Table of
Contents
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington D.C.
20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2009
|
|
|
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
(Registrants 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
o
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 31, 2009, there
were 48,394,783 shares of the Companys common stock, no par value,
outstanding.
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Unaudited Condensed
Consolidated 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)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
119,533
|
|
$
|
132,237
|
|
$
|
236,265
|
|
$
|
257,681
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense (1):
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
30,694
|
|
33,164
|
|
60,946
|
|
66,102
|
|
Development
|
|
9,438
|
|
9,801
|
|
18,738
|
|
19,916
|
|
Sales and marketing
|
|
18,010
|
|
20,866
|
|
35,546
|
|
43,090
|
|
General and administrative
|
|
19,853
|
|
20,560
|
|
37,006
|
|
39,885
|
|
Depreciation and amortization
|
|
8,850
|
|
6,276
|
|
16,716
|
|
12,433
|
|
Total operating expense
|
|
86,845
|
|
90,667
|
|
168,952
|
|
181,426
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
32,688
|
|
41,570
|
|
67,313
|
|
76,255
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
764
|
|
1,381
|
|
1,742
|
|
2,900
|
|
Other income (expense), net
|
|
1,208
|
|
(234
|
)
|
764
|
|
38
|
|
Non-operating income, net
|
|
1,972
|
|
1,147
|
|
2,506
|
|
2,938
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income (loss) of unconsolidated entities
|
|
34,660
|
|
42,717
|
|
69,819
|
|
79,193
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
14,024
|
|
15,076
|
|
24,692
|
|
28,580
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
(21
|
)
|
445
|
|
361
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
20,615
|
|
28,086
|
|
45,488
|
|
51,410
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to
the noncontrolling interest
|
|
(71
|
)
|
(87
|
)
|
18
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
20,544
|
|
$
|
27,999
|
|
$
|
45,506
|
|
$
|
51,075
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable
to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
$
|
0.61
|
|
$
|
0.95
|
|
$
|
1.12
|
|
Diluted
|
|
$
|
0.41
|
|
$
|
0.57
|
|
$
|
0.92
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
47,941
|
|
45,921
|
|
47,661
|
|
45,572
|
|
Diluted
|
|
49,631
|
|
49,290
|
|
49,385
|
|
49,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
715
|
|
$
|
528
|
|
$
|
1,264
|
|
$
|
964
|
|
Development
|
|
413
|
|
367
|
|
767
|
|
688
|
|
Sales and marketing
|
|
422
|
|
379
|
|
778
|
|
724
|
|
General and administrative
|
|
1,518
|
|
1,695
|
|
2,984
|
|
3,337
|
|
Total stock-based compensation
expense
|
|
$
|
3,068
|
|
$
|
2,969
|
|
$
|
5,793
|
|
$
|
5,713
|
|
See notes to unaudited condensed consolidated financial
statements.
3
Table of Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated
Balance Sheets
(in thousands except share amounts)
|
|
June 30
2009
|
|
December 31
2008
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
187,099
|
|
$
|
173,891
|
|
Investments
|
|
136,096
|
|
123,686
|
|
Accounts receivable, less
allowance of $695 and $466, respectively
|
|
84,146
|
|
89,537
|
|
Deferred tax asset, net
|
|
3,766
|
|
3,538
|
|
Income tax receivable
|
|
3,261
|
|
9,193
|
|
Other
|
|
13,469
|
|
13,891
|
|
Total current assets
|
|
427,837
|
|
413,736
|
|
Property, equipment, and
capitalized software, net
|
|
60,367
|
|
58,822
|
|
Investments in unconsolidated
entities
|
|
20,150
|
|
20,404
|
|
Goodwill
|
|
207,113
|
|
187,242
|
|
Intangible assets, net
|
|
123,675
|
|
119,812
|
|
Other assets
|
|
3,683
|
|
3,924
|
|
Total assets
|
|
$
|
842,825
|
|
$
|
803,940
|
|
|
|
|
|
|
|
Liabilities
and equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
27,949
|
|
$
|
30,071
|
|
Accrued compensation
|
|
27,100
|
|
73,012
|
|
Deferred revenue
|
|
133,997
|
|
130,270
|
|
Other
|
|
31
|
|
88
|
|
Total current liabilities
|
|
189,077
|
|
233,441
|
|
Accrued compensation
|
|
4,449
|
|
3,611
|
|
Deferred tax liability, net
|
|
7,606
|
|
7,531
|
|
Other long-term liabilities
|
|
23,279
|
|
23,428
|
|
Total liabilities
|
|
224,411
|
|
268,011
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Morningstar, Inc.
shareholders equity:
|
|
|
|
|
|
Common stock, no par value,
200,000,000 shares authorized, of which 48,367,477 and 47,282,958 shares were
outstanding as of June 30, 2009 and December 31, 2008, respectively
|
|
4
|
|
4
|
|
Treasury stock at cost, 225,881
shares as of June 30, 2009 and 233,332 shares as of December 31,
2008
|
|
(3,175
|
)
|
(3,280
|
)
|
Additional paid-in capital
|
|
412,289
|
|
390,404
|
|
Retained earnings
|
|
209,795
|
|
164,289
|
|
Accumulated other comprehensive
income (loss):
|
|
|
|
|
|
Currency translation adjustment
|
|
(1,312
|
)
|
(16,366
|
)
|
Unrealized gain on
available-for-sale securities
|
|
434
|
|
481
|
|
Total accumulated other
comprehensive loss
|
|
(878
|
)
|
(15,885
|
)
|
Total Morningstar, Inc.
shareholders equity
|
|
618,035
|
|
535,532
|
|
Noncontrolling interest
|
|
379
|
|
397
|
|
Total equity
|
|
618,414
|
|
535,929
|
|
Total liabilities and equity
|
|
$
|
842,825
|
|
$
|
803,940
|
|
See notes to unaudited condensed consolidated financial
statements.
4
Table of Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated
Statement of Equity and Comprehensive Income (Loss)
For the Six Months Ended June 30, 2009
|
|
Morningstar, Inc. Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Additional
|
|
|
|
Comprehensive
|
|
Non-
|
|
|
|
|
|
Shares
|
|
Par
|
|
Treasury
|
|
Paid-in
|
|
Retained
|
|
Income
|
|
controlling
|
|
Total
|
|
(in thousands, except share amounts)
|
|
Outstanding
|
|
Value
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
(Loss)
|
|
Interest
|
|
Equity
|
|
Balance
as of December 31, 2008
|
|
47,282,958
|
|
$
|
4
|
|
$
|
(3,280
|
)
|
$
|
390,404
|
|
$
|
164,289
|
|
$
|
(15,885
|
)
|
$
|
|
|
$
|
535,532
|
|
Adoption of SFAS No. 160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397
|
|
397
|
|
Balance
as of January 1, 2009
|
|
47,282,958
|
|
4
|
|
(3,280
|
)
|
390,404
|
|
164,289
|
|
(15,885
|
)
|
397
|
|
535,929
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
|
|
|
|
|
|
|
45,506
|
|
|
|
(18
|
)
|
45,488
|
|
Unrealized loss on investments, net
of income tax of $(28)
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
(47
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
15,054
|
|
|
|
15,054
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
45,506
|
|
15,007
|
|
(18
|
)
|
60,495
|
|
Issuance of common stock related to
stock option exercises and vesting of restricted stock units, net
|
|
1,084,519
|
|
|
|
105
|
|
11,548
|
|
|
|
|
|
|
|
11,653
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
5,793
|
|
|
|
|
|
|
|
5,793
|
|
Tax benefit derived from stock
option exercises and vesting of restricted stock units
|
|
|
|
|
|
|
|
4,544
|
|
|
|
|
|
|
|
4,544
|
|
Balance
as of June 30, 2009
|
|
48,367,477
|
|
$
|
4
|
|
$
|
(3,175
|
)
|
$
|
412,289
|
|
$
|
209,795
|
|
$
|
(878
|
)
|
$
|
379
|
|
$
|
618,414
|
|
See notes to unaudited condensed consolidated financial
statements.
5
Table of Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated
Statements of Cash Flows
|
|
Six Months Ended June 30
|
|
(in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Consolidated net income
|
|
$
|
45,488
|
|
$
|
51,410
|
|
Adjustments to reconcile
consolidated net income to net cash flows from operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
16,716
|
|
12,433
|
|
Deferred income tax expense
(benefit)
|
|
(956
|
)
|
2,919
|
|
Stock-based compensation expense
|
|
5,793
|
|
5,713
|
|
Provision for (recovery of) bad
debt
|
|
187
|
|
(11
|
)
|
Equity in net income of
unconsolidated entities
|
|
(361
|
)
|
(797
|
)
|
Excess tax benefits from stock
option exercises and vesting of restricted stock units
|
|
(4,544
|
)
|
(17,343
|
)
|
Other, net
|
|
(752
|
)
|
(1,099
|
)
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
|
9,312
|
|
(3,222
|
)
|
Other assets
|
|
341
|
|
(1,846
|
)
|
Accounts payable and accrued
liabilities
|
|
(6,012
|
)
|
997
|
|
Accrued compensation
|
|
(45,431
|
)
|
(28,890
|
)
|
Income taxes current
|
|
10,396
|
|
13,104
|
|
Deferred revenue
|
|
806
|
|
6,772
|
|
Deferred rent
|
|
(286
|
)
|
9,306
|
|
Other liabilities
|
|
570
|
|
(327
|
)
|
Cash provided by operating
activities
|
|
31,267
|
|
49,119
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
Purchases of investments
|
|
(50,273
|
)
|
(46,946
|
)
|
Proceeds from sale of investments
|
|
38,128
|
|
82,213
|
|
Capital expenditures
|
|
(6,768
|
)
|
(17,354
|
)
|
Acquisitions, net of cash acquired
|
|
(18,571
|
)
|
(51,017
|
)
|
Other, net
|
|
629
|
|
|
|
Cash used for investing activities
|
|
(36,855
|
)
|
(33,104
|
)
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
Proceeds from stock options
exercises
|
|
11,653
|
|
12,595
|
|
Excess tax benefits from stock
option exercises and vesting of restricted stock units
|
|
4,544
|
|
17,343
|
|
Other
|
|
(178
|
)
|
(4
|
)
|
Cash provided by financing
activities
|
|
16,019
|
|
29,934
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
2,777
|
|
1,352
|
|
Net increase in cash and cash
equivalents
|
|
13,208
|
|
47,301
|
|
Cash and cash equivalents
beginning of period
|
|
173,891
|
|
159,576
|
|
Cash and cash equivalents end of
period
|
|
$
|
187,099
|
|
$
|
206,877
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
14,152
|
|
$
|
15,252
|
|
Supplemental
information of non-cash investing and financing activities:
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale investments
|
|
$
|
(75
|
)
|
$
|
154
|
|
See notes to unaudited condensed consolidated financial
statements.
6
Table of Contents
MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation of Interim
Financial Information
The accompanying unaudited condensed consolidated financial
statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our,
the Company) included herein have been prepared to conform to the rules and
regulations of the Securities and Exchange Commission. 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 as of December 31, 2008 included in our Annual Report on Form 10-K.
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, 2008.
We adopted the following financial accounting standards
effective January 1, 2009:
SFAS No. 160, Accounting and
Reporting of Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51
Statement of Financial Accounting Standards (SFAS) No. 160,
Accounting and Reporting of Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51,
amends the financial accounting and reporting of noncontrolling interests in
consolidated financial statements. A noncontrolling interest is the
portion of equity (net assets) in a subsidiary not attributable, directly or
indirectly, to the parent company. We conduct our business operations
outside of the United States through wholly owned or majority-owned operating
subsidiaries. As a result of adopting SFAS No. 160, the
noncontrolling interest is now reported in our Consolidated Balance Sheet
within equity, separately from the shareholders equity attributable to
Morningstar, Inc. In addition, the net income or loss and
comprehensive income or loss attributed to the Morningstar, Inc.
shareholders and the noncontrolling interest are presented in our Statements of
Income and Statement of Equity and Comprehensive Income (Loss).
SFAS No. 141(R),
Business Combinations
Effective January 1, 2009, SFAS No. 141(R),
Business Combinations
, modifies the financial accounting and
reporting of business combinations. For business combinations which occur after
January 1, 2009, SFAS No. 141(R) requires the acquirer to
recognize and measure the fair value of the acquired operation as a whole, and
the assets acquired and liabilities assumed at their full fair values as of the
date control is obtained, regardless of the percentage ownership in the
acquired operation or how the acquisition was achieved. With the adoption of
SFAS No. 141(R), direct costs incurred in connection with a business
combination, such as finders fees, advisory, accounting, legal, valuation, and
other professional fees are expensed as incurred. Restructuring costs,
including severance and relocation of employees of the acquired entity, are
recognized separately from the business combination as post-combination
expenses unless the criteria of SFAS No. 146
, Accounting
for Costs Associated with Exit or Disposal Activities
, are met on
the acquisition date by the target entity. Prior to the adoption of SFAS No. 141(R),
acquisition-related costs and restructuring costs were generally included as
part of the cost of the acquired business.
In April 2009, the Financial Accounting Standards Board
(FASB) issued a Final Staff Position (FSP) to amend and clarify SFAS No. 141(R),
to address application issues on recognition, measurement, and disclosure of
assets and liabilities, arising from contingencies in a business combination.
This FSP is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after January 1,
2009.
EITF Issue 08-6, Equity Method Investment
Accounting Considerations
We adopted Emerging Issues Task Force (EITF) 08-6,
Equity Method Investment Accounting Considerations,
concurrently
with the adoption of SFAS No. 141(R) and SFAS No. 160. The
intent of EITF 08-6 is to clarify the accounting for certain transactions and
impairment considerations related to equity method investments as modified by
the provisions of SFAS No. 141(R) and SFAS No. 160.
7
Table of Contents
We adopted the following financial accounting standards in
the second quarter of 2009:
In April 2009, the FASB issued three FSPs intended to
provide additional application guidance and enhance disclosures regarding fair
value measurements and impairments of securities.
1.
FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
, provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS No. 157,
Fair Value Measurements
.
2.
FSP FAS 107-1 and
APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures.
3.
FSP FAS 115-2 and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
, provides additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities.
The disclosures related to these FSPs appear in Note 6 in
the Notes to our Condensed Consolidated Financial Statements.
SFAS No. 165, Subsequent Events
SFAS No. 165,
Subsequent Events
,
establishes the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date, that is, whether
that date represents the date the financial statements were issued or were
available to be issued. See Note 12 in the Notes to our Condensed Consolidated
Financial Statements for the related disclosure.
The adoption of these financial accounting standards did not
have a material impact on our Condensed Consolidated Financial Statements.
8
Table of Contents
3. Acquisitions, Goodwill, and Other
Intangible Assets
2009 Acquisitions
In the second quarter of 2009, we completed four
acquisitions. Cash used for these acquisitions, net of acquired cash, was
$18,671,000, and is subject to post-closing adjustments. The table below shows
additional information concerning these acquisitions:
Acquisition
|
|
Description
|
|
Date Completed
|
|
Purchase Price*
|
Global financial filings database business of Global
Reports LLC
|
|
A leading provider of online financial and Corporate and
Social Responsibility reports for publicly traded companies around the world
|
|
April 20, 2009
|
|
Not separately disclosed
|
Equity research and data
business of C.P.M.S. Computerized Portfolio Management Services Inc.
|
|
C.P.M.S. tracks fundamental equity data for approximately
4,000 securities in the United States and Canada as well as tracks and
provides brokerage earnings estimates for Canadian equities
|
|
May 1, 2009
|
|
$13.9 million
|
Andex Associates, Inc.
|
|
The company is known for its Andex Charts, individual
graphic charts detailing historical market returns, stock index growth,
inflation rates, currency rates, and general economic conditions for the
United States dating back to 1926, and for Canada dating back to 1950
|
|
May 1, 2009
|
|
Not separately disclosed
|
Intech Pty Ltd
|
|
A leading provider of multi-manager and investment
portfolio solutions in Sydney, Australia, Intech also manages a range of
single sector, alternative strategy, and diversified investment portfolios,
has one of the leading separately managed account databases in Australia and
offers the Intech Desktop Consultant, a research software product for institutions
|
|
June 30, 2009
|
|
Not separately disclosed
|
* Total purchase price less cash acquired
The following table summarizes our preliminary allocation of
the purchase price to the estimated fair values of the assets acquired and
liabilities assumed at the dates of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
1,333
|
|
Accounts receivable
|
|
2,706
|
|
Other current assets
|
|
135
|
|
Fixed assets
|
|
56
|
|
Other non-current assets
|
|
334
|
|
Intangible assets
|
|
9,876
|
|
Goodwill
|
|
10,380
|
|
Deferred revenue
|
|
(634
|
)
|
Accounts payable and accrued
liabilities
|
|
(3,404
|
)
|
Deferred tax liability
non-current
|
|
(778
|
)
|
Total purchase price
|
|
$
|
20,004
|
|
The preliminary allocation includes $9,876,000 of acquired
intangible assets. These assets primarily include customer-related assets and
technology-based assets, including software and databases. The deferred tax
liability of $778,000 results primarily because the amortization expense
related to certain intangible assets is not deductible for income tax purposes.
