UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31,
2009
OR
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
Commission File Number: 000-51280
MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter)
Illinois
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36-3297908
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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22 West Washington Street
Chicago, Illinois
60602
(Address of Principal Executive Offices)
(312) 696-6000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of Each Class
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Name of Each
Exchange on Which Registered
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Common stock, no par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of
the Act:
None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes
o
No
x
Indicate
by check mark if the Registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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. (Check one):
Large
accelerated filer
x
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Accelerated filer
o
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Non-accelerated
filer
o
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Smaller reporting
company
o
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(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
The
aggregate market value of shares of common stock held by non-affiliates of the
Registrant as of June 30, 2009 was $848,941,450. As of February 22,
2010, there were 48,786,955 shares of the Registrants common stock, no par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain
parts of the Registrants Definitive Proxy Statement for the 2010 Annual
Meeting of Shareholders are incorporated into Part III of this Form 10-K.
Part I
Item 1. Business
Morningstar is a leading provider of
independent investment research to investors around the world. Since our
founding in 1984, our mission has been to create great products that help
investors reach their financial goals. We offer an extensive line of data,
software, and research products for individual investors, financial advisors,
and institutional clients through our Investment Information segment. We also
provide asset management services for advisors, institutions, and retirement
plan participants through our Investment Management segment. In addition to our
U.S.-based products and services, we offer local versions of our products
designed for investors in Asia, Australia, Canada, Europe, Japan, and South
Africa. Morningstar serves approximately 7.4 million individual investors,
245,000 financial advisors, and 4,200 institutional clients. We have operations
in 20 countries and hold minority ownership positions in companies located in
two other countries.
We maintain a series of
comprehensive databases on many types of investments, focusing on investment
vehicles that are widely used by investors globally. After building these
databases, we add value and insight to the data by applying our core skills of
research, technology, and design. As of December 31, 2009, we provided
extensive data on more than:
·
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21,000
mutual fund share classes in the United States;
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·
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97,000
mutual funds and similar vehicles in international markets;
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·
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3,400
exchange-traded funds (ETFs);
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·
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1,800
closed-end funds;
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·
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28,000
stocks;
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·
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8,200
hedge funds;
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·
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7,200
separate accounts and collective investment trusts;
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·
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109,000
variable annuity/life subaccounts and policies;
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·
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46,000
insurance, pension, and life funds;
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·
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12,300
unit investment trusts;
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·
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85
state-sponsored college savings plans (commonly known as Section 529
College Savings Plans);
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·
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83
years of capital markets data capturing performance of several major asset
classes;
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·
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Extensive
cash flow, ownership, and biographical data on directors and officers;
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·
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Real-time
market data on more than 4 million exchange-traded equities, derivatives,
commodities, futures, foreign exchanges, precious metals, news, company
fundamentals, and analytics; and
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·
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Real-time price quotes for global foreign currencies.
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Our business model is based on
leveraging our investments in these databases by selling a wide variety of
products in multiple media to individual investors, financial advisors, and
institutions around the world.
Our data and proprietary analytical
tools such as the Morningstar Rating for mutual funds, which rates past
performance based on risk- and cost-adjusted returns, and the Morningstar Style
Box, which provides a visual summary of a mutual funds underlying investment
style, have become important tools that millions of investors and advisors use
in making investment decisions. Weve created other tools, such as the
Ownership Zone, Sector Delta, and Market Barometer, which allow investors to
see how different investments work together to form a portfolio and to
track its progress. We developed a popular Portfolio X-Ray tool that helps
investors reduce risk and understand the key characteristics of their
portfolios based on nine different factors.
2
We offer a variety of qualitative
measures such as Stewardship Grades, which help investors identify companies
and funds that have demonstrated a high level of commitment to shareholders and
stewardship of investors capital.
Since 1998, weve expanded our research
efforts on individual stocks and have worked to popularize the concepts of
economic moat, a measure of competitive advantage originally developed by
Warren Buffett; and margin of safety, which reflects the size of the discount
in a stocks price relative to its estimated value. The Morningstar Rating for
stocks is based on the stocks current price relative to our analyst-generated
fair value estimates, as well as the companys level of business risk and
economic moat.
In 2009, we began publishing credit
ratings and associated research on corporate debt issuers. We currently provide
ratings on approximately 120 companies. We also introduced comprehensive,
qualitative research and ratings for mutual funds based in Europe and Asia, a
new study comparing the mutual fund investor experience across 16 countries,
hedge fund operational risk flags, attribution analysis for equity funds and
funds of funds, a new equity fund classification structure, and a new series of
specialized, institutional-level investment benchmarks.
Weve also developed in-depth advice on
security selection and portfolio building to meet the needs of investors
looking for integrated portfolio solutions. We believe many investors rely on
these tools because they offer a useful framework for comparing potential
investments and making decisions. Our independence and our history of
innovation make us a trusted resource for investors.
Growth Strategies
In keeping with our mission, we are
pursuing five key growth strategies, which we describe below. We review our
growth strategies on a regular basis and refine them to reflect changes in our
business.
1. Enhance our position in each of our key
market segments by focusing on our three major Internet-based platforms.
We believe that individual investors,
financial advisors, and institutional clients increasingly want integrated
solutions as opposed to using different research tools for different parts of
their portfolios. To help meet this need, one of our key strategies is to focus
our product offerings on our three major platforms:
·
Morningstar.com for individual investors;
·
Morningstar Advisor Workstation for financial advisors;
and
·
Morningstar Direct for institutional professionals.
These products all include integrated
research and portfolio tools, allowing investors to use our proprietary
information and analysis across multiple security types. We believe we can
achieve deeper penetration of our current audiences with each of these
platforms, as well as extend their reach to new customers.
With Morningstar.com, were continuing
to expand the range of content and market updates on the site, including
third-party content. Weve also been focusing on mobile development and social
networking, as well as expanding data and functionality to increase the sites
value to both
3
registered users and Premium members.
With Advisor Workstation, we plan to build on our large installed base by
expanding our mid- and back-office capabilities, improving the products
interface and design, and integrating real-time data and other functionality.
With Morningstar Direct, were pursuing an aggressive development program to
provide data and analysis on securities and investments around the world. Were
adding third-party data and content and enhancing our technology to allow the
product to function as a purely web-based solution. We also plan to expand into
new global markets, enhance our capabilities in portfolio management and
accounting, and significantly increase the amount of equity research content
and functionality.
2. Become a global leader in fund-of-funds
investment management.
The large number of managed investment
products available has made assembling them into well-constructed portfolios a
difficult task for many investors. Consequently, fund-of-funds offerings have
seen strong growth within the mutual fund, variable annuity, and hedge fund
industries. Cerulli Associates estimates that global multimanager
assetsincluding publicly offered funds that invest in other funds as well as
investment vehicles managed by multiple subadvisorstotaled approximately $1.6
trillion in 2009. We believe assembling and evaluating funds of funds is a
natural extension of our expertise in understanding managed investment
products.
Our fund-of-funds programs combine
managed investment vehiclestypically mutual fundsin portfolios designed to
help investors meet their financial goals. When we create portfolios made up of
other funds, our goal is to simplify the investment process and help investors
access portfolios that match their level of risk tolerance, time horizon, and
long-term investment objectives. We draw on our extensive experience analyzing
funds to combine quantitative research with a qualitative assessment of manager
skill and investment style.
In June 2009, we expanded our
investment management business by acquiring Intech Pty Ltd, a leading provider
of multimanager and investment portfolio solutions in Sydney, Australia. Intech
(now doing business as Ibbotson Associates) manages the Intech Investment
Trusts, a range of single sector, alternative strategy, and diversified
investment portfolios.
We had a total of $61.4 billion in
assets under advisement in our Investment Consulting business as of December 31,
2009. Our consulting business focuses on relationships and agreements where we
act as a portfolio construction manager or asset allocation program designer
for a mutual fund or variable annuity and receive a basis-point fee. We plan to
continue building this business by expanding to reach new markets outside of
the United States, expanding our capabilities and products in new areas such as
alternative investment strategies, developing more ways to incorporate risk
protection and insurance, expanding to reach additional client segments, and
focusing on performance and client support.
We also offer managed retirement
account services through our Retirement Advice platform, which includes
Morningstar Retirement Manager and Advice by Ibbotson. We offer these services
for retirement plan participants who choose to delegate management of their
portfolios to our managed account programs, which are quantitative systems that
select investment options and make retirement planning choices for the
participants. We believe that retirement plan participants will continue to
adopt managed accounts because of the complexity involved in retirement
planning.
Morningstar Managed Portfolios is a
fee-based discretionary asset management service that includes a series of
mutual fund, exchange-traded fund, and stock portfolios tailored to meet
specific investment time horizons and risk levels. As of December 31,
2009, we had $2.1 billion in assets under management through Morningstar
Managed Portfolios and $15.6 billion in assets under management in our
managed retirement accounts.
4
3.
Continue
building thought leadership in independent investment research.
We believe that our leadership position
in independent investment research offers a competitive advantage that would be
difficult for competitors to replicate. Our goal is to continue producing
investment insights that empower investors and focus our research efforts in
four major areas:
·
Extend
leadership position in fund research to additional markets outside the United
States.
Over the past several years, we have expanded our analyst
coverage in fund markets outside of the United States. Weve built an
integrated team of locally based fund experts to expand our research coverage
in additional markets around the world. As of December 31, 2009, we had
about 80 fund analysts globally, including teams in North America, Europe,
Asia, and Australia. We currently produce qualitative analyst research on more
than 900 funds outside the United States and plan to continue building our
coverage of funds based in Europe and Asia.
·
Continue
leveraging our capabilities in stocks.
Our equity research complements our
approach to mutual fund analysis, where we focus on analyzing the individual
stocks that make up each funds portfolio. As of December 31, 2009, we
provided analyst research on approximately 2,000 companies.
From June 2004 through July 2009, we provided
research to six major investment banks under the terms of the Global Analyst
Research Settlement, which we describe in more detail on page 27. Although
the period covered by the Global Analyst Research Settlement expired in July 2009,
and the banks covered by it are no longer required to provide independent
investment research to their clients, we remain committed to maintaining the
broad, high-quality coverage weve become known for as one of the largest
providers of independent equity research. For further discussion about this
issue, see Item 1ARisk Factors.
Were working to expand distribution of our equity
research through a variety of other channels, including through financial
advisors
, buy-side firms, and companies outside of the United
States. We believe that investors increasing awareness of the value of
independent research will strengthen our business over the long term. Weve
also expanded our proprietary stock database, which we view as an important
complement to our analyst research.
·
Build
expertise in fixed-income credit research.
In 2009, we began publishing research
and ratings on corporate credit issuers. During the next year, we plan to
produce credit ratings for up to 1,000 companies currently covered by our
equity analyst team. We view credit ratings as a natural extension of the
equity research weve been producing for the past decade. We believe we have a
unique viewpoint to offer on company default risk that leverages our cash-flow
modeling expertise, proprietary measures like economic moat, and in-depth
knowledge of the companies and industries we cover.
Were including this research on our three major software
platforms to provide investors with an additional perspective on fixed-income
investments. We also plan to monetize the ratings through subscriptions to our
institutional equity research clients, who have access to the forecasts,
models, and scores underlying the ratings.
·
Enhance
our retirement income capabilities.
As the baby boom generation approaches retirement, we
believe many investors will need more information to help them manage income
during retirement. We believe this will lead to a greater need for information
and tools focusing on retirement income planning and long-term savings
strategies. In 2009, we introduced an advisory service for investors in
5
retirement through Morningstar
Retirement Manager. We currently offer Retirement Income Strategist, a
web-based financial planning tool that allows financial advisors to create
comprehensive income analyses for clients who are retired or approaching
retirement, as part of our Advisor Workstation platform. Weve developed
several retirement income services for institutional clients within our
Investment Consulting area, and we plan to incorporate additional retirement
income tools and services in other products over the next several years.
4.
Create
a premier global investment database.
Our goal is to continue building or
acquiring new databases for additional types of investments, including various
types of funds outside the United States and other widely used investment
products.
As detailed on page 2, we
currently provide extensive data on nearly 400,000 investments globally,
including managed investment products, individual securities, capital markets
data, real-time stock quotes from nearly all of the worlds major stock
exchanges, and a live data feed that covers exchange-traded equities,
derivatives, commodities, futures, foreign exchanges, precious metals, news,
company fundamentals, and analytics.
Our data is the foundation for all of
the products and services we offer. When we build investment databases, we
prefer to own the data and minimize
license agreements with outside data providers. We also focus on proprietary,
value-added data, such as our comprehensive data on current and historical
portfolio holdings for mutual funds and variable annuities. Within each
database, we continuously update our data to maintain timeliness and expand the
depth and breadth of coverage. Our strategy is to continuously expand our
databases, focusing on investment products that are widely used by large
numbers of investors. In particular, were focusing on expanding our
fundamental equity data. We also strive to establish our databases as the
pre-eminent choice for individual investors, financial advisors, and
institutional clients around the world, as well as continuing to invest in
world-class data quality, manufacturing, and delivery interfaces.
Over the past several years, weve
developed a series of proprietary indexes based on our investment data. The
Morningstar Indexes are rooted in our proprietary research and can be used for
precise asset allocation and benchmarking and as tools for portfolio
construction and market analysis. Weve significantly expanded the range of
indexes we offer and are working to expand our index business globally.
5.
Expand
our international brand presence, products, and services.
