the corresponding commission expense an incremental direct acquisition cost and treated it as a deferred charge, which we expensed over the term of the underlying sales contracts.
In the first quarter of 2014, we modified our sales incentive plan. The revised plan is based on a combination of net new sales and specific business objectives not solely tied to revenue growth. Because of this new structure and the discretion involved in determining the related incentives, we started expensing sales commissions as incurred instead of amortizing them over the contract terms.
However, we continued to amortize the deferred charge capitalized in connection with sales commissions paid in 2013 and previous periods as part of the previous incentive plan. This amortization added $3.5 million and $9.8 million of sales commission cost in 2015 and 2014, respectively.
Advertising Costs. Advertising costs include expenses incurred for various print and Internet ads, search engine fees, and direct mail campaigns. We expense advertising costs as incurred. The table below summarizes our advertising expense for the past three years:
(in millions) | 2015 | 2014 | 2013 | |||||||||
Advertising expense | $ | 8.3 | $ | 7.5 | $ | 6.9 | ||||||
Stock-Based Compensation Expense. We account for our stock-based compensation expense in accordance with FASB ASC 718, Compensation—Stock Compensation. Our stock-based compensation expense reflects grants of restricted stock units, restricted stock, performance share awards, and stock options. We measure the fair value of our restricted stock units, restricted stock, and performance share awards on the date of grant based on the closing market price of Morningstar's common stock on the day prior to grant. For stock options, we estimate the fair value of our stock options on the date of grant using a Black-Scholes option-pricing model. We amortize the fair values to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.
We estimate expected forfeitures of all employee stock-based awards and recognize compensation cost only for those awards expected to vest. We determine forfeiture rates based on historical experience and adjust the estimated forfeitures to actual forfeiture experience as needed.
Liability for Sabbatical Leave. In certain of our operations, we offer employees a sabbatical leave. Although the sabbatical policy varies by region, Morningstar's full-time employees are generally eligible for six weeks of paid time off after four years of continuous service. We account for our sabbatical liability in accordance with FASB ASC 710-10-25, Compensated Absences. We record a liability for employees' sabbatical benefits over the period employees earn the right for sabbatical leave and include this liability in Accrued Compensation in our Consolidated Balance Sheet.
Income Taxes. We record deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and tax purposes in accordance with FASB ASC 740, Income Taxes. FASB ASC 740 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, and disclosure for uncertain tax positions.
We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in our Consolidated Statements of Income. We classify liabilities related to unrecognized tax benefits as either current or long-term liabilities in our Consolidated Balance Sheet, depending on when we expect to make payment.
16
Income per Share. We compute and present income per share in accordance with FASB ASC 260, Earnings Per Share. The difference between weighted average shares outstanding and diluted shares outstanding mainly reflects the dilutive effect associated with our stock-based compensation plans. We further compute income per share in accordance with FASB ASC 260-10-45-59A, Participating Securities and the Two-Class Method. Under the two-class method, we allocate earnings 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. For purposes of calculating earnings per share, we reduce our reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders.
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. 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.
Foreign Currency. We translate the financial statements of non-U.S. subsidiaries to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for revenue and expense. We use the local currency as the functional currency for all of our non-U.S. subsidiaries. We record translation adjustments for non-U.S. subsidiaries as a component of “Other comprehensive income (loss)” in our Consolidated Statements of Comprehensive Income. We include exchange gains and losses arising from transactions denominated in currencies other than the functional currency in “Other income (expense), net” in our Consolidated Statements of Income.
3. Credit Arrangements
In July 2015, we renewed our $75.0 million, single-bank revolving credit facility. We drew on the credit facility during the fourth quarter of 2015 and had an outstanding principal balance of $35.0 million at an interest rate of LIBOR plus 100 basis points as of December 31, 2015, leaving borrowing availability of $40.0 million.