Approximately $7,590,000 of the intangible assets is deductible for income tax
purposes over a period of approximately 15 years from the acquisition date.
9
Table of Contents
Goodwill of $10,380,000 represents the premium we paid over
the fair value of the net tangible and intangible assets we acquired with these
four acquisitions. We paid this premium for a number of reasons, including the
strategic benefits of expanding our Canadian equity research and data
offerings, expanding our international presence in the area of funds-of-funds
investment management to Australia, expanding our library of market analysis
communications materials to include financial charts and communications
materials for financial advisors in Canada, and broadening our database to
include a global financial filings database. Approximately $8,182,000 of the
goodwill is deductible for income tax purposes over a period of approximately
15 years from the acquisition date.
2008 Acquisitions
In January 2008, we acquired the Hemscott data, media,
and investor relations Web site businesses. We completed five additional
acquisitions throughout the remainder of 2008. The table below summarizes the
acquisitions completed during 2008. We did not make any significant changes
during the first half of 2009 to the purchase price allocations compared with
the preliminary estimates existing as of December 31,
2008. Additional information concerning these acquisitions can be found in
the Notes to our Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Acquisition
|
|
Description
|
|
Date Completed
|
|
Purchase Price*
|
Hemscott data, media, and investor relations Web site
businesses
|
|
U.K.-based operation providing more than 20 years of
comprehensive fundamental data on publicly listed companies in the United
States, Canada, the United Kingdom, and Ireland; free and paid investment
research sites and data services; online investor relations services in the
United Kingdom
|
|
January 9, 2008
|
|
$51.3 million
|
Financial Computer Support, Inc. (FCSI)
|
|
A leading provider of practice management software for
independent advisors
|
|
September 2, 2008
|
|
$4.9 million
|
Fundamental Data Limited (Fundamental Data)
|
|
A leading provider of data on closed-end funds in the
United Kingdom
|
|
October 2, 2008
|
|
$18.6 million
|
10-K Wizard Technology, LLC (10-K Wizard)
|
|
A leading provider of SEC filing research and alert
services
|
|
December 4, 2008
|
|
$11.5 million
|
Tenfore Systems Limited (Tenfore)
|
|
Global provider of real-time market data and financial
data workstations based in the United Kingdom
|
|
December 17, 2008
|
|
$19.2 million
|
InvestData (Proprietary) Limited (InvestData)
|
|
A leading provider of fund information in South Africa
|
|
December 29, 2008
|
|
Not separately disclosed
|
* Total purchase price less cash acquired
Pro Forma Information for 2009 and 2008
Acquisitions
The following unaudited pro forma information presents a
summary of our Consolidated Statements of Income for the six months ended June 30,
2009 and 2008 as if we had completed these 10 acquisitions as of January 1
of each of these years. In calculating the pro forma information below, we made
an adjustment to include amortization expense related to the intangible assets
acquired.
|
|
Six months ended
|
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
Revenue
|
|
$
|
242,138
|
|
$
|
279,953
|
|
Operating income
|
|
$
|
66,956
|
|
$
|
74,664
|
|
Net income
|
|
$
|
45,272
|
|
$
|
49,736
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.95
|
|
$
|
1.09
|
|
Diluted net income per share
|
|
$
|
0.92
|
|
$
|
1.01
|
|
10
Table of Contents
Goodwill
The following table shows the changes in our goodwill
balances from January 1, 2008 to June 30, 2009:
|
|
($000)
|
|
Balance as of January 1, 2008
|
|
$
|
128,141
|
|
Acquisition of the Hemscott data,
media, and investor relations Web site businesses
|
|
35,683
|
|
Acquisition of Fundamental Data
|
|
13,669
|
|
Acquisition of 10-K Wizard
|
|
7,219
|
|
Acquisition of Tenfore
|
|
13,916
|
|
Acquisition of FCSI and InvestData
|
|
3,858
|
|
Other, primarily currency
translation
|
|
(15,244
|
)
|
Balance as of December 31,
2008
|
|
187,242
|
|
Goodwill for acquisitions
completed in the first six months of 2009
|
|
10,380
|
|
Other, primarily currency
translation
|
|
9,491
|
|
Balance as of June 30, 2009
|
|
$
|
207,113
|
|
We did not record any impairment losses in the second
quarter or year-to-date periods ended June 30, 2009 and June 30, 2008,
respectively.
The following table summarizes our intangible assets:
|
|
As of June 30, 2009
|
|
As of December 31, 2008
|
|
($000)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Useful Life
(years)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Useful Life
(years)
|
|
Intellectual property
|
|
$
|
27,327
|
|
$
|
(10,322
|
)
|
$
|
17,005
|
|
10
|
|
$
|
26,198
|
|
$
|
(8,338
|
)
|
$
|
17,860
|
|
10
|
|
Customer-related assets
|
|
68,908
|
|
(21,746
|
)
|
47,162
|
|
10
|
|
67,325
|
|
(17,620
|
)
|
49,705
|
|
10
|
|
Supplier relationships
|
|
240
|
|
(54
|
)
|
186
|
|
20
|
|
240
|
|
(48
|
)
|
192
|
|
20
|
|
Technology-based assets
|
|
35,719
|
|
(12,064
|
)
|
23,655
|
|
9
|
|
34,845
|
|
(9,525
|
)
|
25,320
|
|
9
|
|
Non-competition agreement
|
|
810
|
|
(459
|
)
|
351
|
|
5
|
|
810
|
|
(375
|
)
|
435
|
|
5
|
|
Intangible assets related to
acquisitions of FCSI, Fund Data, Tenfore, 10-K Wizard, InvestData, Global
Reports, C.P.M.S., Andex, and Intech
|
|
39,176
|
|
(3,860
|
)
|
35,316
|
|
5
|
|
26,962
|
|
(662
|
)
|
26,300
|
|
5
|
|
Total intangible assets
|
|
$
|
172,180
|
|
$
|
(48,505
|
)
|
$
|
123,675
|
|
8
|
|
$
|
156,380
|
|
$
|
(36,568
|
)
|
$
|
119,812
|
|
9
|
|
We amortize intangible assets using the straight-line method
over their expected economic useful lives. Amortization expense was $10,663,000
and $8,113,000 for the six months ended June 30, 2009 and 2008,
respectively.
As of June 30, 2009, we estimate that aggregate
amortization expense for intangible assets will be $22,509,000 in 2009;
$21,563,000 in 2010; $20,078,000 in 2011; $19,420,000 in 2012; $17,094,000 in
2013; and $10,751,000 in 2014. Our estimates of future amortization
expense for intangible assets may be affected by changes to the preliminary
purchase price allocations.
11
Table of Contents
4. Income Per Share
The numerator for both basic and diluted income per share is
net income attributable to Morningstar, Inc. The denominator for
basic income per share is the weighted average number of common shares
outstanding during the period. For diluted income per share, we reflect the
dilutive effect of outstanding employee stock options and restricted stock
units in the denominator using the treasury stock method. 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)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
20,544
|
|
$
|
27,999
|
|
$
|
45,506
|
|
$
|
51,075
|
|
Weighted average common shares
outstanding
|
|
47,941
|
|
45,921
|
|
47,661
|
|
45,572
|
|
Basic net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.43
|
|
$
|
0.61
|
|
$
|
0.95
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
20,544
|
|
$
|
27,999
|
|
$
|
45,506
|
|
$
|
51,075
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
47,941
|
|
45,921
|
|
47,661
|
|
45,572
|
|
Net effect of dilutive stock
options and restricted stock units
|
|
1,690
|
|
3,369
|
|
1,724
|
|
3,578
|
|
Weighted average common shares
outstanding for computing diluted income per share
|
|
49,631
|
|
49,290
|
|
49,385
|
|
49,150
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.41
|
|
$
|
0.57
|
|
$
|
0.92
|
|
$
|
1.04
|
|
5. Segment and Geographical Area Information
Beginning in 2009, we changed our organizational structure
and now have two operating segments: Investment Information and
Investment Management. Previously, we organized our operations based on three
audience segments: Individual, Advisor, and Institutional. The new structure
organizes our operations according to product lines and growth strategies
rather than audience segments. Under the previous segment reporting, we
allocated costs for our corporate functions to each of the segments. Beginning
in 2009, we no longer allocate corporate costs to our business
segments. We have changed the presentation of the 2008 segment information
to conform to the current years presentation.
·
Investment Information.
The Investment
Information segment includes all of our data, software, and research products
and services. These products are typically sold through subscriptions or
license agreements.
The largest products in this segment based on revenue are
Licensed Data; Morningstar Advisor Workstation; Morningstar.com, including
Premium memberships and Internet advertising sales; Morningstar Direct; and
Morningstar Principia. Licensed Data is a set of investment data spanning all
of our investment databases and available through electronic data feeds.
Advisor Workstation is a Web-based investment planning system for advisors.
Advisor Workstation is available in two editions: one for independent financial
advisors and an enterprise edition for financial advisors affiliated with
larger firms. Morningstar.com includes both Premium Memberships and Internet
advertising sales. Morningstar Direct is a Web-based institutional research
platform. 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. Our equity
research has been distributed through six major investment banks to meet the
requirements for independent research under the Global Analyst Research
Settlement, as well as to several other companies that purchase our research
for their own use or provide our research to their affiliated financial
advisors or to individual investors.
12
Table of Contents
·
Investment Management.
The Investment
Management segment includes all of our asset management operations, which
operate as registered investment advisors and earn more than half of their
revenue from asset-based fees.
The key products and services in this segment based on
revenue are Investment Consulting, which focuses on investment monitoring and
asset allocation for funds of funds, including mutual funds and variable
annuities; Retirement Advice, 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.
Our segment accounting policies are the same as those
described in Note 2 to our Consolidated Financial Statements included in our
Annual Report on Form 10-K as of December 31, 2008, 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 segments 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 to arrive at the
consolidated financial information. Our segment disclosures include the
business segment information provided to our chief operating decision maker on
a recurring basis, and therefore, we do not present balance sheet information
by segment. We disclose goodwill by segment in accordance with the requirements
of SFAS No. 142,
Goodwill and Other
Intangible Assets
.
The following tables show selected segment data for the
three and six months ended June 30, 2009 and 2008:
|
|
Three months ended June 30,
2009
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
97,739
|
|
$
|
21,794
|
|
$
|
|
|
$
|
119,533
|
|
Operating expense, excluding
stock-based compensation expense, depreciation, and amortization
|
|
57,770
|
|
8,126
|
|
9,031
|
|
74,927
|
|
Stock-based compensation expense
|
|
1,526
|
|
517
|
|
1,025
|
|
3,068
|
|
Depreciation and amortization
|
|
1,201
|
|
89
|
|
7,560
|
|
8,850
|
|
Operating income (loss)
|
|
$
|
37,242
|
|
$
|
13,062
|
|
$
|
(17,616
|
)
|
$
|
32,688
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,713
|
|
$
|
148
|
|
$
|
317
|
|
$
|
2,178
|
|
|
|
|
|
|
|
|
|
|
|
U.S. revenue
|
|
|
|
|
|
|
|
$
|
89,286
|
|
Non-U.S. revenue
|
|
|
|
|
|
|
|
$
|
30,247
|
|
|
|
Three months ended June 30, 2008
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
101,580
|
|
$
|
30,657
|
|
$
|
|
|
$
|
132,237
|
|
Operating expense, excluding
stock-based compensation expense, depreciation, and amortization
|
|
60,460
|
|
12,592
|
|
8,370
|
|
81,422
|
|
Stock-based compensation expense
|
|
1,389
|
|
525
|
|
1,055
|
|
2,969
|
|
Depreciation and amortization
|
|
1,034
|
|
44
|
|
5,198
|
|
6,276
|
|
Operating income (loss)
|
|
$
|
38,697
|
|
$
|
17,496
|
|
$
|
(14,623
|
)
|
$
|
41,570
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,574
|
|
$
|
1,272
|
|
$
|
1,797
|
|
$
|
10,643
|
|
|
|
|
|
|
|
|
|
|
|
U.S. revenue
|
|
|
|
|
|
|
|
$
|
99,534
|
|
Non-U.S. revenue
|
|
|
|
|
|
|
|
$
|
32,703
|
|
13
Table of Contents
|
|
Six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
193,979
|
|
$
|
42,286
|
|
$
|
|
|
$
|
236,265
|
|
Operating expense, excluding
stock-based compensation expense, depreciation, and amortization
|
|
114,835
|
|
16,303
|
|
15,305
|
|
146,443
|
|
Stock-based compensation expense
|
|
2,793
|
|
985
|
|
2,015
|
|
5,793
|
|
Depreciation and amortization
|
|
2,272
|
|
109
|
|
14,335
|
|
16,716
|
|
Operating income (loss)
|
|
$
|
74,079
|
|
$
|
24,889
|
|
$
|
(31,655
|
)
|
$
|
67,313
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
5,473
|
|
$
|
332
|
|
$
|
963
|
|
$
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
U.S. revenue
|
|
|
|
|
|
|
|
$
|
177,434
|
|
Non-U.S. revenue
|
|
|
|
|
|
|
|
$
|
58,831
|
|
|
|
Six months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
198,086
|
|
$
|
59,595
|
|
$
|
|
|
$
|
257,681
|
|
Operating expense, excluding
stock-based compensation expense, depreciation, and amortization
|
|
121,355
|
|
25,714
|
|
16,211
|
|
163,280
|
|
Stock-based compensation expense
|
|
2,678
|
|
1,029
|
|
2,006
|
|
5,713
|
|
Depreciation and amortization
|
|
2,068
|
|
97
|
|
10,268
|
|
12,433
|
|
Operating income (loss)
|
|
$
|
71,985
|
|
$
|
32,755
|
|
$
|
(28,485
|
)
|
$
|
76,255
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
12,954
|
|
$
|
2,304
|
|
$
|
2,096
|
|
$
|
17,354
|
|
|
|
|
|
|
|
|
|
|
|
U.S. revenue
|
|
|
|
|
|
|
|
$
|
194,697
|
|
Non-U.S. revenue
|
|
|
|
|
|
|
|
$
|
62,984
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Goodwill
|
|
$
|
175,618
|
|
$
|
31,495
|
|
$
|
|
|
$
|
207,113
|
|
|
|
|
|
|
|
|
|
|
|
U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
44,285
|
|
Non-U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
16,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Goodwill
|
|
$
|
126,868
|
|
$
|
31,470
|
|
$
|
|
|
$
|
158,338
|
|
|
|
|
|
|
|
|
|
|
|
U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
24,220
|
|
Non-U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
11,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Table of Contents
6. Investments and Fair Value Measurements
We account for our investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and
Equity Securities.
We classify our investments into three
categories: held-to-maturity, trading, and available-for-sale. 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 follows:
|
|
June 30, 2009
|
|
December 31, 2008
|
|
Available-for-sale
|
|
$
|
128,033
|
|
$
|
116,867
|
|
Held-to-maturity
|
|
4,456
|
|
3,497
|
|
Trading securities
|
|
3,607
|
|
3,322
|
|
Total
|
|
$
|
136,096
|
|
$
|
123,686
|
|
Available-for-Sale:
Investments not
considered held-to-maturity or trading securities are classified as available-for-sale
securities and consist primarily of fixed-income securities. We record these
securities at their fair value in our Consolidated Balance Sheets. We report
unrealized gains and losses for available-for-sale securities as other
comprehensive income (loss), net of related income taxes.
Held-to-maturity:
Investments consist
primarily of certificates of deposit 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. The amortized cost of these
securities approximates the fair value of these investments.
Trading
: Investments consist
primarily of mutual fund and equity securities based on our intent to hold the
securities for a short period of time and generate profits on short-term
differences in price, as well as to satisfy the requirements of one of our
wholly owned subsidiaries which is a registered broker-dealer. We record these
securities at their fair value in our Consolidated Balance Sheets and include
realized and unrealized gains and losses associated with these investments as a
component of our operating income in the Consolidated Statements of Income.