Our operations outside of the United
States generated $129.2 million in revenue in 2009 compared with $121.4 million
in 2008 and represent an increasing percentage of our consolidated revenue. Our
strategy is to expand our non-U.S. operations (either organically or through
acquisitions) to meet the increasing demand for wide-ranging, independent
investment insight by investors around the globe. Because more than half of the
worlds investable assets are located outside of the United States, we believe
there are significant opportunities for us there. Our strategy is to focus our
non-U.S. sales efforts on our major products, including Morningstar Advisor
Workstation and Morningstar Direct, as well as opportunities such as real-time
data, qualitative investment research and ratings, investment indexes, and
consulting. We also plan to explore new regions, such as Latin America, Eastern
Europe, and the Middle East; continue expanding our databases to be locally and
globally comprehensive; introduce new products in markets where we already have
operations; and expand our sales and product support infrastructure around the
world.
6
Acquisitions
Historically, the majority of our
long-term revenue growth has been driven by organic growth as weve introduced
new products and services and expanded our marketing efforts for existing
products. However, we have made and expect to continue making selective
acquisitions that support our five growth strategies. In reviewing potential
acquisitions, we focus on transactions that:
·
offer a good
strategic fit with our mission of creating great products that help investors
reach their financial goals;
·
help us build our
proprietary investment databases, research capabilities, technical expertise,
or customer base faster and more cost effectively than we could if we built
them ourselves; and
·
offer a good
cultural fit with our entrepreneurial spirit and brand leadership.
We paid approximately $74.2 million for
six acquisitions in 2009, as summarized in the table below.
Acquisition
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Description
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Date Completed
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Purchase Price*
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Global financial filings database business of Global
Reports LLC
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A leading provider of online financial and Corporate and
Social Responsibility reports for publicly traded companies around the world
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April 20, 2009
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Not separately disclosed
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Equity research and data business of C.P.M.S. Computerized
Portfolio Management Services Inc.
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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 earnings estimates for Canadian stocks
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May 1, 2009
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$13.9 million
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Andex Associates, Inc.
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Andex is known for Andex Charts, which illustrate
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
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May 1, 2009
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Not separately disclosed
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Intech Pty Ltd
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A leading provider of multimanager 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
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June 30, 2009
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Not separately disclosed
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Canadian Investment Awards and Gala
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Canadas marquee investment awards program, recognizing
excellence in products and firms within the financial services industry
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December 17, 2009
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Not separately disclosed
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Logical Information Machines, Inc.
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A leading provider of data and analytics for the energy,
financial, and agriculture sectors
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December 31, 2009
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$53.5 million
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*Total purchase price less cash
acquired.
For information about our previous
acquisitions, refer to Note 6 of the Notes to our Consolidated Financial
Statements.
7
Business Segments,
Products, and Services
We operate our business in two
segments:
·
Investment
Information, which includes all of our data, software, and research products
and services. These products are typically sold through subscriptions or
license agreements; and
·
Investment
Management, which 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 table
below shows our revenue by business segment for each of the past three years:
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2009
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2008
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2007
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Revenue by Segment
($000)
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Amount
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%
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Amount
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%
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Amount
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%
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Investment Information
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$
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386,642
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80.7%
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$
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390,693
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77.8%
|
|
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$
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327,372
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75.2%
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Investment Management
|
|
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92,354
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19.3
|
|
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111,764
|
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22.2
|
|
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107,735
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24.8
|
|
Consolidated revenue
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$
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478,996
|
|
100.0%
|
|
|
$
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502,457
|
|
100.0%
|
|
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$
|
435,107
|
|
100.0%
|
|
For information on segment
operating income (loss), refer to Note 4 of the Notes to our Consolidated
Financial Statements.
Investment Information
The largest products in this segment
based on revenue are Morningstar Licensed Data, a set of investment data
spanning all of our investment databases, including real-time pricing data, and
available through electronic data feeds; Morningstar Advisor Workstation, a
web-based investment planning system for independent financial advisors as well
as advisors affiliated with larger firms; Morningstar.com, which includes both
Premium Memberships and Internet advertising sales; Morningstar Direct, a
web-based institutional research platform; and Morningstar Principia, 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. Investors can access our equity research through the Premium
Membership service on Morningstar.com. In addition, we distribute our research
to several other companies that provide our analyst research to their
affiliated financial advisors or to individual investors. From June 2004
through July 2009, we distributed our equity research through six major
investment banks to meet the requirements for independent research under the
Global Analyst Research Settlement, which we describe in more detail on page 27.
We also offer a variety of financial
communications materials, real-time data, other investment software, and
investment indexes, as well as several print and online publications focusing
on stocks, mutual funds, personal finance, and other investing topics. In 2009,
we developed a beta version of Morningstar QuoteSpeed, a new web-based solution
that delivers real-time market data through a simplified desktop application.
In addition to real-time market information, QuoteSpeed provides users with
access to Morningstars fundamental data, news, analysis, and more. QuoteSpeed
will be available as a stand-alone application or as a module through platforms
such as Morningstar.com, Direct, Office, and Advisor Workstation. We also
created a
8
new Enterprise Data Management business
that helps institutions outsource certain business operations to Morningstar,
including creating investment profiles, aggregating account data, performance
reporting, and consolidating and managing data feeds from multiple sources.
With our purchase of Logical
Information Machines, Inc. (LIM) at the end of 2009, we added a new
analytical software application, which delivers a comprehensive, real-time
solution for research, analysis, and trading for institutional clients. LIM is
an analytical software service that aggregates financial and energy data from a
large number of sources. LIMs software lets clients query these multiple data
sets simultaneously. The majority of LIMs clients are in the energy and
commodities industries.
In 2009, about 31.6% of Investment
Information segment revenue was from outside of the United States.
Most of our products for individual
investors target experienced investors who are actively involved in the
investing process and want to take charge of their own investment decisions. We
also reach individuals who want to learn more about investing and investors who
seek out third-party sources to validate the advice they receive from brokers
or financial planners.
We sell our advisor-related products
both directly to independent financial advisors and through enterprise
licenses, which allow financial advisors associated with the licensing
enterprise to use our products. Our institutional clients include banks,
brokerage firms, insurance companies, mutual fund companies, media outlets, and
retirement plan sponsors and providers. We also have data reselling agreements
with third-party providers of investment tools and applications, allowing us to
increase the distribution of our data with minimal additional cost.
We believe the Investment Information
segment has a modest amount of seasonality. Weve historically had higher
revenue in the second quarter because we hold an investment conference then.
Sales for other products, such as Morningstar.com, tend to be slightly lower
over the spring and summer months. Other products in this segment generally
have not shown marked seasonality.
Our largest customer in the Investment
Information segment made up approximately 3% of segment revenue in 2009.
Licensed Data
Our Licensed Data service gives
institutions access to a full range of proprietary investment data spanning
numerous investment databases, including real-time pricing data. The data
packages we offer include proprietary statistics, such as the Morningstar Style
Box and Morningstar Rating, and a wide range of other data, including
information on investment performance, risk, portfolios, operations data, fees
and expenses, cash flows, and ownership. Institutions can use Licensed Data in
a variety of investor communications, including websites, print publications,
and marketing fact sheets, as well as for internal research and product
development. We deliver Licensed Data through electronic data feeds and provide
daily updates to clients. Pricing for Licensed Data is based on the number of
funds or other securities covered, the amount of information provided for each
security, and the level of distribution.
In 2009, we introduced a new
browser-based interface that allows clients who license proprietary data for
their marketing materials to access Morningstars proprietary statistics and
images in a format easily used by designers and web developers. We also added
interfaces that allow clients to view, search, and sort data on their desktops,
or export the data to their own applications. We launched an alert feed that
highlights relevant changes in a funds status and proprietary statistics, as
well as additional descriptive data on separate accounts. We introduced a
series of manager benchmarks based on our new institutional categories, as well
as other specialized
9
investment groupings and
client-customizable benchmarks. We continued to expand our fundamental data on
stocks around the world.
We rebranded Tenfore Systems Limited
(acquired in December 2008) as Morningstar Real-Time Data and integrated
many of Morningstars data sets, including fundamental equity data and
research. We also began providing 24-hour support to our Real-Time Data
clients.
We introduced a new Ownership Database
toward the end of the year, which provides security ownership information and
position changes on individual stocks. Following our acquisition of Fundamental
Data Limited in 2008, in 2009 we created a new Traded Funds Center, which includes
all global data on closed-end and exchange-traded funds. We also launched the
Morningstar Pension and Endowment Center, which provides insight into the
largest pensions and endowments and the underlying investments used in these
types of plans.
For Licensed Data, our primary
competitors are Bloomberg, FactSet Research Systems, Interactive Data
Corporation, Standard & Poors, and Thomson Reuters.
Licensed Data was our largest product
in 2009 and accounted for 19.1%, 15.6%, and 13.6% of our consolidated revenue
in 2009, 2008, and 2007, respectively.
Morningstar Advisor
Workstation
Morningstar Advisor Workstation, a
web-based investment planning system, provides financial advisors with a
comprehensive set of tools for conducting their core businessincluding
investment research, planning, and presentations. It allows advisors to build
and maintain a client portfolio database that can be fully integrated with the
firms back-office technology and resources. Moreover, it helps advisors create
customized reports for client portfolios that combine mutual funds, stocks,
separate accounts, variable annuity/life subaccounts, ETFs, hedge funds,
closed-end funds, 529 plans, offshore funds, and pension and life funds.
As of December 31, 2009, about
149,000 advisors in the United States were licensed to use Advisor Workstation,
which is available in two versions: Morningstar Office (formerly Advisor
Workstation Office Edition) for independent financial advisors and a
configurable enterprise version for financial advisors affiliated with larger
firms. Morningstar Advisor Workstation includes four core modules: Clients & Portfolios, Research,
Sales/Hypotheticals, and Planning. We also offer a variety of other
applications, including tools for defined contribution plans; Morningstar
Retirement Income Strategist, a financial planning application that helps
advisors create retirement income plans for their clients; Morningstar
Portfolio Builder, which helps advisors quickly produce sound client
portfolios; Morningstar Annuity Analyzer, which helps advisors screen and
analyze variable annuity contracts and subaccounts; and Morningstar
Hypothetical Illustrator. These applications can be purchased as stand-alone
products or combined as part of a full Workstation license.
Pricing for Morningstar Advisor
Workstation varies based on the number of users, as well as the level of
functionality offered. We typically charge about $3,100 per licensed user for a
base configuration of Morningstar Advisor Workstation, but pricing varies
significantly based on the scope of the license. For clients who purchase more
limited tools-only licenses, the price per user is substantially less. We
generally charge $5,400 per user for an annual license for Morningstar Office.
In 2009, we upgraded our defined
contribution module and alert capabilities, created a newer and more flexible
version of Hypothetical Illustrator, and launched a new version of Annuity
Analyzer.
We incorporated additional
functionality and content, including Target-Date Fund Series Reports, a
new version of the Analyst Research Center, and a Roth IRA calculator. We also
expanded our sales efforts for Portfolio Builder in several markets outside the
United States. With Morningstar
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Office, we introduced an enhanced
client web portal, added more investment data, and expanded back-office
services that handle daily importing and reconciliation of client accounts.
Major competitors for Morningstar
Advisor Workstation and Morningstar Office include Advanced Sales, Advent
Software, ASI, Junxure, MoneyGuide Pro, SunGard, and Thomson Reuters.
Morningstar Advisor Workstation is our
second-largest product based on revenue and made up 13.7%, 12.8%, and 12.5% of
our consolidated revenue in 2009, 2008, and 2007, respectively.
Morningstar.com
Our largest website for individual
investors is Morningstar.com in the United States, which includes both Premium
Membership revenue and Internet advertising sales. As of December 31,
2009, the free membership services offered through Morningstar.com had more
than 7.3 million registered users worldwide, who have access to
comprehensive data on stocks, mutual funds, exchange-traded funds, hedge funds,
commodities, options, bonds, and other investments to help them conduct
research and track performance. In addition, Morningstar.com features extensive
market data, articles, proprietary portfolio tools, and educational content to
help investors of all levels access timely, relevant investment information.
Morningstar.com also includes Portfolio X-Ray, which helps investors reduce
risk and understand key characteristics of their portfolios, and a variety of
other portfolio tools.
We also offer free local websites for
investors in 35 countries around the world, including new sites launched in
Estonia, India, Iceland, Ireland, Latvia, Lithuania, and Thailand in 2009.
We use our free content as a gateway
into paid Premium Membership, which includes access to written analyst reports
on more than 1,700 stocks, 1,700 mutual funds, and 300 exchange-traded
funds, as well as Analyst Picks and Pans, Stewardship Grades, and Premium Stock
and Fund Screeners. We currently offer Premium Membership services in
Australia, China, the United Kingdom, and the United States.
In 2009, we re-launched our site for
individual investors in Australia supported by a significant branding campaign.
The product integrates
Your Money Weekly
content with managed funds data and research. With the new site, we now offer
qualitative research that was previously available only to professionals to
individual investors in this market.
For Morningstar.com in the United
States, in 2009 we added real-time stock and ETF quotes, as well as expanded
market data. During the year we also doubled the number of free articles
published to about 40 per week and introduced a new mobile application for the
iPhone. In its December 2009 issue,
Kiplingers
Personal Finance
magazine named Morningstar.com as one of two best
investing websites.
In early 2010, we acquired the Footnoted.org website and the
Footnoted Pro service, which provide insight and analysis gathered from
corporate SEC filings. We plan to make some content from Footnoted.org
available on Morningstar.com.