17
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:
(in millions, except per share amounts) | 2015 | 2014 | 2013 | |||||||||
Basic net income per share attributable to Morningstar, Inc.: | ||||||||||||
Net income attributable to Morningstar, Inc.: | $ | 132.6 | $ | 78.3 | $ | 123.5 | ||||||
Less: Distributed earnings available to participating securities | — | — | — | |||||||||
Less: Undistributed earnings available to participating securities | — | — | — | |||||||||
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders | $ | 132.6 | $ | 78.3 | $ | 123.5 | ||||||
Weighted average common shares outstanding | 44.2 | 44.7 | 46.2 | |||||||||
Basic net income per share attributable to Morningstar, Inc. | $ | 3.00 | $ | 1.75 | $ | 2.68 | ||||||
Diluted net income per share attributable to Morningstar, Inc.: | ||||||||||||
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders | $ | 132.6 | $ | 78.3 | $ | 123.5 | ||||||
Add: Undistributed earnings allocated to participating securities | — | — | — | |||||||||
Less: Undistributed earnings reallocated to participating securities | — | — | — | |||||||||
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders | $ | 132.6 | $ | 78.3 | $ | 123.5 | ||||||
Weighted average common shares outstanding | 44.2 | 44.7 | 46.2 | |||||||||
Net effect of dilutive stock options and restricted stock units | 0.1 | 0.2 | 0.3 | |||||||||
Weighted average common shares outstanding for computing diluted income per share | 44.3 | 44.9 | 46.5 | |||||||||
Diluted net income per share attributable to Morningstar, Inc. | $ | 3.00 | $ | 1.74 | $ | 2.66 | ||||||
The following table shows the number of weighted average restricted stock units and performance share awards excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
(in thousands) | 2015 | 2014 | 2013 | ||||||
Weighted average restricted stock units | 38 | 47 | 17 | ||||||
Weighted average performance share awards | 4 | 6 | — | ||||||
Total | 42 | 53 | 17 | ||||||
Stock options could be included in the calculation in the future.
18
5. Segment and Geographical Area Information
Segment Information
We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and evaluates our financial results.
Because we have a single reportable segment, all required financial segment information can be found directly in the Consolidated Financial Statements.
The accounting policies for our reportable segment are the same as those described in Note 2. We evaluate the performance of our reporting segment based on revenue and operating income.
Geographical Area Information
The tables below summarize our revenue and long-lived assets by geographical area:
External revenue by geographical area | ||||||||||||
Year ended December 31 | ||||||||||||
(in millions) | 2015 | 2014 | 2013 | |||||||||
United States | $ | 585.1 | $ | 550.8 | $ | 500.8 | ||||||
United Kingdom | 64.2 | 61.8 | 56.2 | |||||||||
Continental Europe | 58.8 | 62.7 | 57.6 | |||||||||
Australia | 30.5 | 35.0 | 35.3 | |||||||||
Canada | 27.9 | 30.8 | 31.8 | |||||||||
Asia | 18.5 | 15.8 | 13.9 | |||||||||
Other | 3.8 | 3.2 | 2.7 | |||||||||
Total International | 203.7 | 209.3 | 197.5 | |||||||||
Consolidated revenue | $ | 788.8 | $ | 760.1 | $ | 698.3 | ||||||
Long-lived assets by geographical area | ||||||||
As of December 31 | ||||||||
(in millions) | 2015 | 2014 | ||||||
United States | $ | 116.9 | $ | 98.1 | ||||
United Kingdom | 8.6 | 8.1 | ||||||
Continental Europe | 2.2 | 2.1 | ||||||
Australia | 0.9 | 0.8 | ||||||
Canada | 0.7 | 0.9 | ||||||
Asia | 5.2 | 7.5 | ||||||
Other | — | 0.1 | ||||||
Total International | 17.6 | 19.5 | ||||||
Consolidated property, equipment, and capitalized software, net | $ | 134.5 | $ | 117.6 | ||||
19
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 into three categories: available-for-sale, held-to-maturity, and trading. Our investment portfolio consists of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. We classify our investment portfolio as shown below:
As of December 31 | ||||||||
(in millions) | 2015 | 2014 | ||||||
Available-for-sale | $ | 17.3 | $ | 13.2 | ||||
Held-to-maturity | 15.3 | 17.9 | ||||||
Trading securities | 8.9 | 8.3 | ||||||
Total | $ | 41.5 | $ | 39.4 | ||||
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 December 31, 2015 | As of December 31, 2014 | |||||||||||||||||||||||||||||||
(in millions) | Cost | Unrealized Gain | Unrealized Loss | Fair Value | Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||
Equity securities and exchange-traded funds | 17.4 | 0.3 | (1.6 | ) | 16.1 | 11.4 | 0.8 | (0.3 | ) | 11.9 | ||||||||||||||||||||||
Mutual funds | 1.3 | — | (0.1 | ) | 1.2 | 1.2 | 0.2 | (0.1 | ) | 1.3 | ||||||||||||||||||||||
Total | $ | 18.7 | $ | 0.3 | $ | (1.7 | ) | $ | 17.3 | $ | 12.6 | $ | 1.0 | $ | (0.4 | ) | $ | 13.2 | ||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||||||||||
Certificates of deposit | $ | 15.3 | $ | — | $ | — | $ | 15.3 | $ | 17.9 | $ | — | $ | — | $ | 17.9 | ||||||||||||||||
As of December 31, 2015 and December 31, 2014, investments with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.