The following table shows the cost, unrealized gains
(losses), and fair values related to investments classified as
available-for-sale and held-to-maturity:
|
|
June 30, 2009
|
|
December 31, 2008
|
|
($000)
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government obligations
|
|
$
|
127,338
|
|
$
|
721
|
|
$
|
(26
|
)
|
$
|
128,033
|
|
$
|
111,513
|
|
$
|
806
|
|
$
|
(27
|
)
|
$
|
112,292
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
3,595
|
|
1
|
|
(21
|
)
|
3,575
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
1,000
|
|
Total
|
|
$
|
127,338
|
|
$
|
721
|
|
$
|
(26
|
)
|
$
|
128,033
|
|
$
|
116,108
|
|
$
|
807
|
|
$
|
(48
|
)
|
$
|
116,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
4,456
|
|
$
|
|
|
$
|
|
|
$
|
4,456
|
|
$
|
3,497
|
|
$
|
|
|
$
|
|
|
$
|
3,497
|
|
As of June 30, 2009, we did not hold any investments
with unrealized losses for greater than a 12-month period. Investments with
unrealized losses for less than a 12-month period were not material to our
Condensed Consolidated Balance Sheet and were not deemed to have other than
temporary declines in value.
The table below shows the cost and estimated fair value of
investments classified as available-for-sale and held-to-maturity based on
their contractual maturities. 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.
|
|
June 30, 2009
|
|
December 31, 2008
|
|
($000)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
60,464
|
|
$
|
60,679
|
|
$
|
72,910
|
|
$
|
73,376
|
|
Due in one to two years
|
|
66,874
|
|
67,354
|
|
43,198
|
|
43,491
|
|
Total
|
|
$
|
127,338
|
|
$
|
128,033
|
|
$
|
116,108
|
|
$
|
116,867
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,998
|
|
$
|
3,998
|
|
$
|
3,350
|
|
$
|
3,350
|
|
Due in one to two years
|
|
458
|
|
458
|
|
147
|
|
147
|
|
Total
|
|
$
|
4,456
|
|
$
|
4,456
|
|
$
|
3,497
|
|
$
|
3,497
|
|
15
Table of Contents
Held-to-maturity investments include a $1,600,000
certificate of deposit held as collateral against two bank guarantees for our
office space lease in Australia.
Net unrealized gains on trading securities included in our
Condensed Consolidated Statement of Income were $604,000 for the six months
ended June 30, 2009. Our Condensed
Consolidated Statement of Income for the six months ended June 30, 2008
includes $302,000 of net unrealized losses on trading securities.
The following table shows the net realized gains (losses)
arising from sales of our investments recorded in our Condensed Consolidated
Statements of Income:
|
|
Six months ended
|
|
($000)
|
|
June 30, 2009
|
|
June 30, 2008
|
|
Realized gains
|
|
$
|
9
|
|
$
|
32
|
|
Realized losses
|
|
(531
|
)
|
(43
|
)
|
Realized loss, net
|
|
$
|
(522
|
)
|
$
|
(11
|
)
|
The fair value of our assets subject to fair value
measurements and the necessary disclosures are as follows:
|
|
Fair Value
|
|
Fair Value Measurements as of
June 30, 2009
|
|
|
|
as of
|
|
Using Fair Value Hierarchy
|
|
($000)
|
|
June 30, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Available-for-sale investments
|
|
$
|
128,033
|
|
$
|
128,033
|
|
$
|
|
|
$
|
|
|
Trading securities
|
|
3,607
|
|
3,607
|
|
|
|
|
|
Total
|
|
$
|
131,640
|
|
$
|
131,640
|
|
$
|
|
|
$
|
|
|
|
|
Fair Value
|
|
Fair Value Measurements as of December 31, 2008
|
|
|
|
as of
|
|
Using Fair Value Hierarchy
|
|
($000)
|
|
December 31, 2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Available-for-sale investments
|
|
$
|
116,867
|
|
$
|
116,867
|
|
$
|
|
|
$
|
|
|
Trading securities
|
|
3,322
|
|
3,322
|
|
|
|
|
|
Total
|
|
$
|
120,189
|
|
$
|
120,189
|
|
$
|
|
|
$
|
|
|
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.
|
16
Table of Contents
7. Investments In Unconsolidated Entities
Our investments in unconsolidated entities consist primarily
of the following:
Morningstar Japan K.K.
Morningstar
Japan K.K. (MJKK) develops and markets products and services customized
for the Japanese market. MJKKs shares are traded on the Osaka Stock Exchange, Hercules
Market, using the ticker 4765. As of June 30, 2009 and December 31,
2008, we owned approximately 34% of MJKK. We account for our investment in MJKK
using the equity method. The book value of our investment in MJKK totaled
$17,848,000 and $18,083,000 as of June 30, 2009 and December 31,
2008, respectively. The market value of our investment in MJKK was
approximately ¥3.6 billion (approximately U.S. $37,448,000) as of June 30,
2009 and ¥2.9 billion (approximately U.S. $32,536,000) as of December 31,
2008.
Morningstar Korea, Ltd
.
Morningstar Korea provides financial information and services for investors in
South Korea. Our ownership interest and profit- and loss-sharing interest in
Morningstar Korea was 40% as of June 30, 2009 and December 31, 2008.
We account for this investment using the equity method. Our investment totaled
$1,553,000 and $1,560,000 as of June 30, 2009 and December 31, 2008,
respectively.
Other Investments in Unconsolidated
Entities
. As of June 30, 2009 and December 31, 2008, the
book value of our other investments in unconsolidated entities totaled $749,000
and $761,000, respectively, and consist primarily of our investments in
Morningstar Danmark A/S (Morningstar Denmark) and Morningstar Sweden AB
(Morningstar Sweden). Morningstar Denmark and Morningstar Sweden develop and
market products and services customized for their respective markets. Our
ownership interest in both Morningstar Denmark and Morningstar Sweden was
approximately 25% as of June 30, 2009 and December 31, 2008. We
account for our investments in Morningstar Denmark and Morningstar Sweden using
the equity method.
The following table shows unaudited condensed combined
financial information for our investments in unconsolidated entities.
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
7,429
|
|
$
|
10,042
|
|
$
|
15,304
|
|
$
|
30,784
|
|
Operating income
|
|
$
|
1,044
|
|
$
|
1,780
|
|
$
|
1,835
|
|
$
|
3,406
|
|
Net income
|
|
$
|
804
|
|
$
|
1,424
|
|
$
|
1,445
|
|
$
|
2,553
|
|
In April 2008, MJKK sold one of its
subsidiaries. The information for the six months ended June 30, 2008
includes the financial results of this subsidiary.
8. Stock-Based Compensation
Stock-Based Compensation Plans
Our 2004 Stock Incentive Plan (the 2004 Plan) provides for
grants of options, stock appreciation rights, restricted stock units, and
performance shares. Prior to adopting the 2004 Plan, we granted stock options
under various plans, including the 1993 Stock Option Plan, the 2000 Morningstar
Stock Option Plan, and the 2001 Morningstar Stock Option Plan (collectively,
the Prior Plans). The 2004 Plan amends and restates the Prior Plans. Under the
2004 Plan, we will not grant any additional options under any of the Prior
Plans, and any shares subject to an award under any of the Prior Plans that are
forfeited, canceled, settled, or otherwise terminated without a distribution of
shares, or withheld by us in connection with the exercise of options or in
payment of any required income tax withholding, will not be available for
awards under the 2004 Plan. As of June 30, 2009, we had approximately
2,200,000 shares available for future grants under our 2004 Plan. All of our
employees and our non-employee directors are eligible for awards under the 2004
Stock Incentive Plan. Joe Mansueto, our chairman and chief executive officer,
does not participate in the 2004 Stock Incentive Plan or Prior Plans.
Under the 2004 Plan, we have granted stock options and,
beginning in 2006, restricted stock units. Stock options granted under the 2004
Plan generally vest ratably over a four-year period and expire 10 years after
the date of grant. Almost all of the options granted under the 2004 Plan have a
premium feature in which the exercise price increases over the term of the option
at a rate equal to the 10-year Treasury bond yield as of the date of grant.
Restricted stock units represent the right to receive a share of Morningstar
common stock when that unit vests. Restricted stock units granted under the
2004 Plan generally vest ratably over a four-year period. For restricted stock
units granted through December 31, 2008, employees could elect to defer
receipt of the Morningstar common stock issued upon vesting of the restricted
stock unit.
Options granted under the Prior Plans generally vest over a
four-year period and were substantially all vested as of June 30, 2009;
however, because the options under the Prior Plans expire 10 years after the
date of grant, some options granted under these plans remain outstanding as of June 30,
2009.
17
Table of Contents
In February 1999, we entered into an Incentive Stock
Option Agreement and a Nonqualified Stock Option Agreement under the 1999
Incentive Stock Option Plan (the 1999 Plan) with Don Phillips, an officer of
Morningstar. Under these agreements, we granted Don options to purchase
1,500,000 shares of common stock at an exercise price of $2.77 per share, equal
to the fair value at the grant date. These options were fully vested and
expired in February 2009. The 30,576 options outstanding as of December 31,
2008 were exercised in 2009, prior to the expiration date.
Accounting for Stock-Based Compensation
Awards
In accordance with SFAS No. 123(R),
Stock Based Compensation
, we estimate
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. Estimated forfeitures are adjusted to actual
forfeiture experience as needed.
The following table summarizes stock-based compensation
expense:
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Stock-based compensation expense
|
|
$
|
3,068
|
|
$
|
2,969
|
|
$
|
5,793
|
|
$
|
5,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit related to the stock-based
compensation expense above was $967,000 and $1,113,000 for the three months
ended June 30, 2009 and 2008, respectively, and $1,834,000 and $2,004,000
for the six months ended June 30, 2009 and 2008, respectively.
Restricted Stock Units
We measure the fair value of our restricted stock units on
the date of grant based on the closing market price of the underlying common
stock on the day prior to grant. We amortize that value to stock-based
compensation expense, net of estimated forfeitures, ratably over the vesting
period. The total grant date fair value of restricted stock units granted
in the first six months of 2009 was approximately $13,291,000. As of June 30,
2009, the total amount of unrecognized stock-based compensation expense related
to restricted stock units was approximately $28,204,000. We expect
to recognize this expense over an average period of approximately 36
months.
The following table summarizes restricted stock unit
activity in the first six months of 2009:
Restricted Stock Units (RSUs)
|
|
Unvested
|
|
Vested but
Deferred
|
|
Total
|
|
Weighted
Average
Grant Date Value
per RSU
|
|
RSUs outstandingDecember 31,
2008
|
|
494,500
|
|
22,024
|
|
516,524
|
|
$
|
55.17
|
|
Granted
|
|
348,236
|
|
|
|
348,236
|
|
38.17
|
|
Vested
|
|
(121,942
|
)
|
|
|
(121,942
|
)
|
54.74
|
|
Vested but deferred
|
|
(17,561
|
)
|
17,561
|
|
|
|
|
|
Forfeited
|
|
(9,292
|
)
|
|
|
(9,292
|
)
|
52.84
|
|
RSUs outstandingJune 30,
2009
|
|
693,941
|
|
39,585
|
|
733,526
|
|
46.94
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
Stock Options
The following tables summarize stock option activity in the
first six months of 2009 for our various stock option grants. The first table
includes activity for options granted at an exercise price below the fair value
per share of our common stock on the grant date; the second table includes
activity for all other option grants.
Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options outstandingDecember 31, 2008
|
|
1,110,652
|
|
$
|
15.33
|
|
Canceled
|
|
(175
|
)
|
15.14
|
|
Exercised
|
|
(237,233
|
)
|
10.19
|
|
Options outstandingJune 30,
2009
|
|
873,244
|
|
17.06
|
|
|
|
|
|
|
|
Options exercisableJune 30,
2009
|
|
873,119
|
|
$
|
17.06
|
|
All Other Option Grants, Excluding Activity Shown Above
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstandingDecember 31, 2008
|
|
2,942,706
|
|
$
|
15.14
|
|
Canceled
|
|
(2,754
|
)
|
21.99
|
|
Exercised
|
|
(757,206
|
)
|
13.89
|
|
Options outstandingJune 30,
2009
|
|
2,182,746
|
|
15.71
|
|
|
|
|
|
|
|
Options exercisableJune 30,
2009
|
|
2,159,818
|
|
$
|
15.47
|
|
The total intrinsic value (difference between the market
value of our stock on the date of exercise and the exercise price of the
option) of options exercised during the six months ended June 30, 2009 and
2008 was $25,041,000 and $82,224,000, respectively.
The table below shows additional information for options
outstanding and options exercisable as of June 30, 2009:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Outstanding
Shares
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Exercisable
Shares
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($000)
|
|
$8.57 - $14.70
|
|
1,646,376
|
|
2.04
|
|
$
|
12.18
|
|
$
|
47,827
|
|
1,646,233
|
|
2.04
|
|
$
|
12.18
|
|
$
|
47,822
|
|
$17.79 - $40.26
|
|
1,409,614
|
|
5.71
|
|
20.67
|
|
28,954
|
|
1,386,704
|
|
5.70
|
|
20.37
|
|
28,903
|
|
$8.57 - $40.26
|
|
3,055,990
|
|
3.73
|
|
16.09
|
|
$
|
76,781
|
|
3,032,937
|
|
3.71
|
|
15.93
|
|
$
|
76,725
|
|
Vested
or Expected to Vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.57 - $40.26
|
|
3,053,862
|
|
3.73
|
|
$
|
16.08
|
|
$
|
76,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents
the total pretax intrinsic value, based on our closing stock price of $41.23 on
June 30, 2009, which would have been received by the option holders had
all option holders exercised their options as of that date.
As of June 30, 2009, the total amount of unrecognized
stock-based compensation expense related to non-vested stock options was
approximately $114,000. We expect to recognize this expense over a
weighted average period of approximately five months.
19
Table of Contents
9. Related Party Transactions
In February 1999, in conjunction with the expiration of
options granted under the 1989 Nonqualified Stock Option Plan, we entered into
a Deferred Compensation Agreement (the Agreement) with Don Phillips, an officer
of Morningstar. Under the terms of the Agreement, on any date that Don
exercises the right to purchase shares under the 1999 Plan, we shall pay to him
$2.69 per share in the form of cash or, at our election, shares of common
stock. Our obligation to pay deferred compensation will not be increased by any
imputed interest or earnings amount.
As of December 31, 2008, our Condensed Consolidated
Balance Sheet included a liability of $82,000 for the Agreement. This amount
was paid to Don in the first six months of 2009 in accordance with the
Agreement.
10. Income Taxes
The following table shows our effective income tax rate for
the three and six months ended June 30, 2009 and 2008:
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Income before income taxes and
equity in net income (loss) of unconsolidated entities
|
|
$
|
34,660
|
|
$
|
42,717
|
|
$
|
69,819
|
|
$
|
79,193
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
(21
|
)
|
445
|
|
361
|
|
797
|
|
Net (income) loss attributable to
the noncontrolling interest
|
|
(71
|
)
|
(87
|
)
|
18
|
|
(335
|
)
|
Total
|
|
$
|
34,568
|
|
$
|
43,075
|
|
$
|
70,198
|
|
$
|
79,655
|
|
Income tax expense
|
|
$
|
14,024
|
|
$
|
15,076
|
|
$
|
24,692
|
|
$
|
28,580
|
|
Effective tax rate
|
|
40.6
|
%
|
35.0
|
%
|
35.2
|
%
|
35.9
|
%
|
Our effective tax rate increased by 5.6 percentage points in
the second quarter of 2009. A deposit penalty of $3,500,000, which
decreased pre-tax income and which is not deductible for tax purposes,
accounted for 3.7 percentage points of the increase. Year-to-date, our
effective tax rate decreased to 35.2% from 35.9% in 2008. The year-to-date
effective tax rate reflects the impact from the first quarter of 2009 of
reversing a $1,420,000 reserve for uncertain tax positions as a result of a
lapse in the statute of limitations and the reversal in the second quarter of
2009 of $635,000 of reserves due to settlements and other audit activity. These
non-cash benefits contributed approximately 3 percentage points of the decrease
in the effective tax rate in the year-to-date period. This reduction in our
effective tax rate was partially offset by the impact of the non-deductible
deposit penalty expense, which increased our effective tax rate by approximately
2 percentage points in the year-to-date period.
We conduct business globally and as a result, we file income
tax returns in U.S. Federal, state, local, and foreign jurisdictions. In the
normal course of business we are subject to examination by tax authorities
throughout the world. The open tax years for our U.S. Federal tax return
include the years 2005 to the present. Most of our state tax returns have open
tax years from 2005 to the present. In non-U.S. jurisdictions, the statute of
limitations generally extends to years prior to 2003.
As of June 30, 2009, our Consolidated Balance Sheet
includes a current liability of $1,356,000 and a non-current liability of
$3,796,000 for unrecognized tax benefits. As of December 31, 2008,
our Consolidated Balance Sheet includes a current liability of $3,983,000 and a
non-current liability of $3,756,000 for unrecognized tax benefits. These
amounts include interest and penalties, less any associated tax benefits. The
decrease in the liability from December 31, 2008 primarily reflects the
reversal of $2,055,000 of reserves for uncertain tax positions, which reduced
our effective tax rate.