Morningstar.com competes with the
personal finance websites of AOL Money & Finance, Google Finance, The
Motley Fool, MSN Money, Seeking Alpha, The Street.com, Yahoo! Finance, and The
Wall Street Journal Online.
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As of December 31, 2009, we had
150,473 paid Premium subscribers for Morningstar.com in the United States plus
an additional 16,000 paid Premium subscribers in Australia, the United Kingdom,
and China. We currently charge $19.95 for a monthly subscription, $179 for an
annual subscription, $299 for a two-year subscription, and $399 for a
three-year subscription for Morningstar.coms Premium service in the United
States. We also sell advertising space on Morningstar.com.
Morningstar.com (including local language
versions outside of the United States) is one of our five largest products
based on revenue and accounted for 8.2% of our consolidated revenue in 2009,
compared with 9.1% of our consolidated revenue in 2008 and 9.0% in 2007.
Morningstar Direct
Morningstar Direct is a web-based
institutional research platform that provides advanced research on the
complete range of securities in Morningstars global database. This
comprehensive research platform allows research and marketing
professionals to conduct advanced performance comparisons and in-depth analyses
of a portfolios underlying investment style. Morningstar Direct includes
access to numerous investment universes, including U.S. mutual funds; European
and offshore funds; funds based in most major markets around the world; stocks;
separate accounts; hedge funds; closed-end funds; exchange-traded funds; global
equity ownership data; variable annuity and life portfolios; and market
indexes.
In 2009, we made several key
enhancements to Morningstar Direct, including a new Presentation Studio that
allows clients to create reusable templates of customized presentations,
reports, and fact sheets; improved capabilities for performance attribution;
and expanded performance reporting, importing, and batch scheduling. We also
added new data on fund flows; descriptive text on separate accounts; Target
Date Fund Series Reports; more specialized fund categories; qualitative
analyst reports and ratings; and data on unit investment trusts. We introduced
local language versions of Morningstar Direct in China and Italy in 2009 and
plan to launch additional versions in Spain, France, and Germany in 2010.
For Morningstar Direct, our primary competitors are
eVestment Alliance, FactSet Research Systems, Markov Processes International,
Strategic Insight, Thomson Reuters, and Zephyr Associates in the United States,
and Europerformance, Feri, FinEx, Mercer, MoneyMate, and Style Research in
non-U.S. markets.
Morningstar Direct had 3,524 licensed
users worldwide as of December 31, 2009.
Pricing for Morningstar Direct is based
on the number of licenses purchased. We charge $16,000 for the first user,
$10,500 for the second user, and $8,000 for each additional user.
Morningstar Principia
Principia is our CD-ROM-based
investment research and planning software for financial planners and had 35,844
subscriptions as of December 31, 2009. The modules offered in Principia
provide data on mutual funds, stocks, separate accounts, variable annuity/life
subaccounts, closed-end funds, defined contribution plans, asset allocation,
presentations and education, and exchange-traded funds. Each module is
available separately or together and features searching, screening, and ranking
tools. Principia allows advisors to create integrated portfolios for clients
and offers three-page Portfolio Snapshot reports that provide a
comprehensive picture of the clients portfolio. The Snapshot report shows
overall style and sector weightings as well as the cumulative exposure to
individual stocks. The Snapshot report is among those approved by the
12
National Association of Securities
Dealers for financial advisors to distribute and review with their clients.
In 2009, we began offering electronic
delivery for Principia, which allows us to deliver data to customers faster and
at lower cost. We introduced a new CAMS (Client Account Manager Service) module
that incorporates the portfolio accounting and performance reporting
functionality we acquired through our purchase of Financial Computer Support, Inc.
in 2008. We also introduced new functionality for point-in-time historical
analysis, portfolio comparisons, and investment policy statements.
Principia prices generally range from
approximately $710 per year for monthly updates on one investment database to
$3,345 per year for monthly updates on the complete package spanning all
investment universes, or $7,535 for all investment universes plus additional
modules for asset allocation, defined contribution plans, and portfolio
management.
Major competitors for Principia include
Standards & Poors and Thomson Reuters.
Morningstar Site
Builder and Licensed Tools
We offer an extensive set of online
tools and editorial content that institutional clients can license to use in
their websites and software products. Within the United States, we offer
Morningstar Site Builder, a set of integrated tools, content, and reports that
investment firms can easily add to their existing advisor websites. Outside of
the United States, we offer Licensed Tools, which can be customized to meet the
needs of international audiences. Clients can select from more than 30
customizable investment tools for retail and advisor websites or purchase
modules focusing on screening and performance tools, editorial commentary and
educational articles, and goal planning and portfolio analysis. Site Builder
and Licensed Tools can be customized to analyze a set of investments, focus on
client-defined data points, or perform calculations required by specific
products or services. We also offer licenses for investment research and
portfolio analysis tools. Morningstar Site Builder and Licensed Tools can be
integrated with a clients existing website and allow users to drill down into
the underlying data when researching a potential investment.
In 2009, we added several new tools to
the Site Builder suite, including Portfolio Planner, Retirement Analyzer,
Watchlist, News, Ticker Tape, and IRA Calculators as well as a new
administrative tool. We have also launched new charting capabilities, market
monitoring tools, and real-time market data.
We also added several new tools to our
Licensed Tools offerings outside the United States, including Portfolio
Planner, Asset Allocator, real-time market data, and new equity tools,
including Stock Quickrank and Stock Reports.
Major competitors for Morningstar Site
Builder and Licensed Tools include Interactive Data Corporation, QuoteMedia,
Thomson Reuters, and Wall Street On Demand.
Pricing for Morningstar Site Builder
and Licensed Tools depends on the audience, the level of distribution, and the
scope of information and functionality licensed.
Newsletters and Other
Publications
We offer a variety of print and
electronic publications about investing. Some of these include
Morningstar Mutual Funds,
a reference
publication that features our signature one-page reports on approximately
1,500 mutual funds;
Morningstar
FundInvestor,
a monthly newsletter that provides information
and insight on 500 of the most popular mutual funds and a list of 150 Analyst
13
Picks;
Morningstar StockInvestor,
a monthly newsletter that focuses
on companies with strong competitive positions and stock prices that we believe
are low enough to provide investors with a margin of safety; and the
Ibbotson Stocks, Bonds, Bills, and Inflation
Yearbook,
a definitive study of historical capital markets data in
the United States. In addition, we offer several other investment
newsletters and a series of books about investing and personal finance,
which are available directly from us and in bookstores.
Our Investment Information segment also
includes several publications for investors in Australia, including
IFA Magazine,
Australias leading magazine
for independent financial advisors, and
Your
Money Weekly
, which focuses on investment recommendations and
portfolios ideas for companies listed in Australia.
In 2009, we created companion websites
for two of our publications. We also moved
Your
Money Weekly
in Australia
to
an online format that integrates content from the magazine with data and
research on managed investment funds.
Our print publications compete with
Agora Publishing, Forbes, InvestorPlace Media, The Motley Fool, and Value Line
in the United States and Intelligent Investor, InvestSmart, and The Rivkin
Report in Australia.
Morningstar Equity
Research
As of December 31, 2009, we
offered independent equity research on approximately 2,000 companies. Our
approach to stock analysis focuses on long-term fundamentals. Our analysts
evaluate companies by assessing each firms competitive advantage, analyzing the
level of business risk, and completing an in-depth projection of future cash
flows. For the companies we cover, our analysts prepare a fair value estimate,
a Morningstar Rating for stocks, a rating for business risk, and an assessment
of the companys economic moat. Economic moat is a concept originally developed
by Warren Buffett that describes a companys competitive advantage relative to
other companies. For the remaining stocks included in our database, we offer
quantitative grades for growth, profitability, and financial health, as well as
an explanation of the companys business operations. We currently deliver our
equity research to individual investors as part of our Premium Membership
service on Morningstar.com, as well as to several other companies who provide
our research to their affiliated financial advisors or to individual investors.
From June 2004 through July 2009,
we also provided independent equity research to six major investment banks
under the terms of the Global Analyst Research Settlement. For further
discussion about this issue, see Item 1A Risk Factors.
We currently provide analyst reports on
virtually all of the most widely held stocks in the S&P 500 index, as well
as numerous companies included in other major indexes. We had approximately 108
stock analysts around the world as of December 31, 2009, compared with 128
as of December 31, 2008.
In 2009, we entered into an agreement
with the NASDAQ OMX Group, Inc. to provide equity research profile reports
on more than 3,600 NASDAQ OMX-listed companies. In January 2010, we
announced an expanded agreement with NASDAQ OMX that gives NASDAQ-listed
companies the option of contracting with NASDAQ OMX for comprehensive analyst
research reports provided by Morningstar.
We also began publishing credit ratings
on 100 of the largest corporate issuers in 2009. In 2010, we plan to produce
credit ratings for up to 1,000 companies currently covered by our equity
analyst team. The ratings are available on Morningstar.com, and we offer
forecasts and scores underlying the ratings to our institutional equity
research clients.
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Our Equity Research services compete
with The Applied Finance Group, Credit Suisse HOLT, Renaissance Capital,
Standard & Poors, Value Line, Zacks Investment Research, and several
smaller research firms. Competitors for our fixed-income credit research
include Credit Sights, Egan-Jones, Fitch, Gimme Credit, Moodys, and Standard &
Poors.
Pricing for Morningstar Equity Research
varies based on the level of distribution, the number of securities covered,
the amount of custom coverage required, and the length of the contract term.
Morningstar Indexes
We offer an extensive set of investment
indexes that can be used to benchmark the market and create investment
products. Our index family includes a series of U.S. equity indexes that track
the U.S. market by capitalization, sector, and investment style; a dividend
index; a focused stock index capturing performance of wide moat stocks with
the most attractive valuations; a series of bond indexes that track the U.S.
market by sector and term structure; global bond indexes; commodity indexes;
and asset allocation indexes. Investment firms can license the Morningstar
Indexes to create investment vehicles, including mutual funds, ETFs, and
derivative securities. We charge licensing fees for the Morningstar
Indexes, with fees consisting of an annual licensing fee as well as fees linked
to assets under management.
We currently license the Morningstar
Indexes to several institutions that offer exchange-traded funds or
exchange-traded notes based on the indexes, including Barclays Global
Investors, First Trust, and Merrill Lynch.
In 2009, we introduced a family of
asset allocation indexes that serve as benchmarks for target-date and
target-risk investments and expanded our family of commodity- and managed
futures- based indexes. We believe were the only index provider that offers
indexes spanning all asset categories, which allows us to develop indexes that
blend various asset classes.
Investment Management Segment
The largest 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 client base in this segment
includes banks, brokerage firms, insurance companies, mutual fund companies,
and retirement plan sponsors and providers. We currently offer investment
management services in the United States, Europe, Japan, and Australia. Our
license agreements in the Investment Management segment have an average
contract term of approximately three years, although some of our agreements
allow for early termination.
About 7.7% of Investment Management
segment revenue was from outside the United States in 2009.
Many of our largest customers are
insurance companies, including variable annuity providers, followed by mutual
fund companies and other asset management firms, retirement plan sponsors and
providers, broker-dealers, and banks. We plan to develop additional
distribution channels to reach other client types, including foundations and
endowments, defined contribution plans, defined benefit plans, and wealth
management firms. We also expect to continue expanding our Investment
Management business outside the United States.
15
For Morningstar Managed Portfolios, our
target audience consists of home offices of insurance companies,
broker-dealers, and registered investment advisors, as well as independent
financial advisors.
We market our Investment Management
services almost exclusively through our institutional sales team, including
both strategic account managers and sales representatives within each business
unit. We employ a consultative sales approach and often tailor customized
solutions to meet the needs of larger institutions. We have a regional sales
team responsible for expanding relationships for Morningstar Managed
Portfolios.
We believe our institutional clients
value our independence, breadth of information, and customized services; in
addition, we believe our research, tools, and advice reach many individual
investors through this channel. We also reach approximately 1,900 financial
advisors through our Managed Portfolios platform.
The Investment Management segment has
not historically shown seasonal business trends; however, business results for
this segment are typically more variable because of our emphasis on asset-based
fees, which change along with market movements and other factors.
Our largest customer in the Investment
Management segment made up approximately 9% of segment revenue in 2009.
Investment Consulting
Our Investment Consulting area provides
a broad range of services, many of which emphasize investment monitoring and
asset allocation for funds of funds, including mutual funds and variable
annuities. We offer Investment Consulting services through Morningstar
Associates, LLC, Morningstar Associates Europe, Ltd, Ibbotson Associates, Inc., Ibbotson
Advisors, LLC, and Intech Pty Ltd, which are registered investment advisors and
wholly owned subsidiaries of Morningstar, Inc. We emphasize contracts
where were paid a percentage of assets under management for ongoing investment
management and consulting, as opposed to one-time relationships where were
paid a flat fee.
Morningstar Associates generally
focuses on a small number of large relationships, focusing on customized
solutions that improve the investor experience and help our clients build their
businesses.
Our investment professionals evaluate
investment plans, recommend strategies, help set investment policies, develop
asset allocation programs, construct portfolios, and monitor ongoing
performance. We offer these consulting services to clients in the United
States, Asia, Australia, Canada, and Europe, including insurance companies,
investment management companies, mutual fund companies, and broker-dealers. We
also provide services for retirement plan sponsors and providers, including
developing plan lineups, creating investment policy statements, and monitoring
investment performance.