20
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 December 31, 2015 and December 31, 2014. 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 December 31, 2015 | As of December 31, 2014 | |||||||||||||||
(in millions) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Available-for-sale: | ||||||||||||||||
Equity securities, exchange-traded funds, and mutual funds | 18.7 | 17.3 | 12.6 | 13.2 | ||||||||||||
Total | $ | 18.7 | $ | 17.3 | $ | 12.6 | $ | 13.2 | ||||||||
Held-to-maturity: | ||||||||||||||||
Due in one year or less | $ | 15.3 | $ | 15.3 | $ | 17.9 | $ | 17.9 | ||||||||
Total | $ | 15.3 | $ | 15.3 | $ | 17.9 | $ | 17.9 | ||||||||
As of December 31, 2014, held-to-maturity investments included a $1.5 million certificate of deposit, held as collateral against bank guarantees for our office leases, primarily 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 Consolidated Statements of Income:
(in millions) | 2015 | 2014 | 2013 | |||||||||
Realized gains | $ | 1.3 | $ | 1.5 | $ | 5.5 | ||||||
Realized losses | (0.7 | ) | (0.5 | ) | (1.3 | ) | ||||||
Realized gains, net | $ | 0.6 | $ | 1.0 | $ | 4.2 | ||||||
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 Consolidated Statements of Income:
(in millions) | 2015 | 2014 | 2013 | |||||||||
Unrealized gains (losses), net | $ | (0.8 | ) | $ | (0.2 | ) | $ | 0.8 | ||||
The table below shows the fair value of our assets subject to fair value measurements 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:
Fair Value | Fair Value Measurements as of December 31, 2015 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
(in millions) | December 31, 2015 | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale investments | ||||||||||||||||
Equity securities and exchange-traded funds | 16.1 | 16.1 | — | — | ||||||||||||
Mutual funds | 1.2 | 1.2 | — | — | ||||||||||||
Trading securities | 8.9 | 8.9 | — | — | ||||||||||||
Cash equivalents | 0.2 | 0.2 | — | — | ||||||||||||
Total | $ | 26.4 | $ | 26.4 | $ | — | $ | — | ||||||||
21
Fair Value | Fair Value Measurements as of December 31, 2014 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
(in millions) | December 31, 2014 | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale investments | ||||||||||||||||
Equity securities and exchange-traded funds | 11.9 | 11.9 | — | — | ||||||||||||
Mutual funds | 1.3 | 1.3 | — | — | ||||||||||||
Trading securities | 8.3 | 8.3 | — | — | ||||||||||||
Cash equivalents | 0.5 | 0.5 | — | — | ||||||||||||
Total | $ | 22.0 | $ | 22.0 | $ | — | $ | — | ||||||||
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 each of these investment categories 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. We did not hold any securities categorized as Level 2 or Level 3 as of December 31, 2015 and December 31, 2014.
7. Acquisitions, Goodwill, and Other Intangible Assets
2015 Acquisitions
Increased Ownership Interest in Ibbotson Associates Japan K.K. (IAJ)
In July 2015, we acquired an additional 28.9% interest in Ibbotson Associates Japan K.K. (IAJ), increasing our ownership to 100% from 71.1%