We are currently being audited by the U.S. federal and
various state and local tax authorities in the United States as well as the tax
authorities in certain non-U.S. jurisdictions. It is likely that the
examination phase of some of these audits will conclude in 2009. It is not
possible to estimate the impact of current audits on previously recorded
unrecognized tax benefits.
Our effective income tax rate reflects the fact that we are
not recording an income tax benefit related to losses recorded by certain of
our non-U.S. operations. The net operating losses (NOLs) may become
deductible in certain non-U.S. tax jurisdictions to the extent these non-U.S.
operations become profitable. In the year certain non-U.S. entities record a
loss, we do not record a corresponding tax benefit, thus increasing our
effective tax rate. For each of our operations, we evaluate whether it is more
likely than not that the tax benefits related to NOLs will be realized. As
part of this evaluation, we consider evidence such as tax planning
strategies, historical operating results, forecasted taxable income, and recent
financial performance. Upon determining that it is more likely than not
that the NOLs will be realized, we reduce the tax valuation allowances related
to these NOLs, which results in a reduction to our income tax expense and our
effective tax rate in the period.
20
Table of Contents
11.
Contingencies
Estimated Penalties Related to
the Timing of Deposits for Taxes Withheld on Non-Qualified Stock Option Exercises
In the second quarter of 2009, we recorded an operating expense of
$3,500,000 for estimated penalties related to the timing of deposits for taxes
withheld on stock option exercises from 2006 through June 30, 2009. We
recorded this operating expense and the related liability in accordance with
SFAS No. 5,
Accounting for
Contingencies
. For some
companies, including Morningstar, it is common practice for taxes withheld on
stock-based compensation to be paid with the companys regularly scheduled
payroll deposit. This approach, however, does not technically comply with
Internal Revenue Service guidelines concerning deposits of taxes withheld in
connection with stock-based compensation, which generally require that if a
companys cumulative deposit liability for all compensation exceeds $100,000,
the tax withholding must be deposited by the following business day.
Transactions related to stock-based compensation frequently cause companies to
exceed this threshold outside of their regularly scheduled payroll cycles, thus
triggering the accelerated deposit rules. The subject of tax deposit penalties
is part of an ongoing IRS audit that began in 2009. We have since increased the
frequency of deposits for taxes withheld on stock option exercises.
NewRiver, Inc.
In January 2009,
NewRiver, Inc. filed a lawsuit in the Superior Court of the Commonwealth
of Massachusetts against Morningstar, Inc. alleging that Morningstar
inappropriately accessed a database containing SEC-filed mutual fund disclosure
documents. In February 2009, the case was removed to the United States
District Court for the District of Massachusetts. NewRiver seeks, among other
things, a permanent injunction preventing Morningstar from accessing NewRivers
Prospectus Express Web-based data warehouse, and unspecified damages. While
Morningstar is vigorously contesting the claims against it, we cannot predict
the outcome of the proceeding.
Morningstar Associates, LLC Subpoenas from the Securities and Exchange
Commission, the New York Attorney Generals Office, and the Department of Labor
Securities and Exchange Commission
In February 2005,
Morningstar Associates, LLC, a wholly owned subsidiary of Morningstar, Inc.,
received a request from the SEC for the voluntary production of documents
relating to the investment consulting services the company offers to retirement
plan providers, including fund lineup recommendations for retirement plan
sponsors. In July 2005, the SEC issued a subpoena to Morningstar
Associates that was virtually identical to its February 2005 request.
Subsequently, the
SEC focused on disclosure relating to an optional service offered to retirement
plan sponsors (employers) that select 401(k) plan services from ING, one
of Morningstar Associates clients. In response to the SEC investigation, ING
and Morningstar Associates revised certain documents for plan sponsors to
further clarify the roles of ING and Morningstar Associates in providing that
service. The revisions also help reinforce that Morningstar Associates makes
its selections only from funds available within INGs various retirement
products.
In January 2007,
the SEC notified Morningstar Associates that it ended its investigation, with
no enforcement action, fines, or penalties.
New York Attorney Generals Office
In December 2004,
Morningstar Associates received a subpoena from the New York Attorney Generals
office seeking information and documents related to an investigation the New
York Attorney Generals office is conducting. The request is similar in scope
to the SEC subpoena described above. Morningstar Associates has provided the
requested information and documents.
In January 2007,
Morningstar Associates received a Notice of Proposed Litigation from the New
York Attorney Generals office. The Notice centers on the same issues that
became the focus of the SEC investigation described above. The Notice gave
Morningstar Associates the opportunity to explain why the New York Attorney
Generals office should not institute proceedings. Morningstar Associates
promptly submitted its explanation and has cooperated fully with the New York
Attorney Generals office.
We cannot predict
the scope, timing, or outcome of this matter, which may include the
institution of administrative, civil, injunctive, or criminal proceedings, the
imposition of fines and penalties, and other remedies and sanctions, any of
which could lead to an adverse impact on our stock price, the inability to
attract or retain key employees, and the loss of customers. We also cannot
predict what impact, if any, this matter may have on our business,
operating results, or financial condition.
21
Table
of Contents
United States Department of Labor
In May 2005,
Morningstar Associates received a subpoena from the United States Department of
Labor, seeking information and documents related to an investigation the
Department of Labor is conducting. The Department of Labor subpoena is
substantially similar in scope to the SEC and New York Attorney General
subpoenas.
In January 2007,
the Department of Labor issued a request for additional documents pursuant to
the May 2005 subpoena, including documents and information regarding
Morningstar Associates retirement advice products for plan participants.
Morningstar Associates continues to cooperate fully with the Department of
Labor.
We cannot predict
the scope, timing, or outcome of this matter, which may include the
institution of administrative, civil, injunctive, or criminal proceedings, the
imposition of fines and penalties, and other remedies and sanctions, any of
which could lead to an adverse impact on our stock price, the inability to
attract or retain key employees, and the loss of customers. We also cannot
predict what impact, if any, these matters may have on our business,
operating results, or financial condition.
12. Subsequent Events
We evaluated events for potential recognition and disclosure
in the Condensed Consolidated Financial Statements and Notes thereto presented
in this Quarterly Report on Form 10Q through August 4, 2009, the date
the financial statements were issued.
13. Recently Issued Accounting
Pronouncements
In June 2009, the FASB issued the following accounting
pronouncements:
·
SFAS No. 166,
Accounting for Transfers of Financial Assets, an amendment of FASB
Statement 140,
and
SFAS No.167,
Amendments to FASB
Interpretation No. 46(R)
These accounting pronouncements change the way entities
account for transfers of financial assets and determine what entities must be
consolidated. The most significant amendment resulting from SFAS No. 166
consists of the removal of the concept of a Qualifying Special-Purpose Entity
(QSPE) from SFAS No. 140.
SFAS No. 167 addresses the effects of eliminating the
QSPE concept from SFAS No. 140 and responds to concerns about the
application of certain key provisions of FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities (FIN 46(R))
,
including concerns over the transparency of enterprises involvement with
Variable Interest Entities (VIEs).
For Morningstar, both SFAS No. 166 and SFAS No.167 will
be effective beginning January 1, 2010. We are in the process of
determining the impact, if any, these accounting pronouncements will have on
our Consolidated Financial Statements.
·
SFAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162
The FASBs
Accounting Standards Codification
(ASC) will
become the source of authoritative U.S. accounting and reporting standards for
nongovernmental entities, in addition to guidance issued by the SEC. The
Codification reorganizes the thousands of U.S. GAAP pronouncements into roughly
90 accounting topics and displays all topics using a consistent structure. It
also includes relevant SEC guidance that follows the same topical structure in
separate sections in the Codification. SFAS No. 168 is the final standard
that will be issued by FASB in the current form. For Morningstar, this
Statement will be applied beginning with our financial statements for the
quarter and year-to-date period ended September 30, 2009.
We are in the process of determining
the impact this accounting pronouncement will have on our Consolidated Financial
Statement disclosures.
22
Table of Contents
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
The discussion included in this section,
as well as other sections of this Quarterly Report on Form 10-Q, contains
forward-looking statements as that term is used in the Private Securities
Litigation Reform Act of 1995. These statements are based on our current
expectations about future events or future financial performance.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain, and often contain words such as may, could, expect,
intend, plan, seek, anticipate, believe, estimate, predict, potential,
or continue. These statements involve known and unknown risks and
uncertainties that may cause the events we discuss not to occur or to differ
significantly from what we expect. For us, these risks and uncertainties
include, among others, general industry conditions and competition, including
the current global financial crisis that began in 2007; the impact of market
volatility on revenue from asset-based fees; damage to our reputation resulting
from claims made about possible conflicts of interest; liability for any losses
that result from an actual or claimed breach of our fiduciary duties; financial
services industry consolidation; a prolonged outage of our database and network
facilities; challenges faced by our non-U.S. operations; and the availability
of free or low-cost investment information.
A more complete description of these risks
and uncertainties can be found in our other filings with the SEC, including our
Annual Report on Form 10-K for the year ended December 31, 2008. If
any of these risks and uncertainties materialize, our actual future results may
vary significantly from what we expect. We do not undertake to update our
forward-looking statements as a result of new information or future events.
All dollar and percentage comparisons,
which are often accompanied by words such as increase, decrease, grew, declined,
was up, was down, was flat, or was similar refer to a comparison with
the same period in the prior year unless otherwise stated.
Understanding our Company
Our Business
Our mission is to create great products that help investors
reach their financial goals. We offer an extensive line of Internet, software,
and print-based products for individual investors, financial advisors, and
institutional clients. We also offer asset management services for advisors,
institutions, and retirement plan participants. Many of our products are sold
through subscriptions or license agreements. As a result, we typically generate
recurring revenue.
We emphasize a decentralized approach to running our
business to create a culture of responsibility and accountability. Beginning in
2009, we changed our segment reporting to focus on two operating segments:
Investment Information, which includes all of our data, software, and research
products and services, and Investment Management, which includes our asset
management operations.
Historically, we have focused primarily on organic growth by
introducing new products and services and expanding our existing
products. However, we have made and expect to continue to make selective
acquisitions that support our five key growth strategies, which are:
·
|
Enhance our position in each of our key market segments by
focusing on our three major Internet-based platforms;
|
·
|
Become a global leader in funds-of-funds investment
management;
|
·
|
Continue building thought leadership in independent
investment research;
|
·
|
Create a premier global investment database; and
|
·
|
Expand our international brand presence, products, and
services.
|
Industry Overview
We
monitor developments in the economic and financial information industry on an
ongoing basis and use these insights to help inform our company strategy,
product development plans, and marketing initiatives.
The
U.S. equity market generally showed strong performance in the second quarter of
2009, reversing direction from continued negative returns in the first quarter.
Morningstars U.S. Market Index, a broad market benchmark, was up 16.6% during
the quarter and 4.3% for the first half of 2009. Total U.S. mutual fund assets increased
to $10.0 trillion as of June 30, 2009 based on data from the Investment
Company Institute (ICI), compared with $9.2 trillion as of March 31, 2009.
Many stock and bond funds experienced net inflows as the market turned up
during the quarter.
23
Table of
Contents
Despite
the more positive market environment, alternative asset classes, such as hedge
funds, continued to show mixed results. In aggregate, hedge funds included in
Morningstars database, excluding funds of hedge funds, experienced net
outflows of about $53 billion for the year-to-date period through May 31,
2009.
Assets
in exchange-traded funds (ETFs) increased to $590 billion as of June 2009,
compared with $578 billion as of June 2008, based on data from the ICI.
Based
on data from Nielsen/Net Ratings, aggregate page views and pages viewed
per visit for financial and investment sites were both up slightly compared
with the second quarter of 2008, while the number of unique users was similar
to levels shown in the second quarter of 2008. Although page views to
Morningstar.com declined year over year because of reduced traffic to several
areas of the site, the site continued to perform well based on metrics such as pages viewed
per visit and time spent per visit.
Market
weakness and economic uncertainty continued to weigh on the global advertising
market. Some industry researchers, including ZenithOptimedia and GroupM, have
revised their forecasts for global advertising sales to project continued
downturns in 2009. Although online advertising has held up better than other
areas as advertisers have continued to shift spending from traditional media to
the Internet, we believe that spending trends in the financial services area
remain under pressure. Some industry surveys indicate that many investment
management firms plan to continue reducing their marketing budgets in 2009.
Overall,
we remain cautious because of the difficult market environment, which has
persisted in the wake of the financial crisis that began in 2008. Despite the
recent upturn in the U.S. equity market, we believe asset management firms and
other financial services companies continue to carefully scrutinize their
spending levels, creating additional pricing pressure and increasing the time
required to close new business and renewals. On the positive side, however, we
believe some of the uncertainty in the financial services sector began easing
during the first half of the year.
Three and Six Months Ended June 30,
2009 vs. Three and Six Months Ended June 30, 2008
Consolidated Results
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Revenue
|
|
$
|
119,533
|
|
$
|
132,237
|
|
(9.6
|
)%
|
$
|
236,265
|
|
$
|
257,681
|
|
(8.3
|
)%
|
Operating income
|
|
32,688
|
|
41,570
|
|
(21.4
|
)%
|
67,313
|
|
76,255
|
|
(11.7
|
)%
|
Operating margin
|
|
27.3
|
%
|
31.4
|
%
|
(4.1
|
)pp
|
28.5
|
%
|
29.6
|
%
|
(1.1
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for)
investing activities
|
|
(26,652
|
)
|
4,859
|
|
NMF
|
|
(36,855
|
)
|
(33,104
|
)
|
11.3
|
%
|
Cash provided by financing
activities
|
|
12,913
|
|
18,217
|
|
(29.1
|
)%
|
16,019
|
|
29,934
|
|
(46.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
39,589
|
|
$
|
47,742
|
|
(17.1
|
)%
|
$
|
31,267
|
|
$
|
49,119
|
|
(36.3
|
)%
|
Capital expenditures
|
|
(2,178
|
)
|
(10,643
|
)
|
(79.5
|
)%
|
(6,768
|
)
|
(17,354
|
)
|
(61.0
|
)%
|
Free cash flow
|
|
$
|
37,411
|
|
$
|
37,099
|
|
0.8
|
%
|
$
|
24,499
|
|
$
|
31,765
|
|
(22.9
|
)%
|
NMF not meaningful
pp percentage points
We define free cash flow as cash provided by or used for
operating activities less capital expenditures. We present free cash flow
solely as supplemental disclosure to help investors better understand how much
cash is available after we spend money to operate our business. Our management
team uses free cash flow to evaluate the performance of our business. Free cash
flow is not a measure of performance set forth under U.S. generally accepted
accounting principles (GAAP). Also, the free cash flow definition we use may
not be comparable to similarly titled measures used by other companies.
Because weve made several acquisitions in recent years,
comparing our financial results from year to year is complex. To make it easier
for investors to compare our results in different periods, we provide
information on both organic revenue, which reflects our underlying business
excluding acquisitions, and revenue from acquisitions. We include an acquired
operation as part of our revenue from acquisitions for 12 months after we
complete the acquisition. After that, we include it as part of our organic
revenue.
Consolidated organic revenue (revenue excluding acquisitions
and the impact of foreign currency translations) is considered a non-GAAP
financial measure. The definition of organic revenue we use may not be the same
as similarly titled measures used by
24
Table
of Contents
other companies. Organic revenue should not be considered an
alternative to any measure of performance as promulgated under GAAP.
The table below shows the period in which we included each
acquired operation in revenue from acquisitions.
|
|
Revenue from Acquisitions
|
|
|
Acquisition
|
|
Three Months Ended June 30, 2009
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
Hemscott data, media, and investor
relations Web site businesses
|
|
|
|
January 1 through January 8, 2009
|
Financial Computer Support, Inc.
|
|
April 1 through June 30, 2009
|
|
January 1 through June 30, 2009
|
Fundamental Data Limited
|
|
April 1 through June 30, 2009
|
|
January 1 through June 30, 2009
|
10-K Wizard Technology, LLC
|
|
April 1 through June 30, 2009
|
|
January 1 through June 30, 2009
|
Tenfore Systems Limited
|
|
April 1 through June 30, 2009
|
|
January 1 through June 30, 2009
|
InvestData (Proprietary) Limited
|
|
April 1 through June 30, 2009
|
|
January 1 through June 30, 2009
|
Global financial filings database
business of Global Reports LLC
|
|
April 20 through June 30, 2009
|
|
April 20 through June 30, 2009
|
Equity research and data business of C.P.M.S. Computerized
Portfolio Management Services Inc.
|
|
May 1 through June 30, 2009
|
|
May 1 through June 30, 2009
|
Andex Associates, Inc.
|
|
May 1 through June 30, 2009
|
|
May 1 through June 30, 2009
|
Intech was acquired on June 30,
2009. Intechs operations are not included in our revenue from acquisitions for
the three and six months ended June 30, 2009.