Our team of investment consultants
draws on both quantitative research tools and qualitative expertise to assess
investment programs, provide detailed analysis of performance and portfolio
characteristics, and make comprehensive recommendations for improvement. We
also offer investment manager search services. Our staff combines the depth of
Morningstars historical fundamental databases with detailed investment
knowledge and investment experience to recommend qualified candidates for
subadvisory firms, mutual fund managers, variable insurance trust managers, and
separate account managers. Our investment monitoring services include analyst
reports, customizable board reports, select lists, watch lists, and in-depth
attribution analysis.
16
In 2009, Morningstar Associates
introduced several new multimanager portfolios, including one incorporating a
risk management overlay and one using managed futures and foreign exchange managers
for distribution to accredited investors. We also developed a technology
solution that enables advisors or plan sponsors to create time, risk, or hybrid
models to select funds for defined contribution plan lineups.
In early 2010, Morningstar Associates
announced an agreement with Pax World Funds to create and manage a series of
four asset allocation portfolios featuring investment managers who incorporate
environment, social, and governance issues in their investment process.
Pax World is the investment advisor to
these portfolios, and Morningstar Associates is charged with manager selection,
asset allocation, and portfolio construction and monitoring. We invested $8
million as seed money in the portfolios in 2009.
We significantly expanded our Investment
Consulting area in 2006 when we acquired Ibbotson Associates, which has a
well-established consulting business that began in 1977. Ibbotsons Investment
Consulting unit is a leading authority on asset allocation and draws on its
knowledge of capital markets and portfolio building to construct portfolios
from the top down, starting at the asset class level. Ibbotson develops
customized asset allocation programs for mutual fund firms, banks,
broker-dealers, and insurance companies.
Ibbotson provides a range of consulting
services, including licensing its asset allocation models, providing consulting
services, and acting as a portfolio subadvisor. Ibbotson works with different
types of investment options, including mutual funds, variable annuities, and
exchange-traded funds, and provides both strategic and dynamic asset allocation
services. The group offers consulting services and fund-of-funds subadvisory
services, as well as tailored model portfolios, fund classification schemes,
and questionnaire design.
In 2009, Ibbotson Associates added
capabilities for forecasting and modeling the glide paths of target-maturity
funds; launched a lifetime financial advice solution that combines insurance
and annuities as part of investors portfolios over time; expanded its
target-maturity portfolio construction services to large plan sponsors; began
specifically incorporating an analysis of statistically unlikely (aka fat tail)
events in its portfolio construction process for some clients; and introduced
alternative investment strategy portfolios for clients in the United States.
Ibbotson is also developing active
investment management capabilities based on founder Roger Ibbotsons liquidity
methodology. We launched two seed portfolios in October 2009 with an investment
of $2 million to begin establishing a track record for this methodology.
As discussed on page 7, in June 2009
we acquired Intech Pty Ltd, a leading provider of multimanager and investment
portfolio solutions in Sydney, Australia, from IOOF Holdings Limited. Intech
manages the Intech Investment Trusts, a range of single sector, alternative
strategy, and diversified investment portfolios. In 2009, Intech launched
several additional unit trusts, including five multimanager solutions and two
trusts emphasizing different levels of growth and income. We rebranded Intech
under the Ibbotson name in February 2010.
Our Investment Consulting business
competes primarily with Mercer, Mesirow Financial, Russell Investments, Watson
Wyatt, and Wilshire Associates, as well as some smaller firms in the retirement
consulting business and various in-house providers of investment advisory
services.
Pricing for the consulting services we
provide through Morningstar Associates and Ibbotson Associates is based on the
scope of work and the level of service required. In the majority of our
contracts, we receive asset-based fees, reflecting our work as a portfolio
construction manager or subadvisor for a mutual fund or variable annuity.
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Investment Consulting was our
third-largest product based on revenue in 2009 and accounted for 13.3%, 15.5%,
and 17.4% of our consolidated revenue in 2009, 2008, and 2007, respectively.
Retirement Advice
We have two Retirement Advice offerings
that help retirement plan participants plan and invest for retirement:
Morningstar Retirement Manager (offered by Morningstar Associates) and Advice
by Ibbotson (offered by Ibbotson Associates).
Morningstar Retirement Manager is
designed to help retirement plan participants determine how much to invest and
which investments are most appropriate for their portfolios. It gives guidance
explaining whether participants suggested plans are on target to meet their
retirement goals. As part of this service, we deliver personalized
recommendations for a target savings goal, a recommended contribution rate to
help achieve that goal, a portfolio mix based on risk tolerance, and specific
fund recommendations. Morningstar Retirement Manager includes a managed account
service designed for plan participants who choose to delegate management of
their portfolios to Morningstars investment professionals. We offer these
services primarily through retirement plan providerstypically third-party
asset management companies or companies that offer administrative services to
retirement plans. These providers often offer proprietary mutual funds to
retirement plan sponsors and their participants.
In 2009, we introduced a new advisory
service for individuals in retirement that provides recommendations for drawing
down their portfolios to create sustainable income and managing their remaining
assets. We also created a custom models platform that enables retirement plan
sponsors and advisors to develop custom retirement date, lifestyle, or blended
portfolios using the plans investment lineup.
As of December 31, 2009,
approximately 11.2 million plan participants had access to Morningstar
Retirement Manager through approximately 83,000 plan sponsors and 16 plan
providers. Pricing for Morningstar Retirement Manager depends on the number of
participants, as well as the level of service we provide.
Advice by Ibbotson offers a set of
services and proprietary software to give retirement plan participants access
to investment education, self-service advice, and managed retirement accounts.
We offer these services mainly through retirement plan providers. The platform
includes installed software advice solutions that can be co-branded by
retirement plan sponsors and providers. Advice by Ibbotson combines asset
allocation and patented human capital methodologies that help participants
determine how to prepare for retirement based on their financial assets as well
as their future earnings and savings power. Advice by Ibbotsons customized software
can be integrated with existing systems to help investors accumulate wealth,
transition into retirement, and manage income during retirement.
In 2009, we launched our proprietary
Advice by Ibbotson technology platform serving defined contribution plan
providers; expanded the services available in Advice by Ibbotson to provide
financial advice to retirement plan participants through all stages of their
lives (including wealth accumulation, transition, and retirement); began
incorporating simulations of statistically unlikely (aka fat tail) events in
Advice by Ibbotsons wealth-forecasting process for defined contribution plans;
and enhanced our reporting capabilities for retirement-plan sponsors and plan
participants.
As of December 31, 2009, approximately
9.5 million plan participants had access to Advice by Ibbotson through
approximately 68,000 plan sponsors and seven plan providers. Pricing for Advice
by Ibbotson depends on the number of participants, as well as the level of
service we provide.
In the retirement advice market, we
compete primarily with Financial Engines, Guided Choice, and ProManage.
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Morningstar Managed
Portfolios
Morningstar Managed Portfolios is a
fee-based discretionary asset management service that includes a series of
mutual fund, ETF, and stock portfolios tailored to meet specific investment
time horizons and risk levels. This program is only available through financial
advisors. Our team of investment professionals uses a disciplined process for
asset allocation, fund selection, and portfolio construction. They actively
monitor the portfolios and make adjustments as needed. We complement these
asset management services with online client-management functions such as risk
profiling and access to client statements, transaction capabilities, and
performance reports.
We had approximately $2.1 billion
in assets under management with about 1,900 financial advisors using the
service as of December 31, 2009. We charge asset-based fees for
Morningstar Managed Portfolios. The management fee is based on a tiered
schedule that depends on the clients average daily portfolio balance.
Fees for our mutual fund and exchange-traded fund portfolios generally range
from 30 to 40 basis points. We charge 55 basis points for the Select Stock
Baskets, which are a managed account service consisting of individually
customized stock portfolios based on Morningstars proprietary indexes and
independent equity research.
In 2009, Morningstar Investment
Services introduced a series of Lifetime Wealth Portfolios in partnership with
Ibbotson Associates and a large insurance company. The Lifetime Wealth Portfolios
incorporate insurance as an integral part of an asset allocation. The solution
builds on Ibbotsons Human Capital concept, which models the value and risk
of an individuals human capital and recommends a face value of life insurance
(or an annuity) to hedge that capital. As a first-of-its-kind solution, the
portfolios help to define and contextualize an investors insurance needs
within a holistic financial plan.
For Morningstar Managed Portfolios, our
primary competitors are Brinker Capital, Curian Capital, Envestnet PMC,
FundQuest, and SEI Investments.
The Morningstar Managed Portfolios
program is offered through Morningstar Investment Services, Inc., a
registered investment advisor, registered broker-dealer, member of the
Financial Industry Regulatory Authority, Inc. (FINRA), and wholly owned
subsidiary of Morningstar, Inc.
Marketing and Sales
We promote our print, software,
web-based products and services, and consulting services with a staff of sales
and marketing professionals, as well as an in-house public relations team. Our
marketing staff includes both product specialists and a corporate marketing
group that manages company initiatives. Our sales team includes several
strategic account managers who oversee all aspects of our largest institutional
client relationships. We also have a sales operations staff, which focuses on
tracking and forecasting sales and other tasks to support our sales team.
Across our business, we emphasize high levels of product support to help our
customers use our products effectively and provide our product managers with
feedback from customers. We had approximately 400 sales and marketing
professionals on staff as of December 31, 2009.
International
Operations
We conduct our business operations
outside of the United States, which have been increasing as a percentage of our
consolidated revenue, through wholly owned or majority-owned operating
subsidiaries doing business in each of the following countries: Australia,
Canada, France, Germany, India, Italy, Japan, Korea, the Netherlands, New
Zealand, Norway, Peoples Republic of China (both Hong Kong and the mainland),
Singapore, South Africa, Spain, Switzerland, Taiwan, Thailand, and the United
Kingdom. See Note 4 of the Notes to our Consolidated
19
Financial Statements for additional
information concerning revenue from customers and long-lived assets from our
business operations outside the United States.
In addition, we hold minority ownership
positions in operating companies based in Denmark, Japan, and Sweden. As of December 31,
2009, we owned approximately 34% of the outstanding shares in Morningstar Japan
K.K. (Morningstar Japan) and our share had a market value of approximately
$28.5 million. Morningstar Japan is publicly traded under ticker 4765 on the
Osaka Stock Exchange Hercules Market. See Note 7 of the Notes to our
Consolidated Financial Statements for information on our investments in
unconsolidated entities.
To enable these companies to do
business in their designated territories, we provide them with the rights to
the Morningstar name and logo and with access to certain of our products and
technology. Each company is responsible for developing marketing plans tailored
to meet the specific needs of investors within its country and working with
Morningstars data collection and development centers to create and maintain
databases, develop new products, and enhance existing products.
See Item 1ARisk Factors for a
discussion of the risks related to our business operations outside of the
United States.
Intellectual Property
and Other Proprietary Rights
We treat our brand, product names and
logos, software, technology, databases, and other products as proprietary. We
try to protect this intellectual property by using trademark, copyright, patent
and trade secrets laws, licensing and nondisclosure arrangements, and other
security measures. For example, in the normal course of business, we only
provide our intellectual property to third parties through standard licensing
agreements. The purposes of these agreements are to both define the extent and
duration of any third-party usage rights and to provide for our continued
ownership in any intellectual property furnished.
Because of the value of our brand name
and logo, we have tried to register one or both of them in all of the relevant
international classes under the trademark laws of most of the jurisdictions in
which we maintain operating companies. As we move into new countries, we
consider adding to these registrations and, in some jurisdictions, register
certain product identifiers as well. We have registered our name and/or logo in
numerous countries and the European Union and have applied for registrations in
several other countries.
Morningstar and the Morningstar logo
are registered marks of Morningstar in the United States and in certain other
jurisdictions. The table below includes some of the trademarks or service marks
that we use:
Advice
by Ibbotson
®
|
|
Morningstar
®
Managed
Portfolios
SM
|
Hemscott
®
|
|
Morningstar
®
Managed
Portfolios
SM
Select
Stock Baskets
|
Ibbotson
Associates
®
|
|
Morningstar
Market Barometer
SM
|
Ibbotson
®
SBBI
®
|
|
Morningstar
®
Mutual
Funds
TM
|
Morningstar
®
Advisor
Workstation
SM
|
|
Morningstar
Office
SM
|
Morningstar
®
Advisor
Workstation
SM
Enterprise
Edition
|
|
Morningstar
®
Ownership
Zone
SM
|
Morningstar
®
Analyst
Research Center
|
|
Morningstar
®
Pension &
Endowment Center
SM
|
Morningstar
®
Annuity
Analyzer
SM
|
|
Morningstar
®
Portfolio
Builder
SM
|
Morningstar
®
Back
Office Services
SM
|
|
Morningstar
®
Portfolio
X-Ray
®
|
Morningstar
Direct
SM
|
|
Morningstar
®
Principia
®
|
Morningstar
®
Enterprise Data Management
|
|
Morningstar
Qualitative Rating
|
Morningstar
®
Equity
Research Services
SM
|
|
Morningstar
Rating
TM
|
Morningstar
®
Essentials
TM
|
|
Morningstar
®
Real-Time
Data
|
Morningstar
®
ETFInvestor
TM
|
|
Morningstar
®
Retirement
Income Strategist
SM
|
Morningstar
®
FundInvestor
TM
|
|
Morningstar
®
Retirement
Manager
SM
|
Morningstar
®
Global
Document Library
SM
|
|
Morningstar
®
Site
Builder
SM
|
Morningstar
®
Hypothetical
Illustrator
SM
|
|
Morningstar
®
Stewardship
Grade
SM
|
Morningstar
®
Institutional
Equity Research Services
SM
|
|
Morningstar
®
StockInvestor
TM
|
Morningstar
®
Investment
Guide
|
|
Morningstar
Style Box
TM
|
Morningstar
®
Investment
Profiles
TM
|
|
Morningstar
®
Traded
Fund Center
SM
|
Morningstar
®
Licensed
Data
SM
|
|
Morningstar
®
Wide
Moat Focus
SM
Index
|
Morningstar
®
Licensed
Tools and Content
|
|
Morningstar.com
®
|
In addition to trademarks, we currently
hold several patents in the United States, United Kingdom, and Canada. We are
in the process of registering another patent in the United States. We believe
these patents represent our commitment to developing innovative products and
tools for investors.