Consolidated Revenue
In the second quarter of 2009, our consolidated revenue
decreased 9.6% to $119.5 million. Revenue for the first half of the year fell
8.3% to $236.3 million. The majority of the revenue decline was driven by our
Investment Consulting business, which suffered because of the market downturn
over the past year, as well as the impact of one client not renewing when its
contract expired in the fourth quarter of 2008, and to a lesser extent by
another client not renewing when its contract expired in May 2009.
Currency movements also had a significant negative effect as the U.S. dollar
appreciated against most other major currencies during the quarter, offsetting
the positive impact of additional revenue from acquisitions. Acquisitions
contributed about 5 percentage points to our consolidated revenue growth, but
the impact of foreign currency translations reduced revenue by about 4
percentage points.
The table below reconciles consolidated revenue with organic
revenue (revenue excluding acquisitions and the impact of foreign currency
translations):
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Consolidated revenue
|
|
$
|
119,533
|
|
$
|
132,237
|
|
(9.6
|
)%
|
$
|
236,265
|
|
$
|
257,681
|
|
(8.3
|
)%
|
Less: acquisitions
|
|
(6,732
|
)
|
|
|
NMF
|
|
(12,660
|
)
|
|
|
NMF
|
|
Unfavorable impact of foreign
currency translations
|
|
5,031
|
|
|
|
NMF
|
|
10,728
|
|
|
|
NMF
|
|
Organic revenue
|
|
$
|
117,832
|
|
$
|
132,237
|
|
(10.9
|
)%
|
$
|
234,333
|
|
$
|
257,681
|
|
(9.1
|
)%
|
The table below shows our consolidated revenue by segment
for the three and six months ended June 30, 2009 and June 30, 2008:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenue by Segment ($000)
|
|
Amount
|
|
% of
total
|
|
Amount
|
|
% of
total
|
|
Amount
|
|
% of
total
|
|
Amount
|
|
% of
total
|
|
Investment Information
|
|
$
|
97,739
|
|
81.8
|
%
|
$
|
101,580
|
|
76.8
|
%
|
$
|
193,979
|
|
82.1
|
%
|
$
|
198,086
|
|
76.9
|
%
|
Investment Management
|
|
21,794
|
|
18.2
|
|
30,657
|
|
23.2
|
|
42,286
|
|
17.9
|
|
59,595
|
|
23.1
|
|
Consolidated revenue
|
|
$
|
119,533
|
|
100.0
|
%
|
$
|
132,237
|
|
100.0
|
%
|
$
|
236,265
|
|
100.0
|
%
|
$
|
257,681
|
|
100.0
|
%
|
Morningstar has two operating segments: Investment
Information and Investment Management. The Investment Information segment
includes all of our data, software, and research products and services. These
products and services are typically sold
25
Table
of Contents
through subscriptions or license agreements. The Investment
Management segment includes all of our asset management operations, which
operate as registered investment advisors and earn more than half of their
revenue from asset-based fees.
While revenue for the Investment Information segment was
down slightly in the second quarter of 2009, revenue in the Investment
Management segment was down about 29% for the same period. Investment
Consulting was by far the most significant driver behind the revenue decline.
We had lower revenue from asset-based fees as assets under advisement declined
to $56.1 billion from $99.1 billion. The majority of the asset decline reflects
the loss of two contracts, and the remaining portion of the decline was mainly
driven by the market downturn over most of the past 12 months.
Revenue from international operations decreased $2.5
million, or 7.5%, to $30.2 million in the second quarter of 2009. Acquisitions
contributed $4.9 million of additional revenue outside the United States, but
that was offset by the unfavorable impact of foreign currency translations,
which reduced international revenue by $5.0 million. Excluding acquisitions and
the impact of foreign currency translations, international revenue decreased
approximately 7.1%.
Revenue from international operations decreased $4.2
million, or 6.6%, to $58.8 million in the first half of 2009. Acquisitions
contributed $8.9 million of additional revenue outside the United States, but
this additional revenue was offset by the unfavorable impact of foreign
currency translations, which reduced international revenue by $10.7 million.
Excluding acquisitions and the impact of foreign currency translations,
international revenue decreased approximately 3.6%.
International organic revenue (international revenue
excluding acquisitions and the impact of foreign currency translations) is
considered a non-GAAP financial measure. The definition of international
organic revenue we use may not be the same as similarly titled measures used by
other companies. International organic revenue should not be considered an
alternative to any measure of performance as promulgated under GAAP. The tables
below present a reconciliation from international revenue to international
organic revenue (international revenue excluding acquisitions and the impact of
foreign currency translations):
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
International revenue
|
|
$
|
30,247
|
|
$
|
32,703
|
|
(7.5
|
)%
|
$
|
58,831
|
|
$
|
62,984
|
|
(6.6
|
)%
|
Less: acquisitions
|
|
(4,902
|
)
|
|
|
NMF
|
|
(8,854
|
)
|
|
|
NMF
|
|
Unfavorable impact of foreign
currency translations
|
|
5,031
|
|
|
|
NMF
|
|
10,728
|
|
|
|
NMF
|
|
International organic revenue
|
|
$
|
30,376
|
|
$
|
32,703
|
|
(7.1
|
)%
|
$
|
60,705
|
|
$
|
62,984
|
|
(3.6
|
)%
|
Consolidated Operating Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Operating expense
|
|
$
|
86,845
|
|
$
|
90,667
|
|
(4.2
|
)%
|
$
|
168,952
|
|
$
|
181,426
|
|
(6.9
|
)%
|
% of revenue
|
|
72.7
|
%
|
68.6
|
%
|
4.1
|
pp
|
71.5
|
%
|
70.4
|
%
|
1.1
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2009, our consolidated operating
expense decreased $3.9 million, or 4.2%. For the first six months of 2009,
operating expense decreased $12.4 million, or 6.9%. To better align operating
expense with revenue in a challenging business environment, we took a number of
steps to reduce costs beginning in 2008, with the largest cutbacks effective January 1,
2009. We changed our bonus plan in 2009 to reduce bonus expense, our single
largest discretionary cost. As a result, bonus expense was down about $8.6
million in the second quarter of 2009 and $16.0 million in the first half of
2009.
We also suspended matching contributions to our 401(k) program
in the United States, which reduced operating expense by about $1.3 million in
the second quarter and $4.1 million in the first half of 2009. In addition, we
reduced discretionary spending in advertising and marketing as well as travel.
Advertising and marketing costs declined by $1.1 million in the second quarter
of 2009 and $3.4 million in the first half of 2009 compared with the same
periods a year ago. Weve been carefully evaluating spending in this area and
cutting back on programs that dont generate positive returns. In addition, we
discontinued three publications previously published in the first half of the
year, which contributed to lower marketing expense earlier in the year. Travel
costs were about $0.8 million lower in the quarter and $1.6 million lower in
the first half of the year compared with the prior-year periods.
Partially offsetting these cost reductions was a $3.5
million operating expense we recorded for estimated penalties we may incur
related to the timing of deposits for taxes withheld on stock-option exercises
from 2006 through June 30, 2009. The expense impacted each of our
operating expense categories, with approximately half recorded as general and
administrative expense. For some companies, including Morningstar, it is common
practice for taxes withheld on stock-based compensation to be paid with the
26
Table
of Contents
companys regularly scheduled payroll deposit. This
approach, however, does not technically comply with Internal Revenue Service
guidelines concerning deposits of taxes withheld in connection with stock-based
compensation, which generally require that if a companys cumulative deposit
liability for all compensation exceeds $100,000, the tax withholding must be
deposited by the following business day. Transactions related to stock-based
compensation frequently cause companies to exceed this threshold outside of
their regularly scheduled payroll cycles, thus triggering the accelerated
deposit rules. The subject of tax deposit penalties is part of an ongoing IRS
audit that began in 2009. We believe our
approach was reasonable and the potential penalties are excessive considering
our long record of making tax deposit payments with our regularly scheduled
semi-monthly payroll. We have since increased the frequency of deposits for
taxes withheld on stock option exercises.
We also had additional costs related to acquisitions in the
second quarter of 2009, including a $1.4 million increase in amortization
expense. We completed five acquisitions in the second half of 2008 and four in
the first half of 2009. Because of the timing of these acquisitions, our
results for the second quarter and first half of 2009 include operating expense
that did not exist in the same periods last year. Headcount and salary expense
also increased year over year, partly because of incremental employees added
through acquisitions. We had approximately 2,510 employees worldwide as of June 30,
2009, a 21.8% increase from the same period a year ago and a 6.0% increase
compared with March 31, 2009. Headcount grew year over year mainly from
acquisitions and continued hiring in our development center in China. We added
approximately 180 employees from acquisitions over the 12 months ending June 30,
2009.
Cost of Goods Sold
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Cost of goods sold
|
|
$
|
30,694
|
|
$
|
33,164
|
|
(7.4
|
)%
|
$
|
60,946
|
|
$
|
66,102
|
|
(7.8
|
)%
|
% of revenue
|
|
25.7
|
%
|
25.1
|
%
|
0.6
|
pp
|
25.8
|
%
|
25.7
|
%
|
0.1
|
pp
|
Gross profit
|
|
$
|
88,839
|
|
$
|
99,073
|
|
(10.3
|
)%
|
$
|
175,319
|
|
$
|
191,579
|
|
(8.5
|
)%
|
Gross margin
|
|
74.3
|
%
|
74.9
|
%
|
(0.6
|
)pp
|
74.2
|
%
|
74.3
|
%
|
(0.1
|
)pp
|
Cost of goods sold is our largest category of operating
expense, accounting for more than one-third of our total operating expense in
both 2009 and 2008. Our business relies heavily on human capital, and cost of goods
sold includes the compensation expense for employees who produce our products
and services.
Cost of goods sold was down $2.5 million in the second
quarter and $5.2 million in the first half of 2009, with the entire decline
driven by lower bonus expense.
Our second-quarter 2009 gross margin decreased slightly to
74.3%, compared with 74.9% in the second quarter of 2008. The year-to-date
gross margin was about in line with same period in 2008.
Development Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Development expense
|
|
$
|
9,438
|
|
$
|
9,801
|
|
(3.7
|
)%
|
$
|
18,738
|
|
$
|
19,916
|
|
(5.9
|
)%
|
% of revenue
|
|
7.9
|
%
|
7.4
|
%
|
0.5
|
pp
|
7.9
|
%
|
7.7
|
%
|
0.2
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense decreased $0.4 million in the second
quarter of 2009 and $1.2 million in the first six months of 2009. While
compensation expense rose because of higher headcount, the increase was more
than offset by lower bonus expense. As a percentage of revenue, development
expense increased modestly in the second quarter and first half of 2009.
Sales and Marketing Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Sales and marketing expense
|
|
$
|
18,010
|
|
$
|
20,866
|
|
(13.7
|
)%
|
$
|
35,546
|
|
$
|
43,090
|
|
(17.5
|
)%
|
% of revenue
|
|
15.1
|
%
|
15.8
|
%
|
(0.7
|
)pp
|
15.0
|
%
|
16.7
|
%
|
(1.7
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense decreased $2.9 million in the
second quarter of 2009 and $7.6 million in the first six months of 2009. About
40% of the decline reflects lower spending on advertising and marketing, which
we reduced from higher levels in 2008 because of the challenging business
environment. In 2009, we also discontinued three of the publications we
previously published in the first quarter of each year
Morningstar Funds 500
,
Morningstar Stocks
500
, and
Morningstar
ETFs 150
and therefore didnt incur costs to promote these
publications. This contributed to the decline in the first six months of 2009.
Lower bonus expense and other compensation costs also contributed to lower
sales and marketing expense in the second quarter.
27
Table of Contents
As a
percentage of revenue, sales and marketing expense decreased 0.7 percentage
points in the second quarter and 1.7 percentage points in the first six months
of 2009.
General and Administrative Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
General and administrative expense
|
|
$
|
19,853
|
|
$
|
20,560
|
|
(3.4
|
)%
|
$
|
37,006
|
|
$
|
39,885
|
|
(7.2
|
)%
|
% of revenue
|
|
16.6
|
%
|
15.5
|
%
|
1.1
|
pp
|
15.7
|
%
|
15.5
|
%
|
0.2
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense decreased $0.7 million in
the second quarter of 2009 and $2.9 million in the first six months of 2009.
Most of the decline reflects lower bonus expense. Decreases in other
compensation costs, travel, and other general and administrative costs also
contributed to lower expense in this area, but to a lesser extent. These cost
reductions were partially offset by the estimated tax deposit penalty discussed
in more detail on pages 26 and 27, which contributed $1.8 million to general
and administrative expense in the second quarter of 2009.
As a percentage of revenue, general and administrative
expense increased 1.1 percentage points in the second quarter of 2009 and 0.2
percentage points in the first six months of 2009.
Depreciation and Amortization Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Depreciation expense
|
|
$
|
3,309
|
|
$
|
2,185
|
|
51.4
|
%
|
$
|
6,053
|
|
$
|
4,320
|
|
40.1
|
%
|
Amortization expense
|
|
5,541
|
|
4,091
|
|
35.4
|
%
|
10,663
|
|
8,113
|
|
31.4
|
%
|
Total depreciation and
amortization expense
|
|
$
|
8,850
|
|
$
|
6,276
|
|
41.0
|
%
|
$
|
16,716
|
|
$
|
12,433
|
|
34.4
|
%
|
% of revenue
|
|
7.4
|
%
|
4.7
|
%
|
2.7
|
pp
|
7.1
|
%
|
4.8
|
%
|
2.3
|
pp
|
Depreciation and amortization expense rose $2.6 million in
the second quarter of 2009 and $4.3 million in the first six months of 2009,
primarily from incremental amortization expense of intangible assets related to
acquisitions made in 2008 and the first half of 2009. As a percentage of
revenue, depreciation and amortization increased 2.7 percentage points in the
second quarter and 2.3 percentage points in the first half of the year.
We expect that amortization of intangible assets will be an
ongoing cost for the remaining life of the assets. Based on acquisitions
completed through June 30, 2009, we estimate that aggregate amortization
expense for intangible assets will be $22.5 million in 2009. Our estimates of
future amortization expense for intangible assets may be affected by changes to
the preliminary purchase price allocations associated with the acquisitions we
made in 2008 and 2009.
Stock-Based Compensation Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Stock-based compensation expense
|
|
$
|
3,068
|
|
$
|
2,969
|
|
3.3
|
%
|
$
|
5,793
|
|
$
|
5,713
|
|
1.4
|
%
|
% of revenue
|
|
2.6
|
%
|
2.2
|
%
|
0.4
|
pp
|
2.5
|
%
|
2.2
|
%
|
0.3
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense was about on par with 2008
levels in the second quarter and first half of 2009. It increased slightly as a
percentage of revenue compared with the same periods in 2008.
We include stock-based compensation expense in each of our
operating expense categories. We began granting restricted stock units (RSUs)
in May 2006 and made additional grants in 2007, 2008, and 2009, primarily
in the second quarter of each year. We recognize the expense related to RSUs
over the vesting period, which is generally four years.
We determine stock-based compensation
expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004),
Share-Based Payment
(SFAS No. 123(R)). We estimate forfeitures of all stock-based awards
and recognize compensation cost only for those awards expected to vest. We
determine forfeiture rates based on historical experience. We typically adjust
estimated forfeitures to actual forfeiture experience in the second quarter,
which is when most of our larger equity grants typically vest. In the second
quarter of 2009 and 2008, we recorded approximately $0.3 million and $0.2
million, respectively, of additional stock-based compensation expense as a
result of these adjustments.
28
Table
of Contents
Based on grants made through June 30, 2009, we
anticipate that stock-based compensation expense will be $11.6 million in
2009. This amount is subject to change based on additional equity grants or
changes in our estimated forfeiture rate related to these grants.
Bonus Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Bonus expense
|
|
$
|
3,548
|
|
$
|
12,182
|
|
(70.9
|
)%
|
$
|
8,738
|
|
$
|
24,719
|
|
(64.7
|
)%
|
% of revenue
|
|
3.0
|
%
|
9.2
|
%
|
(6.2
|
)pp
|
3.7
|
%
|
9.6
|
%
|
(5.9
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus expense, which we include in each of our operating
expense categories, declined $8.6 million in the second quarter and $16.0
million in the first half of 2009. Most of this reduction reflects the changes
we made to our bonus program for 2009 as part of our efforts to better align
our cost structure with revenue in the challenging business environment. The
significant reduction in bonus expense also reflects a slowdown in our
financial performance in 2009 compared with 2008.