20
License Agreements
In the majority of our licensing
agreements, we license our products and/or other intellectual property to our
customers for a fee. We generally use our standard agreements, whether in paper
or electronic form, and we do not provide our products and services to
customers or other users without having an agreement in place.
We maintain licensing agreements with
each of our minority-owned operations. We put these agreements in place so
these companies can use our intellectual property, such as our products and
trademarks, to develop and market similar products under our name in their
operating territories.
In the ordinary course of our business,
we obtain and use intellectual property from a wide variety of sources. We
license some of this intellectual property from third parties and obtain other
portions of it directly from public filings.
Seasonality
We believe our business has a modest
amount of seasonality. Some of our smaller products, such as the
Ibbotson Stocks, Bonds, Bills, and Inflation Yearbook
and one of our investment conferences, generate the majority of
their revenue in the first or second quarter of the year. Most of our products
are sold with subscription or license terms of at least one year, though, and
we recognize revenue ratably over the term of each subscription or license
agreement. This tends to moderate seasonality in sales patterns for individual
products.
We believe market movements generally
have more influence on our performance than seasonality. The amount of revenue
we earn from asset-based fees depends on the value of assets on which we
provide advisory services, and the size of our asset base can increase or
decrease along with trends in market performance.
Largest Customer
In 2009, our largest customer accounted
for less than 5% of our consolidated revenue.
Competitive Landscape
The economic and financial information
industry has been marked by increased consolidation over the past five years,
with the strongest players generally gaining market share at the expense of
smaller competitors. Some of our major competitors include Thomson Reuters;
Standard & Poors, a division of The McGraw-Hill Companies; Bloomberg;
and Yahoo!. These companies
21
have financial resources that are
significantly greater than ours. We also have a number of smaller competitors
in our two business segments, which we discuss in Business Segments, Products,
and Services above.
We believe the most important competitive
factors in our industry are brand and reputation, data accuracy and quality,
breadth of data coverage, quality of investment analysis and analytics, design,
product reliability, and value of the products and services provided.
Major Competitors by
Product
|
|
Licensed Data
|
|
Investment
Consulting
|
|
Morningstar
Advisor
Workstation
|
|
Morningstar.com
|
|
Principia
|
|
Morningstar
Direct
|
Advent Software
|
|
|
|
|
|
·
|
|
|
|
·
|
|
|
Bloomberg
|
|
·
|
|
|
|
|
|
·
|
|
|
|
·
|
eVestment Alliance
|
|
·
|
|
|
|
|
|
|
|
|
|
·
|
FactSet Research Services
|
|
·
|
|
|
|
|
|
|
|
|
|
·
|
Financial Express
|
|
·
|
|
|
|
·
|
|
|
|
|
|
|
Interactive Data Corporation
|
|
·
|
|
|
|
|
|
|
|
|
|
|
News Corporation*
|
|
|
|
|
|
|
|
·
|
|
|
|
|
Standard & Poors
|
|
·
|
|
|
|
·
|
|
|
|
·
|
|
|
Thomson Reuters**
|
|
·
|
|
|
|
·
|
|
|
|
·
|
|
·
|
Wilshire Associates
|
|
|
|
·
|
|
|
|
|
|
|
|
·
|
Yahoo!
|
|
|
|
|
|
|
|
·
|
|
|
|
|
Zephyr Associates
|
|
|
|
|
|
|
|
|
|
|
|
·
|
* News Corporation includes Dow Jones,
MarketWatch, and
SmartMoney
** Thomson Reuters includes
Lipper
Research and
Development
A key aspect of our growth strategy is
to expand our investment research capabilities and enhance our existing
products and services. We strive to rapidly adopt new technology that can
improve our products and services. We have also built a flexible technology
platform that allows our products to work together across a full range of
investment databases, delivery formats, and market segments. As a general
practice, we manage our own websites and build our own software rather than
relying on outside vendors. This allows us to control our development and
better manage costs, enabling us to respond quickly to market changes and to
meet customer needs efficiently. As of December 31, 2009, our technology
team consisted of approximately 500 programmers and technology and
infrastructure professionals.
In 2009, 2008, and 2007, our
development expense represented 8.0%, 8.0%, and 8.1%, respectively, of our
revenue. We expect that development expense will continue to represent a
meaningful percentage of our revenue in the future.
Government Regulation
United States
Investment advisory and broker-dealer businesses
are subject to extensive regulation in the United States at both the federal
and state level, as well as by self-regulatory organizations. Financial
services companies are among the nations most extensively regulated. The SEC
is
22
responsible for enforcing the federal
securities laws and oversees federally registered investment advisors and
broker-dealers.
As of December 31, 2009, four of
our subsidiaries, Ibbotson Associates, Inc., Ibbotson Associates Advisors,
LLC, Morningstar Associates, LLC, and Morningstar Investment Services, Inc.
are registered as investment advisors with the SEC under the Investment
Advisers Act of 1940, as amended (Advisers Act). As registered investment
advisors, these companies are subject to the requirements and regulations of
the Advisers Act. Such requirements relate to, among other things,
record-keeping, reporting, and standards of care, as well as general anti-fraud
prohibitions.
In addition, because these four
subsidiaries provide investment advisory services to retirement plans and
their participants, they may be acting as fiduciaries under the Employee
Retirement Income Security Act of 1974 (ERISA). As fiduciaries under ERISA,
they have duties of loyalty and prudence, as well as duties to diversify
investments and to follow plan documents to comply with the applicable portions
of ERISA.
We provide each of our investment
advisor companies with financial, operational, and administrative support.
However, each of them operates independently from each other and from other
areas of Morningstar, using separate personnel and supervisory structures and
making independent investment decisions.
Morningstar Investment Services is a
broker-dealer registered under the Securities Exchange Act of 1934 (Exchange
Act) and a member of FINRA. The regulation of broker-dealers has, to a large
extent, been delegated by the federal securities laws to self-regulatory
organizations, including FINRA. Subject to approval by the SEC, FINRA adopts rules that
govern its members. FINRA conducts periodic examinations of the operations of
Morningstar Investment Services. Broker-dealers are subject to regulations that
cover all aspects of the securities business, including sales, capital structure,
record-keeping, and the conduct of directors, officers, and employees.
Violation of applicable regulations can result in the revocation of a
broker-dealer license, the imposition of censures or fines, and the suspension
or expulsion of a firm or its officers or employees. Morningstar Investment
Services is subject to certain net capital requirements under the Exchange Act.
The net capital requirements, which specify minimum net capital levels for
registered broker-dealers, are designed to measure the financial soundness and
liquidity of broker-dealers.
Australia
Our subsidiaries that provide financial
information services in Australia, Morningstar Australasia Pty Limited and
Intech Fiduciaries Limited, must hold an Australian Financial Services License
and submit to the jurisdiction of the Australian Securities and Investments
Commission (ASIC). This license requires them to maintain positive net asset
levels and sufficient cash resources to cover three months of expenses and to
comply with the audit requirements of the ASIC.
United Kingdom
Morningstar Associates Europe Limited
is authorized and regulated by the U.K. Financial Services Authority as an
investment advisor. As an authorized firm, this company is subject to the
requirements and regulations of the Financial Services Authority. Such
requirements relate to, among other things, financial reporting and other
reporting obligations, record-keeping, and cross-border requirements.
Additional legislation and regulations,
including those relating to the activities of investment advisors and
broker-dealers, changes in rules imposed by the SEC or other U.S. or
non-U.S. regulatory authorities and self-regulatory organizations, or changes
in the interpretation or enforcement of existing laws and rules may adversely
affect our business and profitability. Our
23
businesses may be materially
affected not only by regulations applicable to it as an investment advisor or
broker-dealer, but also by regulations that apply to companies generally.
Employees
We had approximately 2,600 employees as
of December 31, 2009, including approximately 480 data analysts, 75
designers, 290 investment analysts (including consulting and quantitative
research analysts), 490 programmers and technology staff, and 400 sales and
marketing professionals. Our employees are not represented by any unions, and
we have never experienced a walkout or strike.
Executive Officers
As of February 26, 2010, we had 13
executive officers. The table below summarizes information about each of these
officers.
Name
|
|
Age
|
|
Position
|
Joe
Mansueto
|
|
53
|
|
Chairman,
Chief Executive Officer, and Director
|
Chris
Boruff
|
|
44
|
|
President,
Advisor Software
|
Peng
Chen
|
|
39
|
|
President,
Ibbotson Associates, Inc.
|
Scott
Cooley
|
|
41
|
|
Chief
Financial Officer
|
Bevin
Desmond
|
|
43
|
|
President,
International Division and Institutional Software
|
Catherine
Gillis Odelbo
|
|
47
|
|
President,
Equity Research
|
Tao
Huang
|
|
47
|
|
Chief
Operating Officer
|
Kunal
Kapoor
|
|
34
|
|
President,
Individual Investor Software
|
Elizabeth
Kirscher
|
|
45
|
|
President,
Data Services
|
Don
Phillips
|
|
47
|
|
President,
Fund Research and Managing Director
|
Patrick
Reinkemeyer
|
|
44
|
|
President,
Morningstar Associates LLC
|
Richard
Robbins
|
|
47
|
|
General
Counsel and Corporate Secretary
|
David W.
Williams
|
|
49
|
|
Managing
Director, Design
|
Joe Mansueto
Joe Mansueto founded Morningstar in
1984. He has served as our chairman since our inception and as our chief
executive officer from our inception to 1996 and from 2000 to the present. He
holds a bachelors degree in business administration from The University of
Chicago and a masters degree in business administration from The University of
Chicago Booth School of Business. He is a member of the board of directors for
Trans Union LLC.
Chris Boruff
Chris Boruff has been the president of
our advisor business since 2000 and became president of our advisor software
business in 2009. He is responsible for overseeing strategy, development, and
marketing associated with our software for financial advisors. He joined us in
1996 as product manager for Principia, and from 1997 to 1998, he served as
senior product manager of advisor products. From 1999 to 2000, he served as
vice president of advisor products, where he was responsible for all marketing
related to financial advisors. He holds a bachelors degree in economics and
psychology from Northwestern University.
Peng Chen
Peng Chen has been president of
Ibbotson Associates, Inc. since August 2006. Prior to Morningstars
acquisition of Ibbotson in 2006, he served as Ibbotsons managing director and
chief investment officer. He joined Ibbotson in 1997 and played a key role in
the development of its investment consulting and 401(k) advice/managed
retirement account services. He received a
24
bachelors degree in industrial
management engineering from Harbin Institute of Technology and masters and
doctorate degrees in consumer economics from The Ohio State University.
Scott Cooley
Scott Cooley has been our chief
financial officer since August 2007. Before joining Morningstar in 1996 as
a stock analyst, he was a bank examiner for the Federal Deposit Insurance
Corporation (FDIC), where he focused on credit analysis and asset-backed
securities. From 1996 until 2003, he was an analyst, editor, and manager for
Morningstar.com,
Morningstar Mutual Funds
,
and other Morningstar publications. He became CEO of Morningstar Australia and
Morningstar New Zealand in 2003 and served as co-CEO of these operations
following our acquisition of Aspect Huntley in July 2006. He holds a
bachelors degree in economics and social science and a masters degree in
history from Illinois State University.
Bevin Desmond
Bevin Desmond has been president of our
international business since 2000. She is responsible for identifying and
developing our business in new countries, managing and directing operations,
and launching new products. In 2009, Bevin took on additional responsibilities
as president of institutional software, including oversight of Morningstar
Direct and other institutional software platforms. She joined us in 1993 and
was one of three employees who started our international business. From 1998 to
2000, she served as manager of all international ventures. She holds a bachelors
degree in psychology from St. Marys College.
Catherine Gillis
Odelbo
Catherine Gillis Odelbo was president of
our Individual segment from 2000 through 2008 and became president of our
equity research business in 2009. She joined us in 1988 as a mutual fund
analyst and from 1999 to 2000 served as senior vice president of content
development for the company, as well as publisher and editor of our stock and
closed-end fund research. She holds a bachelors degree in American history
from The University of Chicago and a masters degree in business administration
from The University of Chicago Booth School of Business.
Tao Huang
Tao Huang has been our chief operating
officer since 2000. He is responsible for corporate strategy and overseeing our
business results and day-to-day operations. He joined us in 1990 as a
software developer and from 1996 to 1998 served as chief technology officer.
From 1998 to 2000, he served as senior vice president of business development
and head of international operations. He holds a bachelors degree in computer
science from Hunan University in China, a masters degree in computer science
from Marquette University, and a masters degree in business administration
from The University of Chicago Booth School of Business.