The size of our bonus pool varies each year based on a
number of items, including changes in full-year operating income relative to
the previous year and other factors. We review and update our estimates and the
bonus pool size quarterly. We record bonus expense throughout the year and pay
out annual bonuses to employees in the first quarter.
As a percentage of revenue, bonus expense declined by 6.2
percentage points in the second quarter and 5.9 percentage points in the first
six months of 2009.
Consolidated Operating Income
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Operating income
|
|
$
|
32,688
|
|
$
|
41,570
|
|
(21.4
|
)%
|
$
|
67,313
|
|
$
|
76,255
|
|
(11.7
|
)%
|
% of revenue
|
|
27.3
|
%
|
31.4
|
%
|
(4.1
|
)pp
|
28.5
|
%
|
29.6
|
%
|
(1.1
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income decreased $8.9 million in the
second quarter of 2009 and $9.0 million in the first six months of 2009.
Although we reduced operating expense in several areas with the cost-savings
initiatives implemented at the beginning of the year, we also had incremental
expense from recent acquisitions as well as a $3.5 million operating expense
for estimated penalties related to the timing of deposits for taxes withheld on
stock option exercises. Operating margin declined by about 4 percentage points
for the second quarter and 1 percentage point for the first half of 2009. The
deposit penalty represented 2.9 and 1.5 percentage points of the margin decline
in the second quarter and first half of 2009, respectively.
Consolidated Free Cash Flow
We define free cash flow as cash provided by or used for
operating activities less capital expenditures. Free cash flow is considered a
non-GAAP financial measure. The definition of free cash flow we use may not be
the same as similarly titled measures used by other companies and should not be
considered an alternative to any measure of performance as promulgated under
GAAP.
We generated positive free cash flow in both the second
quarter of 2009 and the year-to-date periods. Our free cash flow of $37.4
million in the second quarter of 2009 reflects cash provided by operating
activities of $39.6 million and capital expenditures of $2.2 million. Free cash
flow of $24.5 million in the first six months of 2009 reflects cash provided by
operating activities of $31.3 million and
capital expenditures of $6.8 million. Free cash flow generated in the
second quarter offset the negative free cash flow generated in the first quarter
of 2009. Our cash flow from operations is typically stronger in the second
quarter compared with the first quarter because we pay annual bonuses early in
the year.
Free cash flow increased $0.3 million in the second quarter
of 2009, as an $8.4 million decrease in capital expenditures was partially
offset by an $8.1 million decrease in cash flow provided by operating
activities. In the year-to-date period, free cash flow decreased $7.2 million,
reflecting a $17.8 million decrease in cash provided by operating activities
partially offset by a $10.6 million decrease in capital expenditures.
In the second quarter of 2008, operating cash flow included
a $5.9 million benefit from tenant improvement allowances related to the
construction of our new corporate headquarters in Chicago. This benefit did not
recur in the second quarter of 2009.
29
Table of Contents
The increase of $9.6 million for bonus payments was the
primary factor contributing to the decline in operating cash flow in the first
half of 2009. We made bonus payments of $58.9 million in the first quarter of
2009, compared with $49.3 million in the first quarter of 2008. Bonuses
paid in the first quarter of 2009 included $10.0 million in payments deferred
from 2007. We revised our bonus program in January 2009 and no longer
defer payment of a portion of bonuses recorded in the prior year. In addition,
in the first six months of 2008, operating cash flow included a $9.3 million
benefit from tenant improvement allowances related to the construction of our
new corporate headquarters. This benefit did not recur in the first half of
2009. Excess tax benefits have a
positive impact on cash provided by financing activities with an equal, but
offsetting, impact on cash from operations. Excess tax benefits declined $12.8
million in the first half of 2009, primarily reflecting a reduction in the
number of options exercised and lower average stock prices on the exercise
dates.
Capital expenditures decreased $8.4 million in the quarter
and $10.6 million in the year-to-date period mainly because of the timing of
payments related to our new corporate headquarters.
To provide investors with additional insight into our
financial results, we provide a comparison between the increase in consolidated
net income and the change in operating cash flow:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Consolidated net income
|
|
$
|
20,615
|
|
$
|
28,086
|
|
$
|
(7,471
|
)
|
$
|
45,488
|
|
$
|
51,410
|
|
$
|
(5,922
|
)
|
Adjustments to reconcile
consolidated net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefits in accordance
with SFAS No. 123(R)
|
|
(4,194
|
)
|
(11,376
|
)
|
7,182
|
|
(4,544
|
)
|
(17,343
|
)
|
12,799
|
|
Depreciation and amortization
expense
|
|
8,850
|
|
6,276
|
|
2,574
|
|
16,716
|
|
12,433
|
|
4,283
|
|
Stock-based compensation expense
|
|
3,068
|
|
2,969
|
|
99
|
|
5,793
|
|
5,713
|
|
80
|
|
All other non-cash items included
in net income
|
|
(821
|
)
|
(1,509
|
)
|
688
|
|
(1,882
|
)
|
1,012
|
|
(2,894
|
)
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for bonuses
|
|
|
|
|
|
|
|
(58,867
|
)
|
(49,253
|
)
|
(9,614
|
)
|
Cash paid for income taxes
|
|
(13,487
|
)
|
(13,195
|
)
|
(292
|
)
|
(14,152
|
)
|
(15,252
|
)
|
1,100
|
|
Accounts receivable
|
|
9,143
|
|
2,484
|
|
6,659
|
|
9,312
|
|
(3,222
|
)
|
12,534
|
|
Deferred revenue
|
|
(3,254
|
)
|
(2,449
|
)
|
(805
|
)
|
806
|
|
6,772
|
|
(5,966
|
)
|
Income taxes current
|
|
12,501
|
|
19,197
|
|
(6,696
|
)
|
24,548
|
|
28,356
|
|
(3,808
|
)
|
Accrued compensation
|
|
9,608
|
|
13,040
|
|
(3,432
|
)
|
13,436
|
|
20,363
|
|
(6,927
|
)
|
Deferred rent
|
|
(130
|
)
|
5,923
|
|
(6,053
|
)
|
(286
|
)
|
9,306
|
|
(9,592
|
)
|
Other assets
|
|
(10
|
)
|
121
|
|
(131
|
)
|
341
|
|
(1,846
|
)
|
2,187
|
|
Accounts payable and accrued
liabilities
|
|
(1,901
|
)
|
(1,773
|
)
|
(128
|
)
|
(6,012
|
)
|
997
|
|
(7,009
|
)
|
All other
|
|
(399
|
)
|
(52
|
)
|
(347
|
)
|
570
|
|
(327
|
)
|
897
|
|
Cash provided by operating
activities
|
|
$
|
39,589
|
|
$
|
47,742
|
|
$
|
(8,153
|
)
|
$
|
31,267
|
|
$
|
49,119
|
|
$
|
(17,852
|
)
|
In the quarter and, to a greater extent, in the year-to-date
period, the decline in cash flow from operations exceeded the decline in net
income. Tenant improvement allowances of $5.9 million and $9.3 million received
in connection with the build-out of our new headquarters benefited cash flow in
the second quarter and first six months of 2008, respectively, but did not
recur in 2009. The tenant improvement allowance received in 2008 is being
amortized as a reduction in office lease expense over the lease term and will
be deducted from net income to arrive at cash flow provided by operating
activities. The $9.6 million increase in bonuses paid in the first quarter of
2009 compared with the first quarter of 2008 also contributed to the divergence
between net income and cash from operations in the year-to-date period. These
items were partially offset by the impact of excess tax benefits related to our
stock-based compensation.
30
Table of Contents
Segment Results
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
$
|
97,739
|
|
$
|
101,580
|
|
(3.8
|
)%
|
$
|
193,979
|
|
$
|
198,086
|
|
(2.1
|
)%
|
Investment Management
|
|
21,794
|
|
30,657
|
|
(28.9
|
)%
|
42,286
|
|
59,595
|
|
(29.0
|
)%
|
Consolidated revenue
|
|
$
|
119,533
|
|
$
|
132,237
|
|
(9.6
|
)%
|
$
|
236,265
|
|
$
|
257,681
|
|
(8.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
$
|
37,242
|
|
$
|
38,697
|
|
(3.8
|
)%
|
$
|
74,079
|
|
$
|
71,985
|
|
2.9
|
%
|
Investment Management
|
|
13,062
|
|
17,496
|
|
(25.3
|
)%
|
24,889
|
|
32,755
|
|
(24.0
|
)%
|
Intangible amortization and
corporate depreciation expense
|
|
(7,560
|
)
|
(5,198
|
)
|
45.4
|
%
|
(14,335
|
)
|
(10,268
|
)
|
39.6
|
%
|
Corporate unallocated
|
|
(10,056
|
)
|
(9,425
|
)
|
6.7
|
%
|
(17,320
|
)
|
(18,217
|
)
|
(4.9
|
)%
|
Consolidated operating income
|
|
$
|
32,688
|
|
$
|
41,570
|
|
(21.4
|
)%
|
$
|
67,313
|
|
$
|
76,255
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
38.1
|
%
|
38.1
|
%
|
|
|
38.2
|
%
|
36.3
|
%
|
1.9
|
pp
|
Investment Management
|
|
59.9
|
%
|
57.1
|
%
|
2.8
|
pp
|
58.9
|
%
|
55.0
|
%
|
3.9
|
pp
|
Consolidated operating margin
|
|
27.3
|
%
|
31.4
|
%
|
(4.1
|
)pp
|
28.5
|
%
|
29.6
|
%
|
(1.1
|
)pp
|
Investment Information Segment
The Investment Information segment includes all of our data,
software, and research products and services, which are typically sold through
subscriptions or license agreements.
The largest products in this segment based on revenue are
Morningstar Licensed Data; Morningstar Advisor Workstation; Morningstar.com,
including Premium memberships and Internet advertising sales; Morningstar
Direct; and Morningstar Principia. Licensed Data is a set of investment data
spanning all of our investment databases and available through electronic data
feeds. Advisor Workstation is a Web-based investment planning system for
advisors. Advisor Workstation is available in two editions: one for independent
financial advisors and an enterprise edition for financial advisors affiliated
with larger firms. Morningstar.com includes both Premium Memberships and
Internet advertising sales. Morningstar Direct is a Web-based institutional
research platform. 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. Our equity
research has been distributed through six major investment banks to meet the
requirements for independent research under the Global Analyst Research
Settlement, as well as to several other companies that purchase our research
for their own use or provide our research to their affiliated financial
advisors or to individual investors.
In 2003 and 2004, 12 leading Wall Street investment banks
agreed to a $1.5 billion settlement (the Global Analyst Research Settlement)
with the Securities and Exchange Commission (SEC), the New York Attorney
General, and other securities regulators to resolve allegations of undue
influence of investment banking interests on securities research. Approximately
$450 million of the $1.5 billion in fines that the investment banks agreed to
pay in the settlement was designated for independent research over a five-year
period. Each firm involved in the settlement was required to provide research
from at least three providers of independent research that were not engaged in
the investment banking industry. The period covered by the Global Analyst
Research Settlement expired at the end of July 2009. The investment banks
covered by it are no longer required to provide independent investment research
to their clients. For further discussion about this issue, see Item 1ARisk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2008.
We also offer a variety of financial communications and
newsletters, real-time data, and investment indexes.
In the first six months of 2009 and 2008, this segment
represented 82.1% and 76.9%, respectively, of our consolidated revenue.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key
Metrics ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Revenue
|
|
$
|
97,739
|
|
$
|
101,580
|
|
(3.8
|
)%
|
$
|
193,979
|
|
$
|
198,086
|
|
(2.1
|
)%
|
Operating income
|
|
$
|
37,242
|
|
$
|
38,697
|
|
(3.8
|
)%
|
$
|
74,079
|
|
$
|
71,985
|
|
2.9
|
%
|
Operating margin (%)
|
|
38.1
|
%
|
38.1
|
%
|
|
|
38.2
|
%
|
36.3
|
%
|
1.9
|
pp
|
In the second quarter of 2009, revenue decreased 3.8% to
$97.7 million. Acquisitions contributed $6.7 million of revenue. Excluding the
impact of acquisitions, revenue declined $10.6 million, primarily reflecting
the unfavorable impact of currency translation and lower revenue in many of our
product lines. In the first half of 2009, revenue decreased 2.1% to $194.0
million, with acquisitions contributing $12.7 million.
One of the primary drivers of the decline in revenue in both
the second quarter and first six months of 2009 was Morningstar.com. Negative
trends in Internet advertising drove almost all of the decrease in this products
revenue. Subscriptions for Morningstar.com Premium service declined by 18,891,
to 160,936 as of June 30, 2009, compared with 179,827 as of June 30,
2008. Subscriptions declined by 16,582 in the first six months of 2009 compared
with 177,518 as of December 31, 2008 because general market weakness
continued to negatively impact subscriber growth and new trials. However, we
moderately increased
31
Table
of Contents
subscription prices for Premium Membership in both January 2009
and 2008, which partly offset lower revenue from the subscription decline.
Revenue from our Investment Research products also declined
in the second quarter and first half of 2009, primarily because of lower
revenue from publications, including newsletters and books. In the first
quarter of 2009, we discontinued three of the print publications we previously
published in the first quarter of each year: the
Morningstar Funds 500
,
Morningstar
Stocks
500
, and
Morningstar ETFs 150
. Lower advertising
revenue from publications sold in Australia also contributed to the decline.
Revenue from the annual Morningstar Investment Conference held in the second
quarter was down compared with the prior-year period, although to a lesser
extent than publications.
Slightly offsetting the year-to-date decrease was revenue
from Morningstar Equity Research, which primarily includes revenue related to
the Global Analyst Research Settlement (GARS). GARS-related revenue accounted
for approximately 5.6% of our Investment Information segment revenue and 4.6%
of our consolidated revenue in the first half of 2009. As mentioned above, the
period covered by GARS expired at the end of July 2009, and the banks
covered by it are no longer required to provide independent research to their
clients. We expect our post-settlement equity research revenue to be
significantly lower beginning in the second half of 2009. For further
discussion, see Item 1ARisk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2008.
Revenue growth in Advisor Software products partially offset
the revenue declines discussed above. The growth was primarily from Morningstar
Advisor Workstation. The number of U.S. licenses for Morningstar Advisor
Workstation increased to 152,971 as of June 30, 2009 compared with 151,874
as of December 31, 2008, but decreased compared with 154,269 as of June 30,
2008. Beginning in 2009, Morningstar no longer includes the Site Builder
product as part of Advisor Workstation. (The number of Advisor Workstation
licenses reported in 2008 has been adjusted to reflect this change. We discuss
this change in more detail in the Reclassifications section on page 37.)
The decline in users over the past year primarily reflects a
client that migrated to our Site Builder product. The decline in licenses did
not adversely impact revenue growth because some contracts include unlimited
usage, and revenue is not tied to the number of client users. In addition, we
expanded some existing contracts to include additional functionality, which
increased the contract value without changing the number of users. This revenue
growth was slightly offset by lower revenue from Principia. Principia revenue
was down in the second quarter and first half of 2009. Principia subscriptions
totaled 38,378 as of June 30, 2009, a 15% decrease from 45,219 as of June 30,
2008. The decline partly reflects clients migrating from Principia to Advisor
Workstation, but also reflects a lower retention rate as the economic
environment weakened during the latter part of 2008 and continued in the first
half of 2009.
Revenue from our data products, primarily Licensed Data,
also increased in the second quarter and first half of 2009, although by a
smaller amount. Licensed Data continued to benefit from expanded sales efforts
in Europe and other markets outside the United States, as well as continued
strength in the United States. The number of licenses for Morningstar Direct grew
18% to 3,171 worldwide as of June 30, 2009, compared with 2,683 as of June 30,
2008.
In the second quarter of 2009, operating income for the
Investment Information segment decreased $1.5 million, or 3.8%, and increased
$2.1 million, or 2.9%, for the first half of 2009.
Operating expense decreased $2.4 million and $6.2 million in
the second quarter and first half of 2009, respectively, as cost reductions for
discretionary expense such as bonuses, advertising, and marketing were
partially offset by additional operating expense from acquisitions. Bonus
expense declined $3.7 million in the quarter and $6.6 million year to date.
Most of this reduction reflects the changes we made to our bonus program for
2009 as part of our efforts to better align our cost structure with revenue in
the challenging business environment. Other compensation-related expense was
down, primarily because we suspended matching contributions to our 401(k) plan
in the United States, reducing operating expense by about $0.9 million in this
segment in the second quarter and $2.5 million in the first half of 2009.
Sales and marketing costs decreased in the second quarter
and the first half of 2009, with the magnitude greater in the first three
months of the year. Most of the decline reflects lower spending on advertising
and marketing and lower travel costs, which we pared back because of the
challenging business environment. In 2009, we also discontinued three of the
publications we previously published in the first quarter of each year
M
orningstar Funds 500
,
Morningstar Stocks
500
, and
Morningstar
ETFs 150
and
therefore didnt incur costs to promote these publications in the first half of
2009.
Our Investment Information segment operating margin was flat
in the second quarter and improved 1.9 percentage points in the first six
months of 2009. Operating expense reductions including lower bonus expense,
advertising, and marketing as a percentage of revenue outpaced the revenue
decline. This margin expansion was partially offset by the impact of
acquisitions in the quarter and year-to-date periods.
32
Table of Contents
Investment Management Segment
The Investment Management segment includes all of our asset
management operations, which operate as registered investment advisors and earn
more than half of their revenue from asset-based fees.
The key products and services in this segment based on
revenue are Investment Consulting, which focuses on investment monitoring and
asset allocation for funds of funds, including mutual funds and variable
annuities; Retirement Advice, 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
and exchange-traded fund 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 the first six months of 2009 and 2008, this segment
represented 17.9% and 23.1%, respectively, of our consolidated revenue.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key
Metrics ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Revenue
|
|
$
|
21,794
|
|
$
|
30,657
|
|
(28.9
|
)%
|
$
|
42,286
|
|
$
|
59,595
|
|
(29.0
|
)%
|
Operating income
|
|
$
|
13,062
|
|
$
|
17,496
|
|
(25.3
|
)%
|
$
|
24,889
|
|
$
|
32,755
|
|
(24.0
|
)%
|
Operating margin (%)
|
|
59.9
|
%
|
57.1
|
%
|
2.8
|
pp
|
58.9
|
%
|
55.0
|
%
|
3.9
|
pp
|
Although revenue declined across all products in the
Investment Management segment, Investment Consulting, which has been a leading
contributor to revenue growth in recent years, accounted for approximately
three-fourths of the segments revenue decline in both the quarter and first
six months of 2009. Our Investment Consulting business suffered because of the
market decline over the past year, as well as the impact of one client not
renewing when its contract expired in the fourth quarter of 2008, and to a
lesser extent by another client not renewing when its contract expired in May 2009.
Combined, these contracts represented about $17 million of revenue in 2008.
We provided advisory services on approximately $56.1 billion
in assets as of June 30, 2009, compared with approximately $66.2 billion
as of December 31, 2008 and approximately $99.1 billion as of June 30,
2008. These totals include consulting relationships as well as agreements where
we act as a portfolio construction manager for a mutual fund or variable
annuity and receive a basis-point fee. We also provide Investment Consulting
services for some assets under management for which we receive a flat fee. Excluding
changes related to contract cancellations or renewals, changes in the value of
assets under advisement can come from two primary sources: gains or losses
related to overall trends in market performance, and net inflows or outflows
caused when investors add to or redeem shares from these portfolios.
Total assets under advisement for Investment Consulting
declined approximately 43% compared with June 30, 2008, as assets under
advisement from Morningstar Associates declined 67.7% and assets under
advisement from Ibbotson Associates decreased about 14%. The majority of the
asset decline reflects the loss of two contracts discussed in more detail
above, and the remaining portion of the decline was mainly driven by the market
downturn over most of the past 12 months. As a result of the two contract
losses, assets under advisement for Morningstar Associates declined more than
the market compared with the prior-year period.
Retirement Advice revenue was also down in the second
quarter and first half of 2009, although to a lesser extent. Assets under
management for Retirement Advice declined to $12.5 billion as of June 30,
2009 compared with $14.6 billion in the same period a year ago, but were up
slightly compared with $11.0 billion as of December 31, 2008.
|
|
As of June 30
|
|
Assets under advisement for Investment Consulting ($ billions)
|
|
2009
|
|
2008
|
|
Ibbotson Associates
|
|
$
|
38.6
|
|
$
|
45.0
|
|
Morningstar Associates
|
|
17.5
|
|
54.1
|
|
Total
|
|
$
|
56.1
|
|
$
|
99.1
|
|
|
|
|
|
|
|
|
|
As of June 30
|
|
Assets under management in managed retirement accounts ($ billions)
|
|
2009
|
|
2008
|
|
Advice by Ibbotson
|
|
$
|
11.3
|
|
$
|
13.4
|
|
Morningstar Retirement Manager
|
|
1.2
|
|
1.2
|
|
Total
|
|
$
|
12.5
|
|
$
|
14.6
|
|
Morningstar Managed Portfolios also contributed to the
segments revenue decline in the second quarter and first half of 2009, although to a much lesser extent than
Investment Consulting. Assets under management for Morningstar Managed
Portfolios fell to $1.7 billion as of June 30, 2009, compared with $2.1
billion as of June 30, 2008, reflecting the general market weakness over
33
Table
of Contents
most of the past year. Assets under management were up
slightly in the first six months of 2009 compared with $1.6 billion as of December 31,
2008.
Operating expense in the segment decreased $4.5 million, or
33.7%, in the second quarter of 2009 and decreased $9.4 million, or 35.2%, in
the first six months of 2009. The decrease was primarily because of lower bonus
and other compensation-related expense, partially as a result of suspending our
401(k) matching contributions in the United States.
Operating margin was 59.9% in the second quarter of 2009 and
58.9% for the first six months of 2009. With operating expense declining more
than revenue in this segment, our operating margin increased 2.8 percentage
points in the second quarter of 2009 and 3.9 percentage points in the first six
months of 2009. Lower bonus expense, as a percentage of revenue, was the main
driver of the margin improvement in both periods.
Corporate Items
We do not allocate corporate costs to our business segments.
The corporate items category also includes amortization expense related to
intangible assets recorded when we allocate the purchase price of acquisitions.
The table below shows the components of corporate items that impacted our
consolidated operating income:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics
($000)
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Amortization expense
|
|
$
|
5,541
|
|
$
|
4,091
|
|
35.4
|
%
|
$
|
10,663
|
|
$
|
8,113
|
|
31.4
|
%
|
Depreciation expense
|
|
2,019
|
|
1,107
|
|
82.4
|
%
|
3,672
|
|
2,155
|
|
70.4
|
%
|
Corporate unallocated
|
|
10,056
|
|
9,425
|
|
6.7
|
%
|
17,320
|
|
18,217
|
|
(4.9
|
)%
|
Corporate items
|
|
$
|
17,616
|
|
$
|
14,623
|
|
20.5
|
%
|
$
|
31,655
|
|
$
|
28,485
|
|
11.1
|
%
|
Amortization of intangible assets increased $1.4 million in
the second quarter of 2009 and $2.6 million in the first half of 2009,
reflecting incremental amortization expense related to our 2008 and 2009
acquisitions. Based on acquisitions completed through June 30, 2009, we
estimate that aggregate amortization expense for intangible assets will be
$22.5 million in 2009. Some of the purchase price allocations are preliminary,
and the values assigned to intangible assets and the associated amortization
expense may be affected by changes to these preliminary purchase price
allocations.
Depreciation expense increased $0.9 million in the second
quarter of 2009 and $1.5 million in the first half of 2009. In the fourth
quarter of 2008, we relocated to our new corporate headquarters, resulting in
higher depreciation expense compared with the prior-year period.
Corporate unallocated increased $0.7 million in the second
quarter of 2009 and decreased $0.9 million in the first six months of 2009.
Included in our Corporate segment results is a $3.5 million operating expense
for estimated penalties related to the timing of deposits for taxes withheld on
stock-option exercises from 2006 through June 30, 2009. The estimated
deposit penalty was partially offset by lower bonus and other
compensation-related expense in the second quarter. The decline in costs in
this category for the first half of 2009 was primarily from lower bonus
expense, other compensation-related expense, and travel expense, partially
offset by the estimated deposit penalty.
Equity in Net Income (Loss) of
Unconsolidated Entities, Non-Operating Income, and Income Tax Expense
Equity in Net Income (Loss) of
Unconsolidated Entities
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
$
|
(21
|
)
|
$
|
445
|
|
$
|
361
|
|
$
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of unconsolidated entities
includes our portion of the net income (loss) of Morningstar Japan K.K. (MJKK),
Morningstar Korea, Ltd., Morningstar Danmark A/S, and Morningstar Sweden AB. In
the second quarter and first half of 2009 and 2008, equity in net income (loss)
of unconsolidated entities was primarily from our position in MJKK. We describe
our investments in unconsolidated entities in more detail in Note 7 of the
Notes to our Unaudited Condensed Consolidated Financial Statements.
Non-Operating Income
The following table presents the components of net
non-operating income:
34
Table of Contents
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Interest income, net
|
|
$
|
764
|
|
$
|
1,381
|
|
$
|
1,742
|
|
$
|
2,900
|
|
Other income (expense), net
|
|
1,208
|
|
(234
|
)
|
764
|
|
38
|
|
Non-operating income, net
|
|
$
|
1,972
|
|
$
|
1,147
|
|
$
|
2,506
|
|
$
|
2,938
|
|
Net interest income mainly reflects interest from our
investment portfolio. Net interest income decreased $0.6 million in the second
quarter of 2009 and $1.2 million in the first half of 2009 as a result of lower
returns on our investment balances.
Other income (expense) primarily represents foreign currency
exchange gains and losses arising from the ordinary course of business related
to our U.S. and non-U.S. operations. It also includes royalty income from MJKK
and realized gains and losses from our investment portfolio. The larger income
in the second quarter and first half of 2009 was driven by net foreign currency
exchange gains.
Income Tax Expense
The following table summarizes the components of our
effective tax rate:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Income before income taxes and
equity in net income (loss) of unconsolidated entities
|
|
$
|
34,660
|
|
$
|
42,717
|
|
$
|
69,819
|
|
$
|
79,193
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
(21
|
)
|
445
|
|
361
|
|
797
|
|
Net (income) loss attributable to
the noncontrolling interest
|
|
(71
|
)
|
(87
|
)
|
18
|
|
(335
|
)
|
Total
|
|
$
|
34,568
|
|
$
|
43,075
|
|
$
|
70,198
|
|
$
|
79,655
|
|
Income tax expense
|
|
$
|
14,024
|
|
$
|
15,076
|
|
$
|
24,692
|
|
$
|
28,580
|
|
Effective tax rate
|
|
40.6
|
%
|
35.0
|
%
|
35.2
|
%
|
35.9
|
%
|
Our effective tax rate increased by 5.6 percentage points in
the second quarter of 2009. A deposit
penalty of $3.5 million, which decreased pre-tax income and which is not
deductible for tax purposes, accounted for 3.7 percentage points of the
increase. Year to date, our effective tax rate decreased to 35.2% from 35.9% in
2008. The year-to-date effective tax rate reflects the impact from the first
quarter of 2009 of reversing a $1.4 million reserve for uncertain tax positions
as a result of a lapse in the statute of limitations and the reversal in the
second quarter of 2009 of $0.6 million of reserves due to settlements and other
audit activity. These non-cash benefits contributed approximately 3 percentage
points of the decrease in the effective tax rate in the year-to-date period.
This reduction in our effective tax rate was partially offset by the impact of
the non-deductible deposit penalty expense, which increased our effective tax
rate by approximately 2 percentage points in the year-to-date period.
As of June 30, 2009, our Consolidated Balance Sheet
includes a current liability of $1.4 million and a non-current liability of
$3.8 million for unrecognized tax benefits. As of December 31, 2008, our
Consolidated Balance Sheet included a current liability of $4.0 million and a
non-current liability of $3.8 million for unrecognized tax benefits. These
amounts include interest and penalties, less any associated tax benefits. The
decrease in the liability from December 31, 2008 primarily reflects the
reversal of approximately $2.0 million of reserves for uncertain tax positions
discussed in the previous paragraph.
We are currently being audited by the U.S. federal and
various state and local tax authorities in the United States as well as the tax
authorities in certain non-U.S. jurisdictions. It is likely that the
examination phase of some of these audits will conclude in 2009. It is not
possible to estimate the impact of current audits on previously recorded
unrecognized tax benefits.
Liquidity and Capital Resources
We believe our available cash balances and investments,
along with cash generated from operations, will be sufficient to meet our
operating and cash needs for the foreseeable future. We invest our cash
reserves in cash equivalents and investments, consisting primarily of
fixed-income securities. We maintain a conservative investment policy for our
investments and invest a portion of these assets in municipal securities with
high-quality stand-alone credit ratings. The ongoing effects of the financial
crisis, which have continued into 2009, have heightened our application of a
conservative investment policy, emphasizing principal preservation. Investments
in our portfolio have a maximum maturity of two years; the weighted average
maturity is approximately one year.
35
Table of
Contents
We intend to use our cash, cash equivalents, and investments
for general corporate purposes, including for working capital and for funding
future growth. To date we have not needed to access any significant commercial
credit and have not attempted to borrow or establish any lines of credit.
Cash and Cash Equivalents
As of June 30, 2009, we had cash, cash equivalents, and
investments of $323.2 million, an increase of $25.6 million compared with December 31,
2008. This increase mainly reflects cash provided by operating activities and
proceeds received from employee stock option exercises, partially offset by
cash used for acquisitions and capital expenditures.
Cash Provided by Operating Activities
Our main source of capital is cash generated from operating
activities. We typically pay bonuses in the first quarter of the year. As a
result, cash flow from operations in the first quarter tends to be lower
compared with subsequent quarters.
In the first six months of 2009, cash provided by operating
activities was $31.3 million, a decrease of $17.8 million compared with cash
provided by operating activities of $49.1 million in the first six months of
2008. The decrease mainly reflects an increase of $9.6 million in bonus
payments and a $9.6 million reduction related to tenant improvement allowances.
We paid $58.9 million in annual bonus payments in the first
quarter of 2009, compared with $49.3 million in the prior-year period.
The bonuses paid in 2009 included approximately $48.9 million of bonus expense
recorded in 2008 and approximately $10.0 million of bonus payments deferred
from 2007. In accordance with bonus program revisions adopted in January 2009,
we are not deferring payments on any bonus expense recorded for 2008.
Tenant improvement allowances of $9.3 million, received in
connection with the build-out of our new headquarters, benefited cash flow in
the first six months of 2008 but did not recur in 2009. The tenant improvement
allowance received in 2008 is being amortized as a reduction in office lease
expense over the lease term and will be deducted from net income to arrive at
cash flow provided by operating activities.
Cash Used for Investing Activities
Cash used for investing activities consists primarily of
cash used for acquisitions; purchases of investments, net of proceeds from the
sale of investments; and capital expenditures. The level of investing
activities can vary from period to period depending on the level of activity in
these three categories. In the first half of 2009, cash used for investing
activities was $36.9 million, compared with $33.1 million in the same period in
2008.
Cash used for acquisitions, net of cash acquired, was $18.6
million in the first half of 2009. We completed four acquisitions in the second
quarter of 2009. In comparison, cash used for acquisitions, net of cash
acquired, was $51.0 million in the first half of 2008, reflecting our
acquisition of the Hemscott data, media, and investor relations Web site
businesses in January 2008.
Purchases of investments, net of proceeds from the sale of
investments, were $12.2 million in the first half of 2009 as we transferred
cash balances in excess of our immediate needs into investments with longer
maturities. In contrast, in the first half of 2008, the proceeds from the sales
of investments exceeded the purchases of investments by $35.3 million. As of June 30,
2009 and December 31, 2008, we had investments, consisting primarily of
fixed-income securities, of $136.1 million and $123.7 million, respectively. As
of June 30, 2009, our investments represented approximately 42% of our
total cash, cash equivalents, and investments balance, consistent with the
levels as of December 31, 2008.
Capital expenditures were $6.8 million in the first half of
2009, a decrease of $10.6 million, compared with $17.4 million in the first
half of 2008. In both periods, the amounts were almost entirely composed
of capital expenditures for our new headquarters in Chicago. We expect to make capital expenditures of
approximately $12 million in 2009, significantly lower than the amount of $48.5
million in 2008.
Cash Provided by Financing Activities
Cash provided by financing activities consists primarily of
proceeds from stock option exercises and excess tax benefits related to stock
option exercises and vesting of restricted stock units. Excess tax benefits
occur at the time a stock option is exercised when the intrinsic value of the
option (the difference between the fair value of our stock on the date of
exercise and the exercise price of the option) is greater than the fair value
of the option at the time of grant. Similarly, excess tax benefits are
generated upon vesting of restricted stock units when the market value of our
common stock on the vesting date exceeds the grant price of the restricted
stock units. These excess tax benefits reduce the cash we pay for income taxes
in the year they are recognized. It is not possible to predict the timing of stock
option exercises or the intrinsic value that will be achieved at the time
options are exercised
36
Table
of Contents
or upon vesting of restricted stock units. As a result, we
expect cash flow from financing activities to vary over time. Note 8 in the
Notes to our Unaudited Condensed Consolidated Financial Statements includes
additional information concerning stock options and restricted stock units
outstanding as of June 30, 2009.