Kunal Kapoor
Kunal Kapoor has been president of
individual investor software since 2009. He joined us in 1997 as a data analyst
and became a fund analyst in 1998. In 2001 he joined Morningstar Investment
Services as a senior research analyst. He was named editor of
Morningstar Mutual Funds
in 2003, and in
2004 was appointed director of mutual fund analysis. In 2006, he was named
director of business strategy for Morningstars international operations. He
became president and chief investment officer of Morningstar Investment
Services in 2007. Kunal holds a bachelors degree in economics and
environmental policy from Monmouth College and a masters degree in business
administration from The University of Chicago Booth School of Business. He also
holds the Chartered Financial Analyst (CFA) designation and is a member of the
Investment Analysts Society of Chicago.
25
Elizabeth Kirscher
Elizabeth Kirscher has been president
of our data services business since 2000. She is responsible for managing our
investment databases and related products. She joined us in 1995 as a major
accounts manager in our institutional sales area. From 1998 to 1999, she served
as international product manager and worked on the launch of Morningstar Japan.
From 1999 to 2000, she was director of sales and business development for
Morningstar.com and marketed Morningstar.com data and tools to other websites.
She holds a bachelors degree from Vassar College and a masters degree in
business administration from the Columbia Business School at Columbia
University.
Don Phillips
Don Phillips has been a managing
director since 2000 and in 2009 took on additional responsibilities as
president of fund research. He is responsible for overseeing our research on
mutual funds, exchange-traded funds, and alternative investments, as well as
our corporate communications area. He joined us in 1986 as our first analyst.
He served as our vice president and publisher from 1991 to 1996, as our
president from 1996 to 1998, and as our chief executive officer from 1998 to
2000. He has served on our board of directors since August 1999. He also
serves on the board of directors for Morningstar Japan. He holds a bachelors
degree from the University of Texas and a masters degree from The University
of Chicago.
Patrick Reinkemeyer
Patrick Reinkemeyer has been president
of Morningstar Associates, LLC since October 2004. He is responsible for
Morningstars Investment Consulting and Retirement Advice businesses. He joined
us in 1996 and directed our print and software variable annuity/life products
from 1996 to 1997. From 1998 until 2001, he was director of Morningstars
Investment Consulting business. From 2001 until October 2004, he served as
president of Investment Consulting. He holds a bachelors degree in
history from Middlebury College and a masters degree in business
administration from The University of Chicago Booth School of Business. He also
holds the Chartered Financial Analyst (CFA) designation and is a member of the
Investment Analysts Society of Chicago.
Richard Robbins
Richard Robbins has been our general
counsel and corporate secretary since August 2005. He is responsible for
directing Morningstars legal department and managing our relationships with
outside counsel. From May 1999 until he joined Morningstar, he was a
partner at Sidley Austin Brown & Wood LLP (now Sidley Austin LLP),
which he joined as an associate in August 1991. He holds bachelors and
masters degrees in computer science and electrical engineering from the
Massachusetts Institute of Technology and a juris doctor degree from The
University of Chicago Law School.
David W.
Williams
David W. Williams has been one of
our managing directors since 2000. He is in charge of design and its
application to brand identity, products, communications, and the workplace. He
joined us in 1993 and has been instrumental in establishing design as one of
our recognized core capabilities. He holds a bachelors degree in industrial
design from The Ohio State University and a masters degree in fine arts from
the Yale University School of Art.
Company Information
We were incorporated in Illinois on May 16,
1984. Our corporate headquarters are located at 22 West Washington Street,
Chicago, Illinois, 60602.
We maintain a website at
http://corporate.morningstar.com
. Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to any of these documents are
available free of charge on this site as soon as reasonably practicable after
the reports are filed with or furnished to the SEC. We also post quarterly
press releases on our financial results and other documents containing
additional information related to our company on this site. We provide this
website and the information contained in or connected to it for informational
purposes only. That information is not part of this Annual Report on
Form 10-K.
26
Item 1A. Risk Factors
You should carefully consider the risks
described below and all of the other information included in this Form 10-K
when deciding whether to invest in our common stock or otherwise evaluating our
business. If any of the following risks materialize, our business, financial
condition, or operating results could suffer. In this case, the trading price
of our common stock could decline, and you may lose all or part of
your investment.
Certain products and services have historically made up a
large percentage of our revenue base. Our business could suffer if sales of
these products and services decline.
In 2009, our five largest products
based on revenue (Licensed Data, Morningstar Advisor Workstation, Investment
Consulting, Morningstar.com, and Morningstar Direct) accounted for
approximately 61% of our consolidated revenue. We believe that sales of these
products and services will continue to make up a substantial portion of our
consolidated revenue for the foreseeable future. If we experience a significant
decline in sales of any of these products for any reason, it would have a
material adverse impact on our revenue and could harm our business.
During 2008 and 2009, two of our
Investment Consulting clients did not renew their contracts. Combined, these
contracts represented about $17 million in annual revenue in 2008.
From June 2004 through July 2009,
we also had significant revenue from the independent equity research we
provided under the terms of the Global Analyst Research Settlement. In 2003 and
2004, 12 leading Wall Street investment banks agreed to a $1.5 billion
settlement (the Global Analyst Research Settlement) with the 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 period of five years, with the independent research provided by
companies that are not engaged in the investment banking industry.
The period during which investment
banks were required to provide independent equity research to their clients
expired in July 2009. As a result, our Equity Research revenue has
declined significantly; the loss of revenue associated with the Global Analyst
Research Settlement accounting for approximately $9.4 million of the decline in
our consolidated revenue in 2009.
Competition could reduce our share of the investment
research market and hurt our financial performance.
We operate in a highly competitive
industry, with many investment research providers competing for business from
individual investors, financial advisors, and institutional clients. We compete
with many different types of companies that vary in size, product scope, and
media focus, including large and well-established distributors of financial
information, such as Thomson Reuters; Standard & Poors, a division of
The McGraw-Hill Companies; Bloomberg; and Yahoo!. We compete with a variety of
other companies in different areas of our business, which we discuss in greater
detail in the Business Segments, Products, and Services section in Item
1Business.
27
Many of our competitors have larger customer bases and significantly
greater resources than we do. This may allow them to respond more quickly
to new technologies and changes in demand for products and services, devote
greater resources to developing and promoting their services, and make more
attractive offers to potential clients, subscribers, and strategic partners.
Industry consolidation may also lead to more intense competition.
Increased competition could result in price reductions, reduced margins, or
loss of market share, any of which could hurt our business, operating results,
or financial condition.
The investment information industry is dominated by a few large players,
and industry consolidation has increased in the past several years. If providers
of data and investment analysis continue to consolidate, our competitive
position may suffer.
Failing to
differentiate our products and continuously create innovative, proprietary
research tools may negatively impact our competitive position and business
results.
We attribute much of our companys success over the past 25 years to our
ability to develop innovative, proprietary research tools. We cannot guarantee
that we will continue to successfully develop new product features and tools
that differentiate our product offerings from those of our competitors. If
tools similar to Morningstars proprietary tools become more broadly available
through other channels, our competitive position and business results may
suffer.
If we do not maintain
and increase the number and contract value of our subscriptions and license
agreements, our operating results could suffer.
We generate a substantial portion of our revenue from subscriptions and
license agreements. In general, our subscriptions are paid in advance. We
may be obligated to refund a portion of prepaid subscription fees when a
customer cancels. Subscription cancellations may have a negative impact on
our revenue and cash position. Our license agreements, which typically do not
allow for cancellation, have terms ranging from one to three years. Our future
success depends on our maintaining (through renewals) and increasing (through
new subscriptions and license agreements) the number of customers who pay for
our investment research and services, as well as the price theyre willing to
pay. Further, if the market for our products and services develops more slowly
than we expect, or declines, and the number of customers who pay for our
services does not increase, or declines, our business, operating results, or
financial condition could suffer.
Consolidation among
our clients may adversely impact our competitive position, our relationships
with our clients, and business results.
Industry consolidation in the financial services sector has accelerated
over the past several years. We cant predict the impact on our business if one
of our clients is acquired. We may lose business following an acquisition of
one of our clients if were not able to continue providing services or expand
our business with the combined organization. Any loss of business because of
increased consolidation could have a negative effect on our revenue and
profitability.
Our reputation and
business may be harmed by allegations made about possible conflicts of
interest.
We offer products and services to our institutional clients, which include
banks, brokerage firms, insurance companies, mutual fund companies, media
outlets, and retirement plan providers and sponsors. Our institutional clients
have generated a significant percentage of our consolidated revenue in recent
years. We provide ratings, analyst research, and investment recommendations on
mutual funds and other investment products offered and securities issued by our
institutional clients. We also provide investment advisory and investment
management services. The fact that our institutional clients pay us for certain
products and services, as well as the fact that in some
28
cases we make investment recommendations within the framework of client
constraints, may create the perception that our ratings, research, and
recommendations are not impartial.
This perception may undermine the confidence of our customers and
potential customers in our reputation as a provider of independent research.
Any such loss of confidence or damage to our reputation could hurt our
business.
Our investment
advisory operations may subject us to liability for any losses that result
from a breach of our fiduciary duties.
Our investment advisory operations involve fiduciary obligations that
require us to act in the best interests of our clients. We may face
liabilities for actual or claimed breaches of our fiduciary duties,
particularly in areas where we provide retirement advice and managed retirement
accounts. We may not be able to prevent clients from taking legal action
against us for an actual or claimed breach of a fiduciary duty. The recent
market downturn may increase the likelihood of legal action and claims that we
have breached our fiduciary duties. Because we provided investment advisory
services on more than $61.4 billion in assets as of December 31, 2009, we
could face substantial liabilities if we breach our fiduciary duties.
In addition, we may face other legal liabilities based on the quality
and outcome of our investment advisory recommendations, even in the absence of
an actual or claimed breach of fiduciary duty.
Changes in laws
applicable to our investment advisory operations, compliance failures, or
regulatory action could adversely affect our business.
Our investment advisory operations are a growing part of our overall
business. Our acquisitions of Ibbotson Associates in 2006 and Intech Pty Ltd in
2009 substantially increased our business in this area. Weve also expanded the
investment advisory services we offer outside the United States through
Morningstar Associates Europe and other subsidiaries. The securities laws and
other laws that govern our activities as a registered investment advisor in the
United States are complex. The activities of our investment advisory operations
are primarily subject to provisions of the Investment Advisers Act of 1940 (the
Advisers Act) and the Employee Retirement Income Security Act of 1974 (ERISA).
In addition, our investment management business is conducted through a
broker-dealer registered under the Securities Exchange Act of 1934 (the
Exchange Act) and is subject to the rules of FINRA.
We also provide investment advisory services in other areas around the
world, and our operations may be subject to additional regulations in markets
outside the United States. It is difficult to predict the future impact of the
broad and expanding legislative and regulatory requirements affecting our
business. The laws, rules, and regulations applicable to our business
may change in the future, and we may not be able to comply with any
such changes. If we fail to comply with any applicable law, rule, or
regulation, we could be fined, sanctioned, or barred from providing investment
advisory services in the future, which could materially adversely affect our
business, operating results, or financial condition.
Our operations outside
of the United States are expanding and involve additional challenges that we
may not be able to meet.
Our operations outside of the United States have expanded to $129.2 million
in revenue in 2009 from $89.7 million in 2007. Several of our recent
acquisitions have added to our business operations in Europe, Australia, and
other areas outside the United States. There are risks inherent in doing
business outside the United States, including challenges in reaching new
markets because of established competitors and limited brand recognition;
difficulties in staffing, managing, and integrating non-U.S. operations;
difficulties in coordinating and sharing information globally; differences in
laws and policies from country to country; exposure to varying legal standards,
including intellectual property protection laws; potential tax exposure related
to
29
transfer pricing and other issues; heightened risk of fraud and
noncompliance; and currency exchange rates and exchange controls. These risks
could hamper our ability to expand around the world, which may hurt our
financial performance and ability to grow.
As our non-U.S. revenue increases as a percentage of 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 reported
revenue could suffer if certain foreign currencies decline relative to the U.S.
dollar, although the impact on operating income may be offset by an opposing
currency impact on locally based operating expense. In addition, because we use
the local currency of our subsidiaries as the functional currency, our
financial results are affected by the translation of foreign currencies into
U.S. dollars.
The increasing
concentration of data and development work carried out at our offshore
facilities may have a negative impact on our business operations, products, and
services.
We now have approximately 600 employees working in our data and technology
development center in Shenzhen, China, or about one-fourth of our total
workforce. Over the past several years, we have been moving a significant
percentage of our data collection and development operations to this location.
Because China has a restrictive government under centralized control, we cannot
predict the level of political and regulatory risk that may affect our
operations. The concentration of development and data work carried out at this
facility also involves operational risks for our network infrastructure. Any
difficulties that we face in successfully maintaining our development center in
China may harm our business and have a negative impact on the products and
services we provide, particularly because of our increasing reliance on this
facility.
Following the Hemscott acquisition, we have approximately 150 employees who
work at our data collection facility in New Delhi, India, which may also be
subject to political and regulatory risk. Like the Shenzhen operation, this
facility also involves operational risks for our network infrastructure.
Downturns in the
financial sector, global financial markets, and global economy may adversely
impact our business.
The global financial crisis that began in 2007 became significantly worse
throughout 2008. Because of problems associated with investments in subprime
mortgage and other securities, many high-profile companies in the financial
sector declared bankruptcy, were acquired, accepted funding from the U.S.
government, or otherwise restructured their operations.