Cash provided by financing activities was $16.0 million in
the first half of 2009, consisting mainly of proceeds from stock option
exercises of $11.7 million and excess tax benefits of $4.5 million. In the
first six months of 2009, cash provided by financing activities decreased by
$13.9 million, or 46.5%, compared with the first half of 2008, driven mostly by
a $12.8 million decline in excess tax benefits and a $0.9 million reduction in
proceeds from stock option exercises. The decrease was due primarily to fewer
options being exercised and lower average stock price at the time the stock
options were exercised.
Employees exercised approximately 1.0 million and 1.4
million stock options in the first six months of 2009 and 2008, respectively.
The total intrinsic value (the difference between the market value of our stock
on the date of exercise and the exercise price of the option) of options
exercised during the first six months of 2009 and 2008 was $25.0 million and
$82.2 million, respectively.
Acquisitions
In the second quarter of 2009, we completed four
acquisitions. Cash used for these
acquisitions, net of acquired cash, was $18,671,000, and is subject to
post-closing adjustments. The table below shows additional information
concerning these acquisitions:
Acquisition
|
|
Description
|
|
Date Completed
|
|
Purchase Price*
|
Global financial filings database business of
Global Reports LLC
|
|
A leading provider of online financial and
Corporate and Social Responsibility reports for publicly traded companies
around the world
|
|
April 20, 2009
|
|
Not
separately disclosed
|
Equity research and data
business of C.P.M.S. Computerized Portfolio Management Services Inc.
|
|
C.P.M.S. tracks fundamental equity data for approximately
4,000 securities in the United States and Canada as well as tracks and
provides brokerage earnings estimates for Canadian equities.
|
|
May 1, 2009
|
|
$13.9
million
|
Andex Associates, Inc.
|
|
The company is known for its Andex Charts, individual
graphic charts detailing historical market returns, stock index growth,
inflation rates, currency rates, and general economic conditions for the
United States dating back to 1926, and for Canada dating back to 1950.
|
|
May 1, 2009
|
|
Not
separately disclosed
|
Intech Pty Ltd
|
|
A leading provider of multi-manager and investment
portfolio solutions in Sydney, Australia. Intech also manages a range of
single sector, alternative strategy, and diversified investment portfolios,
has one of the leading separately managed account databases in Australia and
offers the Intech Desktop Consultant, a research software product for
institutions. As of June 30, 2009, Intech had $2.7 billion in assets under management.
|
|
June 30, 2009
|
|
Not
separately disclosed
|
* Total purchase price less cash acquired
Reclassifications
Beginning in 2009, as a part of the changes to our
organizational structure with a focus on our global product lines, we no longer
include Morningstar Site Builder as part of Morningstar Advisor Workstation.
Site Builder consists of a set of integrated tools, content, and reports that
investment firms can seamlessly add to their existing advisor Web sites. The
table below shows the number of U.S. Advisor Workstation licenses, revised for
consistency with the current-year presentation.
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar 31, 2008
|
|
Jun 30, 2008
|
|
Sep 30, 2008
|
|
Dec 31, 2008
|
|
Mar 31, 2009
|
|
U.S. Advisor Workstation licenses,
revised
|
|
152,747
|
|
154,269
|
|
153,398
|
|
151,874
|
|
148,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Advisor Workstation licenses,
previously reported
|
|
178,619
|
|
188,792
|
|
189,863
|
|
190,267
|
|
194,857
|
|
37
Table of Contents
In addition, beginning in 2009, we are focused on
globalizing the Premium subscription and advertising revenue generated by
Morningstar.com Web sites, which operate in a variety of markets. As a result,
we now include advertising revenue for all non-U.S. sites as part of
Morningstar.com and have reclassified prior-year product revenue for
consistency with the current-year presentation.
These reclassifications did not have any impact on the order
of our top five products in 2008 or 2007, which are shown in the two tables
below.
Top Five Products 2008
|
|
Reclassified for
consistency with
2009 Product
Revenue
($000)
|
|
As Reported
Revenue ($000)
|
|
Licensed Data
|
|
$
|
78,329
|
|
78,329
|
|
Investment Consulting
|
|
77,757
|
|
77,757
|
|
Advisor Workstation
|
|
64,222
|
|
66,675
|
|
Morningstar.com
|
|
45,684
|
|
43,274
|
|
Principia
|
|
27,791
|
|
27,791
|
|
|
|
|
|
|
|
Top Five Products 2007
|
|
Reclassified for
consistency with
2009 Product
Revenue
($000)
|
|
As Reported
Revenue ($000)
|
|
Investment Consulting
|
|
$
|
75,595
|
|
75,595
|
|
Licensed Data
|
|
59,207
|
|
59,207
|
|
Advisor Workstation
|
|
53,755
|
|
54,980
|
|
Morningstar.com
|
|
39,367
|
|
37,630
|
|
Principia
|
|
28,760
|
|
28,760
|
|
Application of Critical Accounting Policies
and Estimates
Our critical accounting policies and estimates are discussed
in the Managements Discussion and Analysis section of our Annual Report on Form 10-K
for the year ended December 31, 2008.
We adopted the following financial accounting standards
effective January 1, 2009:
SFAS No. 160, Accounting and
Reporting of Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51
Effective January 1, 2009, Statement of Financial
Accounting Standards (SFAS) No. 160,
Accounting
and Reporting of Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51,
amends the financial accounting and
reporting of noncontrolling interests in consolidated financial
statements. A noncontrolling interest is the portion of equity (net
assets) in a subsidiary not attributable, directly or indirectly, to the parent
company. We conduct our business operations outside of the United States
through wholly owned or majority-owned operating subsidiaries. As a result
of adopting SFAS No. 160, the noncontrolling interest is now reported in
our Consolidated Balance Sheet within equity, separately from the shareholders
equity attributable to Morningstar, Inc. In addition, the net income or
loss and comprehensive income or loss attributed to the Morningstar, Inc.
shareholders and the noncontrolling interest are presented in our Statements of
Income and Statement of Equity and Comprehensive Income (Loss).
SFAS No. 141(R), Business
Combinations
Effective January 1, 2009, SFAS No. 141(R),
Business Combinations
, modifies the
financial accounting and reporting of business combinations. For
business combinations which occur after January 1, 2009, SFAS No. 141(R) requires
the acquirer to recognize and measure the fair value of the acquired operation
as a whole, and the assets acquired and liabilities assumed at their full fair
values as of the date control is obtained, regardless of the percentage
ownership in the acquired operation or how the acquisition was
achieved. With the adoption of SFAS No. 141(R), direct costs incurred
in connection with a business combination, such as finders fees, advisory,
accounting, legal, valuation, and other professional fees are expensed as
incurred. Restructuring costs, including
severance and relocation of employees of the acquired entity, are recognized
separately from the business combination as post-combination expenses unless
the criteria of SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities
, are met on the
acquisition date
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by the target entity.
Prior to the adoption of SFAS 141(R), acquisition-related costs and
restructuring costs were generally included as part of the cost of the acquired
business.
In April 2009,
the Financial Accounting Standards Board (FASB) issued a Final Staff Position
(FSP) to amend and clarify SFAS No. 141 (R), to address application issues
on recognition, measurement and disclosure of assets and liabilities, arising
from contingencies in a business combination. This FSP is effective for assets
or liabilities arising from contingencies in business combinations for which
the acquisition date is on or after January 1, 2009.
EITF Issue 08-6, Equity Method
Investment Accounting Considerations
We adopted Emerging Issues Task Force (EITF) 08-6,
Equity Method Investment Accounting Considerations,
concurrently with the adoption of SFAS No. 141(R) and SFAS No. 160.
The intent of EITF 08-6 is to clarify the accounting for certain transactions
and impairment considerations related to equity method investments as modified
by the provisions of SFAS No. 141(R) and SFAS No. 160.
We adopted the following financial accounting standards in
the second quarter of 2009:
In April 2009, the FASB issued three Final Staff Positions
(FSPs) intended to provide additional application guidance and enhance
disclosures regarding fair value measurements and impairments of securities.
1.
FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
, provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS No. 157,
Fair Value Measurements
.
2.
FSP FAS 107-1 and
APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures.
3.
FSP FAS 115-2 and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
, provides additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities.
The disclosures related to these FSPs appear in Note 6 in
the Notes to our Condensed Consolidated Financial Statements.
SFAS No. 165, Subsequent Events
SFAS No. 165,
Subsequent Events
,
establishes the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date, that is, whether
that date represents the date the financial statements were issued or were
available to be issued. See Note 12 in the Notes to our Unaudited Condensed
Consolidated Financial Statements for the related disclosure.
The adoption of these financial accounting standards did not
have a material impact on our Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued the following accounting
pronouncements:
SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement 140, and SFAS No.167,
Amendments to FASB Interpretation No. 46(R)
These accounting pronouncements change the way entities
account for transfers of financial assets and determine what entities must be
consolidated. The most significant amendment resulting from SFAS No. 166
consists of the removal of the concept of a Qualifying Special-Purpose Entity
(QSPE) from SFAS No.140.
SFAS No. 167 addresses the effects of eliminating the
QSPE concept from SFAS No. 140 and responds to concerns about the
application of certain key provisions of FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities (FIN 46(R))
,
including concerns over the transparency of enterprises involvement with
Variable Interest Entities (VIEs).
For Morningstar, both SFAS No. 166 and SFAS No.167 will
be effective beginning January 1, 2010. We are in the process of
determining the impact, if any, these accounting pronouncements will have on
our Consolidated Financial Statements.
39
Table of Contents
SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principlesa
replacement of FASB Statement No. 162
.
The FASBs
Accounting Standards Codification
(ASC) will
become the source of authoritative U.S. accounting and reporting standards for
nongovernmental entities, in addition to guidance issued by the SEC. The
Codification reorganizes the thousands of U.S. GAAP pronouncements into roughly
90 accounting topics and displays all topics using a consistent structure. It
also includes relevant SEC guidance that follows the same topical structure in
separate sections in the Codification.
SFAS No. 168 is the final standard that will be issued by FASB in
the current form. For Morningstar, this Statement must be applied beginning
with our financial statements for the quarter and year-to-date period ended September 30,
2009.
We are in the
process of determining the impact this accounting pronouncement will have on
our Consolidated Financial Statement disclosures.
40
Table of Contents
Rule 10b5-1 Sales Plans
Rule 10b5-1 Plans
Our directors and executive officers
may exercise stock options or purchase or sell shares of our common stock
in the market from time to time. We encourage them to make these transactions
through plans that comply with Exchange Act Rule 10b5-1(c). Morningstar
will not receive any proceeds, other than proceeds from the exercise of stock
options, related to these transactions. The following table, which we are
providing on a voluntary basis, shows the Rule 10b5-1 sales plans entered
into by our directors and executive officers that were in effect as of August 1,
2009:
Name and Position
|
|
Date of
Plan
|
|
Plan
Termination
Date
|
|
Number of
Shares
to be
Sold under
the Plan
|
|
Timing of Sales under the Plan
|
|
Number of
Shares
Sold under
the Plan through
August 1,
2009
|
|
Projected
Beneficial
Ownership (1)
|
|
Joe Mansueto
Chairman and
Chief Executive
Officer
|
|
08/13/08
|
|
12/31/09
|
|
1,075,000
|
|
Shares to be sold ratably over the
course of the plan
|
|
548,720
|
|
25,790,021
|
|
Chris Boruff
President,
Advisor Software
|
|
05/12/08
|
|
11/15/09
|
|
80,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
12,000
|
|
91,180
|
|
Catherine Odelbo
President, Equity
Research
|
|
08/13/08
|
|
12/31/09
|
|
28,165
|
|
Weekly increments of up to 3,500
shares
|
|
|
|
148,000
|
|
Don Phillips
President, Fund
Research and
Managing
Director
|
|
05/09/06
|
|
12/01/09
|
|
1,506,097
|
|
Weekly increments of up to 17,500
shares
|
|
1,362,751
|
|
423,895
|
|
Patrick
Reinkemeyer
President,
Morningstar
Associates, LLC
|
|
09/10/08
|
|
10/31/09
|
|
15,000
|
|
Weekly increments of up to 1,000
shares
|
|
|
|
320,390
|
|
David Williams
Managing
Director,
Design
|
|
09/10/08
|
|
09/30/09
|
|
10,000
|
|
Weekly increments of up to 2,500
shares
|
|
|
|
102,640
|
|
(1) This column reflects
an estimate of the number of shares each identified director and executive
officer will beneficially own following the sale of all shares under the Rule 10b5-1
sales plans identified above. This information reflects the beneficial
ownership of our common stock on June 30, 2009, and includes shares of our
common stock subject to options that were then exercisable or that will have
become exercisable by August 29, 2009 and restricted stock units that will
vest by August 29, 2009. The estimates do not reflect any changes to
beneficial ownership that may have occurred since June 30, 2009. Each
director and executive officer identified in the table may amend or terminate
his or her Rule 10b5-1 sales plan and may adopt additional Rule 10b5-1
plans in the future.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
Our investment portfolio is actively managed and may suffer
losses from fluctuating interest rates, market prices, or adverse security
selection. Our investment portfolio is mainly invested in high-quality
fixed-income securities. We do not have any direct exposure to sub-prime
mortgages. As of June 30, 2009, our cash, cash equivalents, and
investments balance was $323.2 million. Based on our estimates, a 100
basis-point change in interest rates would impact the fair value of our
investment portfolio by approximately $0.9 million.
As our non-U.S. revenue increases as a percentage of our
consolidated revenue, fluctuations in foreign currencies present a greater
potential risk. To date, we have not engaged in currency hedging, and we do not
currently have any positions in derivative instruments to hedge our currency
risk. Our results could suffer if certain foreign currencies decline relative
to the U.S. dollar. In
41
Table
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addition, because we use the local currency of our
subsidiaries as the functional currency, we are affected by the translation of
foreign currencies into U.S. dollars.
Item 4. Controls and Procedures
(a) Evaluation and Disclosure Controls
and Procedures
Disclosure controls and procedures are designed to
reasonably assure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to reasonably assure that information required to be
disclosed in the reports filed under the Exchange Act is accumulated and
communicated to management, including the chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 12a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as of June 30,
2009. Based on that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported as and when required and is accumulated and
communicated to management, including the chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls Over
Financial Reporting
There were no changes in our internal controls over
financial reporting during the quarter ended June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings
We incorporate by reference the information regarding legal
proceedings set forth in Note 11, Contingencies, of the Notes to our
Unaudited Condensed Consolidated Financial Statements contained in Part 1,
Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to the risk factors
disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2008.
Item 4. Submission of Matters to
a Vote of Security Holders
Morningstar held its Annual
Shareholders Meeting on May 19, 2009, for the purpose of electing
directors, approving the Morningstar, Inc. Incentive Plan, and ratifying
the appointment of Ernst & Young LLP (Ernst & Young) as
Morningstars independent registered public accounting firm for 2009. Each of
the nominees for director, as listed in the proxy statement, was elected with
the number of votes set forth below.
Name
|
|
Votes For
|
|
Abstentions
|
|
Joe
Mansueto
|
|
45,297,711
|
|
374,848
|
|
Don
Phillips
|
|
44,952,713
|
|
719,846
|
|
Cheryl
Francis
|
|
44,945,280
|
|
727,279
|
|
Steve
Kaplan
|
|
44,915,224
|
|
757,335
|
|
Bill
Lyons
|
|
44,894,840
|
|
777,719
|
|
Jack
Noonan
|
|
44,883,376
|
|
789,183
|
|
Frank
Ptak
|
|
43,864,520
|
|
1,808,039
|
|
Paul
Sturm
|
|
43,926,513
|
|
1,746,046
|
|
The Morningstar, Inc. Incentive
Plan was approved. Of the total votes cast, 41,459,860 were cast for the
proposal, 1,082,673 were cast against the proposal, and there were 102,940
abstentions and 3,027,086 broker non-votes.
42
Table of
Contents
The appointment of Ernst &
Young as Morningstars independent registered public accounting firm for 2009
was ratified. Of the total votes cast, 45,395,155 were cast for the proposal,
234,193 votes were cast against the proposal, and there were 43,211 abstentions
and no broker non-votes.
Item 6.
Exhibits
(a) Exhibits
Exhibit No
|
|
Description of Exhibit
|
|
|
|
10.1
|
|
Morningstar 2004 Stock Incentive
Plan, as amended and restated effective as of July 24, 2009
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
43
Table
of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
MORNINGSTAR, INC.
|
|
|
|
Date: August 4, 2009
|
By:
|
/s/ Scott Cooley
|
|
|
Scott
Cooley
|
|
|
Chief
Financial Officer
|
44
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