In response to these events, the global financial markets showed unusually
high levels of volatility in 2007 and 2008. Although conditions improved in
2009, we believe the disruption in the financial markets continues to cause
investor uncertainty and pressure on consumer discretionary spending. The
market downturn also led to spending cutbacks among asset management firms and
other financial services companies, which make up a large percentage of our
client base. Following the financial crisis in 2007 and 2008, many
institutional clients became more cautious and price-sensitive. Some of them
also implemented additional review processes for new contracts or began to
provide certain services, particularly investment advisory services, in-house
rather than hiring external service providers.
We cant predict how long this situation will persist or what its ultimate
impact will be on our financial results. If financial markets around the world
experience negative performance and volatility, demand for our products and
services may decline, and our revenue, operating income, and other financial
results could suffer. Our business results may also be impacted by negative
trends in Internet advertising sales. The financial markets and many businesses
operating in the financial services industry are highly volatile and are
affected by factors, such as U.S. and foreign economic conditions and general
trends in business and finance, which are beyond our control.
30
Our revenue from
asset-based fees may be impacted by market declines as well as the impact of
cash outflows.
Our fee-based asset management business has become more important to our
financial results. In 2009, revenue from asset-based fees made up approximately
12% of our consolidated revenue and a greater percentage of our operating
income. The amount of revenue we earn from asset-based fees depends on the
value of assets on which we provide advisory services, and the size of our
asset base can increase or decrease along with trends in market performance.
Revenue from asset-based fees made up 12% of consolidated revenue in 2009,
compared with 13% in 2008 and 16% in 2007. The value of assets under advisement
may show substantial declines during periods of significant market volatility.
The size of these portfolios can also be affected if net inflows into the
portfolios on which we provide investment advisory services drop or these
portfolios experience redemptions. If the level of assets on which we provide
investment advisory services goes down, we expect that our fee-based revenue
will show a corresponding decline.
Our results could
suffer if the mutual fund industry experiences slower growth.
A significant portion of our revenue is generated from products and
services related to mutual funds. The mutual fund industry has experienced
substantial growth over the past 25 years, but suffered along with the
market downturn in 2008 and early 2009. Global mutual fund assets declined to
about $22.3 trillion as of September 30, 2009, down from a peak of $26.1
trillion in 2007. Continued downturns or volatility in the financial markets,
increased investor interest in other investment vehicles, or a lack of investor
confidence could reduce investor interest and investment activity in this area.
A slower growth rate or downturn in mutual fund assets could decrease demand
for our products.
Failing to
successfully integrate acquisitions could harm our business.
Weve completed numerous acquisitions over the past three years, including
six acquisitions in 2009. We cannot guarantee that we will successfully
integrate the employees, product lines, business systems, and operations
following any acquisition. We expect to continue making acquisitions and
establishing investments and joint ventures as part of our long-term
business strategy. Acquisitions, investments, and joint ventures involve a
number of risks. They can be time-consuming and may divert managements
attention from day-to-day operations, particularly if numerous acquisitions are
in process at the same time. Financing an acquisition could result in dilution
from issuing equity securities, reduce our financial flexibility because of
reductions in our cash balance, or result in a weaker balance sheet from
incurring debt.
Acquisitions might also result in losing key employees. We may fail to
successfully complete an acquisition, investment, or joint venture. We may also
fail to generate enough revenue or profits from an acquisition to earn a return
on the associated purchase price.
We may be unable to
generate adequate returns on our cash and investment balance if we cannot
identify attractive investment opportunities.
We held a total of $342.6 million in cash and investments as of December 31,
2009. Because of generally low prevailing interest rates on high-quality
fixed-income securities, the rate of return we can generate with our cash and
investment balance is relatively low. We have used portions of our cash and
investment balance to finance acquisitions over the past several years. We
cannot guarantee that we will be able to find suitable acquisition
opportunities in the future. As mentioned above, we may also fail to generate
enough revenue or profits from an acquisition to earn a return on the
associated purchase price.
31
We could be subject to
fines, penalties, or other sanctions as a result of an investigation by
the New York Attorney Generals Office related to some of the services
Morningstar Associates, LLC provides.
As we originally disclosed in 2004, the New York Attorney Generals Office
is conducting an investigation related to some of the products and services
offered by Morningstar Associates, LLC. See Item 3Legal Proceedings for a
description of these matters. We cannot predict the scope, timing, or outcome
of these matters, 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. We
have not established any reserves relating to these matters.
The availability of
free or low-cost investment information could lead to lower demand for our
products and adversely affect our financial results.
Investment research and information relating to publicly traded companies
and mutual funds is widely available for little or no cost from various
sources, including the Internet and public libraries. Investors can also access
information directly from publicly traded companies and mutual funds. The
Interactive Data Electronic Applications (IDEA) database available through the
SEC website provides real-time access to SEC filings, including annual,
semi-annual, and quarterly reports. Financial information and data is also
widely available in XBRL (eXtensible Business Reporting Language), and many
brokerage firms provide financial and investment research to their clients. The
widespread availability of free or low-cost investment information
may make it difficult for us to maintain or increase the prices we charge
for our publications and services and could lead to a lower demand for our
products. A loss of a significant number of customers would hurt our financial
results.
A prolonged outage of
our database and network facilities could result in reduced revenue and the
loss of customers.
The success of our business depends upon our ability to deliver
time-sensitive, up-to-date data and information. We rely on our computer
equipment, database storage facilities, and other office equipment, which are
mainly located in our Chicago headquarters or elsewhere in the Chicago area.
Our operations and those of our suppliers and customers are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure,
terrorist attacks, wars, Internet failures, computer viruses, and other events
beyond our control, including disasters affecting Chicago. We maintain off-site
back-up facilities for our database and network equipment, but these facilities
could be subject to the same interruptions that may affect our
headquarters. Were not currently able to immediately switch over all of our
systems to a back-up facility. If we experience a significant database or
network facility outage, our business may be disrupted until we fully implement
our back-up systems. Any losses, service disruption, or damages incurred by us
could have a material adverse effect on our business, operating results, or
financial condition.
Our business relies
heavily on electronic delivery systems and the Internet. Any failures or
disruptions could result in reduced revenue and the loss of customers.
Most of our products and services depend heavily on our electronic delivery
systems and the Internet. Our ability to deliver information using the Internet
may be impaired because of infrastructure failures, service outages at
third-party Internet providers, or increased government regulation. If
disruptions, failures, or slowdowns of our electronic delivery systems or the
Internet occur, our ability to distribute our products and services effectively
and to serve our customers may be impaired.
32
We could face
liability related to our storage of personal information about our users.
Customers routinely input personal investment and financial information,
including portfolio holdings and credit card information, on our websites. We
could be subject to liability if we were to inappropriately disclose any users
personal information or if third parties were able to penetrate our network
security or otherwise gain access to any users name, address, portfolio
holdings, or credit card information. Any such event could subject us to claims
for unauthorized credit card purchases, impersonation or other similar fraud
claims, or claims for other misuses of personal information, such as
unauthorized marketing or unauthorized access to personal portfolio
information.
We could face
liability for the information we publish, including information based on data
we obtain from other parties.
We may be subject to claims for securities law violations, defamation
(including libel and slander), negligence, or other claims relating to the
information we publish, including our research and ratings on corporate credit
issuers. For example, investors may take legal action against us if they
rely on published information that contains an error, or a company
may claim that we have made a defamatory statement about it or its
employees. We could also be subject to claims based upon the content that is
accessible from our website through links to other websites. We rely on a
variety of outside parties as the original sources for the information we use
in our published data. These sources include securities exchanges, fund
companies, and transfer agents. Accordingly, in addition to possible exposure
for publishing incorrect information that results directly from our own errors,
we could face liability based on inaccurate data provided to us by others.
Defending claims based on the information we publish could be expensive and
time-consuming and could adversely impact our business, operating results, and
financial condition.
Our future success
depends on our ability to recruit and retain qualified employees, including our
executive officers.
We experience competition for analysts and other employees from financial
institutions and financial services organizations. These organizations
generally have greater resources than we do and therefore may be able to
offer significantly more attractive compensation packages to potential
employees. Competition for these employees is intense, and we may not be
able to retain our existing employees or be able to recruit and retain other
highly qualified personnel in the future.
Our future success also depends on the continued service of our executive
officers, including Joe Mansueto, our chairman, chief executive officer,
and controlling shareholder. The loss of one or more of our executive officers
could hurt our business, operating results, or financial condition. We do not
carry any life insurance on our executive officers. We do not have employment
agreements or non-compete agreements in place with any of our executive
officers. They may leave us and work for our competitors or start their
own competing businesses.
Failure to protect our
intellectual property rights could harm our brand-building efforts and ability
to compete effectively.
The steps we have taken to protect our intellectual property may not
be adequate to safeguard our proprietary information. Further, effective
trademark, copyright, and trade secret protection may not be available in
every country in which we offer our services. Our continued ability to market
one or more of our products under their current names could be adversely
affected in those jurisdictions where another person registers, or has a
pre-existing registration on, one or more of them. Failure to adequately
protect our intellectual property could harm our brand, devalue our proprietary
content, and affect our ability to compete in the marketplace.
33
From time to time, we encounter jurisdictions in which one or more third
parties have a pre-existing trademark registration in certain relevant
international classes that may prevent us from registering our own marks
in those jurisdictions. It is possible that our continued ability to use the Morningstar
name or logo, either on a stand-alone basis or in association with certain
products or services, could be compromised in those jurisdictions because of
these pre-existing registrations. Similarly, from time to time, we encounter
situations in certain jurisdictions where one or more third parties are already
using the Morningstar name, either as part of a registered corporate name,
a registered domain name or otherwise. Our ability to effectively market
certain products and/or services in those locations could be adversely affected
by these pre-existing usages.
Control by a principal
shareholder could adversely affect our other shareholders.
As of December 31, 2009, Joe Mansueto, our chairman and chief
executive officer, owned approximately 53% of our outstanding common stock. As
a result, he has the ability to control substantially all matters submitted to
our shareholders for approval, including the election and removal of directors
and any merger, consolidation, or sale of our assets. He also has the ability
to control our management and affairs. This concentration of ownership
may delay or prevent a change in control; impede a merger, consolidation,
takeover, or other business combination involving us; discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of us; or result in actions that may be opposed by other shareholders.
Moreover, because of Joes substantial ownership, we are a controlled
company for purposes of the NASDAQ Marketplace Rules. This means that, if in
the future we elect to be treated as a controlled company under the NASDAQ
Marketplace Rules, we will not be required by NASDAQ to have a majority of
independent directors or to maintain compensation and nominating and corporate
governance committees composed entirely of independent directors to continue to
list our shares on NASDAQ.
Fluctuations in our
operating results may negatively impact our stock price.
We believe our business has relatively large fixed costs and low variable
costs, which magnify the impact of revenue fluctuations on our operating
results. As a result, a decline in our revenue may lead to a larger
decline in operating income. A substantial portion of our operating expense is
related to personnel costs, marketing programs, office leases, and other
infrastructure spending, which generally cannot be adjusted quickly. Our
operating expense levels are based on our expectations for future revenue. If
actual revenue falls below our expectations, or if our expenses increase before
revenues do, our operating results would be materially and adversely affected.
In addition, we do not provide earnings guidance or hold one-on-one meetings
with institutional investors and research analysts. Because of this policy and
limited analyst coverage on our stock, our stock price may be volatile. If
our operating results or other operating metrics fail to meet the expectations
of outside research analysts and investors, the market price of our common
stock may decline.
The future sale of
shares of our common stock may negatively impact our stock price.
If our shareholders sell substantial amounts of our common stock, the
market price of our common stock could fall. A reduction in ownership by Joe
Mansueto or any other large shareholder could cause the market price of our
common stock to fall. In addition, the average daily trading volume in our
stock is relatively low. The lack of trading activity in our stock
may lead to greater fluctuations in our stock price. Low trading volume
may also make it difficult for shareholders to make transactions in a
timely fashion.
34
Our shareholders
may experience dilution in their ownership positions.
In the past, weve granted options to employees as a significant
part of their overall compensation package. In 2006, we began granting
restricted stock units to our employees and non-employee directors. As of December 31,
2009, our employees and non-employee directors held options to acquire
2,677,577 shares of common stock, 2,668,034 of which were exercisable at a
weighted average price of approximately $16.54 per share and 9,543 were not
exercisable. As of December 31, 2009, there were 721,019 restricted stock
units outstanding, which have an average remaining vesting period of 32 months.
Generally speaking, the company issues a share of stock when a restricted stock
unit vests. Some holders have elected to defer when shares are issued, and many
holders satisfy tax withholding obligations by forfeiting the right to have
some of their shares issued. To the extent that option holders exercise
outstanding options to purchase common stock and shares are issued when
restricted stock units vest, there will be further dilution. Future grants
of stock options or restricted stock units may also result in dilution. We
may raise additional funds through future sales of our common stock. Any
such financing would result in additional dilution to our shareholders.
Stock option exercises
and other factors may create volatility in our cash flows.
Our cash provided by financing activities primarily consists 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 if the intrinsic value of the option (the
difference between the exercise price of the option and the fair value of our
stock on the date of exercise) exceeds 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 at vesting is
greater than 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 realized. Because of this
uncertainty, there may be additional volatility in our cash flows from
financing activities.
35
Item 1B. Unresolved Staff Comments
We do not have any unresolved comments from the Staff of the
Securities and Exchange Commission regarding our periodic or current reports
under the Exchange Act.
Item 2. Properties
As of December 31, 2009, we lease approximately 310,000
square feet of office space for our U.S. operations, primarily for our office
located in Chicago, Illinois. We also lease approximately 260,000 square feet
of office space in 19 countries around the world. We believe that our existing
and planned office facilities are adequate for our needs and that additional or
substitute space is available to accommodate growth and expansion.
Item 3. Legal Proceedings
Business Logic
In November 2009, Business
Logic Holding Corporation filed a complaint in the Circuit Court of Cook
County, Illinois against Ibbotson Associates, Inc. and Morningstar, Inc.
relating to Ibbotsons prior commercial relationship with Business Logic.
Business Logic is alleging that Ibbotson Associates and Morningstar violated
Business Logics rights by using its trade secrets to develop a proprietary
web-service software and user interface that connects plan participant data
with the Ibbotson Wealth Forecasting Engine. Business Logic seeks, among other
things, injunctive relief and unspecified damages. While Morningstar and
Ibbotson Associates are vigorously contesting the claims against them, we
cannot predict the outcome of the proceeding.
Online News Link LLC
In October 2009, Online News
Link LLC filed a complaint in the United States District Court for the Eastern
District of Texas against Morningstar, Inc. and several other providers of
online information alleging that each defendant infringes U.S. Patent No. 7,508,789,
which relates to ways for delivering online information. Online News Link
seeks, among other things, unspecified damages and costs incurred by Online
News Link because of defendants infringing activities. The complaint does not
include specific allegations against Morningstar. Morningstar is evaluating the
lawsuit but cannot predict the outcome of the proceeding.
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
its data in order to build a competing product to deliver SEC-filed mutual fund
disclosure documents online. In February 2009, the case was removed to the
United States District Court for the District of Massachusetts. In September 2009,
Morningstar and NewRiver resolved the litigation. Morningstar has agreed not to
engage in the conduct that NewRiver alleges prompted it to file suit, and
NewRiver has agreed to dismiss its lawsuit. The settlement does not include any
payments by either party, and Morningstar maintains its denial of NewRivers
allegations. All other settlement terms are confidential.
Morningstar Associates, LLC
Subpoenas from the Securities and Exchange Commission, the Department of Labor,
and the New York Attorney Generals Office
·
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.
36
·
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 was conducting. The Department of Labor subpoena was
substantially similar in scope to the SEC subpoena.
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.
In September 2009,
the Department of Labor 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 and Department of Labor subpoenas 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.
In addition to these proceedings, we
are involved in legal proceedings and litigation that have arisen in the normal
course of our business. Although the outcome of a particular proceeding can
never be predicted, we do not believe that the result of any of these other
matters will have a material adverse effect on our business, operating results,
or financial condition.
37
Part II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Our common stock is listed on the Nasdaq Global Select
Market under the symbol MORN.
The following table shows the high and low price per share
of our common stock for the periods indicated, as reported on the Nasdaq Global
Select Market:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
38.60
|
|
$
|
26.70
|
|
$
|
77.81
|
|
$
|
58.00
|
|
Second Quarter
|
|
45.69
|
|
30.37
|
|
76.95
|
|
53.67
|
|
Third Quarter
|
|
48.56
|
|
35.61
|
|
71.54
|
|
52.51
|
|
Fourth Quarter
|
|
54.75
|
|
46.00
|
|
61.86
|
|
25.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 22, 2010, the last reported price on the
Nasdaq Global Select Market for our common stock was $44.33 per share and there
were approximately 1,500 shareholders of record of our common stock.
We do not currently pay cash dividends, nor have we paid
cash dividends during the period covered by the financial statements included
in this Annual Report on Form 10-K. Any determination to pay dividends in
the future will be at the discretion of our board of directors and will be
dependent upon our results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law, and other factors deemed
relevant by the board of directors. Future indebtedness and loan facilities
may also prohibit or restrict our ability to pay dividends and make
distributions to our shareholders.
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 February 15, 2010:
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
February 15,
2010
|
|
Projected
Beneficial
Ownership (1)
|
Joe Mansueto
Chairman and Chief
Executive Officer
|
|
08/04/09
|
|
12/31/10
|
|
1,034,050
|
|
Shares to be sold ratably over the
course of the plan
|
|
106,964
|
|
24,740,510
|
Chris Boruff
President,
Advisor Software
|
|
08/25/09
|
|
05/01/10
|
|
15,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
|
|
144,180
|
Cheryl Francis
Director
|
|
08/11/09
|
|
12/17/10
|
|
12,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
4,500
|
|
28,354
|
Steve Kaplan
Director
|
|
08/05/09
|
|
05/31/10
|
|
725
|
|
Shares to be sold under the plan
on a specified date
|
|
|
|
67,776
|
Liz Kirscher
President,
Data Services
|
|
11/23/09
|
|
12/31/10
|
|
25,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
|
|
107,876
|
Cathy Odelbo
President,
Equity Research
|
|
08/13/08
|
|
12/31/10
|
|
100,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
|
|
76,165
|
Richard Robbins
General Counsel and
Corporate Secretary
|
|
11/11/09
|
|
12/31/10
|
|
5,000
|
|
Biweekly increments of up to 500
shares
|
|
|
|
23,801
|
Paul Sturm
Director
|
|
08/28/09
|
|
12/31/10
|
|
25,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
4,000
|
|
104,438
|
David Williams
Managing
Director,
Design
|
|
09/10/08
|
|
12/31/10
|
|
20,000
|
|
Shares to be sold under the plan
if the stock reaches specified prices
|
|
|
|
84,640
|
(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
December 31, 2009, and includes shares of our common stock subject to
options that were then exercisable or that will have become exercisable by
March 1, 2010 and restricted stock units that will vest by March 1,
2010. The estimates do not reflect any changes to beneficial ownership
that may have occurred since
December 31,
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.
38
Item 6. Selected Financial Data
The selected historical financial data shown below should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our Consolidated Financial Statements
and related notes included elsewhere in this Annual Report on Form 10-K.
We have derived our Consolidated Statements of Income Data and Other
Consolidated Financial Data for the years ended December 31, 2009, 2008,
and 2007 and Consolidated Balance Sheet Data as of December 31, 2009 and
2008 from our audited Consolidated Financial Statements included in this Annual
Report on Form 10-K. The Consolidated Statements of Income Data and Other
Consolidated Financial Data for the years ended December 31, 2006 and 2005
and Consolidated Balance Sheet Data as of December 31, 2007, 2006, and
2005 were derived from our audited Consolidated Financial Statements that are
not included in this Annual Report on Form 10-K.
Consolidated
Statements of Income Data
(in thousands except per share amounts)
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
227,114
|
|
$
|
315,175
|
|
$
|
435,107
|
|
$
|
502,457
|
|
$
|
478,996
|
|
Operating expense
|
|
180,634
|
|
237,648
|
|
317,853
|
|
363,338
|
|
353,676
|
|
Operating income
|
|
46,480
|
|
77,527
|
|
117,254
|
|
139,119
|
|
125,320
|
|
Non-operating income, net
|
|
3,199
|
|
4,164
|
|
6,229
|
|
4,252
|
|
2,934
|
|
Income before income taxes, equity
in net income of unconsolidated entities, and cumulative effect of accounting
change
|
|
49,679
|
|
81,691
|
|
123,483
|
|
143,371
|
|
128,254
|
|
Income tax expense
|
|
20,224
|
|
32,975
|
|
51,255
|
|
51,763
|
|
47,095
|
|
Equity in net income of
unconsolidated entities
|
|
1,662
|
|
2,787
|
|
1,694
|
|
1,321
|
|
1,165
|
|
Consolidated income before
cumulative effect of accounting change
|
|
31,117
|
|
51,503
|
|
73,922
|
|
92,929
|
|
82,324
|
|
Cumulative effect of accounting
change, net of tax of $171
|
|
|
|
259
|
|
|
|
|
|
|
|
Consolidated net income
|
|
31,117
|
|
51,762
|
|
73,922
|
|
92,929
|
|
82,324
|
|
Net (income) loss attributable to
noncontrolling interests
|
|
|
|
|
|
|
|
(397
|
)
|
132
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
31,117
|
|
$
|
51,762
|
|
$
|
73,922
|
|
$
|
92,532
|
|
$
|
82,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable
to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.79
|
|
$
|
1.26
|
|
$
|
1.71
|
|
$
|
2.01
|
|
$
|
1.71
|
|
Diluted
|
|
$
|
0.70
|
|
$
|
1.11
|
|
$
|
1.53
|
|
$
|
1.88
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
39,392
|
|
41,176
|
|
43,216
|
|
46,139
|
|
48,112
|
|
Diluted
|
|
44,459
|
|
46,723
|
|
48,165
|
|
49,213
|
|
49,793
|
|
Other Consolidated
Financial Data ($000)
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Consolidated revenue
|
|
$
|
227,114
|
|
$
|
315,175
|
|
$
|
435,107
|
|
$
|
502,457
|
|
$
|
478,996
|
|
Revenue from acquisitions
|
|
(2,443
|
)
|
(36,434
|
)
|
(44,226
|
)
|
(27,125
|
)
|
(29,590
|
)
|
Unfavorable (favorable) impact of
foreign currency translations
|
|
(694
|
)
|
(793
|
)
|
(3,808
|
)
|
(1,850
|
)
|
8,987
|
|
Revenue excluding acquisitions and
impact of foreign currency translations (organic revenue) (1)
|
|
$
|
223,977
|
|
$
|
277,948
|
|
$
|
387,073
|
|
$
|
473,482
|
|
$
|
458,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
(2):
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (liability method)
|
|
$
|
2,810
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Stock options (equity method)
|
|
8,085
|
|
7,169
|
|
6,475
|
|
3,710
|
|
1,002
|
|
Restricted stock units (equity
method)
|
|
|
|
1,406
|
|
4,503
|
|
7,571
|
|
10,591
|
|
Total stock-based compensation
expense
|
|
$
|
10,895
|
|
$
|
8,575
|
|
$
|
10,978
|
|
$
|
11,281
|
|
$
|
11,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
(3)
|
|
$
|
(16,913
|
)
|
$
|
(129,002
|
)
|
$
|
(102,838
|
)
|
$
|
(179,124
|
)
|
$
|
(174,675
|
)
|
Cash provided by financing
activities (4) (8)
|
|
$
|
25,256
|
|
$
|
33,983
|
|
$
|
52,465
|
|
$
|
47,630
|
|
$
|
30,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
48,445
|
|
$
|
98,677
|
|
$
|
112,368
|
|
$
|
152,446
|
|
$
|
96,182
|
|
Capital expenditures
|
|
(7,451
|
)
|
(4,722
|
)
|
(11,346
|
)
|
(48,519
|
)
|
(12,372
|
)
|
Free cash flow (5)
|
|
$
|
40,994
|
|
$
|
93,955
|
|
$
|
101,022
|
|
$
|
103,927
|
|
$
|
83,810
|
|
Consolidated Balance Sheet Data
As of December 31 ($000)
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and
investments
|
|
$
|
153,190
|
|
$
|
163,751
|
|
$
|
258,588
|
|
$
|
297,577
|
|
$
|
342,553
|
|
Working capital
|
|
90,374
|
|
70,021
|
|
149,723
|
|
180,295
|
|
237,218
|
|
Total assets
|
|
296,311
|
|
447,838
|
|
649,307
|
|
803,940
|
|
919,583
|
|
Deferred revenue (6)
|
|
71,155
|
|
100,525
|
|
129,302
|
|
130,270
|
|
127,114
|
|
Long-term liabilities (7)
|
|
6,756
|
|
10,952
|
|
23,166
|
|
34,570
|
|
35,830
|
|
Total equity (7) (8)
|
|
173,714
|
|
269,423
|
|
408,303
|
|
535,929
|
|
676,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
(1)
|
Consolidated revenue excluding acquisitions and the impact
of foreign currency translations (organic revenue) is considered a non-GAAP
financial measure under the regulations of the Securities and Exchange Commission
(SEC). The definition of organic revenue we use may not be the same as
similarly titled measures used by other companies. Organic revenue should not
be considered an alternative to any measure of performance as promulgated
under U.S. generally accepted accounting principles (GAAP).
|
|
|
(2)
|
Prior to our initial public offering in May 2005, in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 123,
Stock-Based Compensation
,
we used two accounting methods. For options granted under plans that
may have required us to settle the options in cash, we used the
liability method. Under this method we recorded a liability for a vested
option equal to the difference between the option exercise price and the fair
value of the shares of common stock underlying the option at the end of the
reporting period. If this fair value increased over the reporting period, we
recorded an expense and, if it decreased, we recorded income. For options
granted under plans that did not require us to settle the options in cash, we
used the equity method. Under this method we calculated the fair value of the
option at the time of grant using a Black-Scholes model and recorded expense
over the vesting period. In each year, our aggregate stock-based compensation
expense reflects the impact of options granted in prior years. Subsequent to
our initial public offering, we no longer settle stock options for cash and
as a result, all of options are accounted for under the equity method.
Effective January 1, 2006, we adopted SFAS
No. 123 (Revised 2004),
Share-Based
Payment
(SFAS No. 123(R)). In 2006, we began granting
restricted stock units. We measure the fair value of our restricted stock
units on the date of grant based on the market price of the underlying common
stock as of the close of trading 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 expense for stock-based compensation is
distributed with other employee compensation costs in the appropriate
operating expense categories of our Consolidated Statements of Income.
Refer to Note 10 of the Notes to our Consolidated
Financial Statements for more information on our stock-based compensation.
|
|
|
(3)
|
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. Refer to Item 7 Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and
Capital Resources for more information concerning cash used for investing
activities.
|
|
|
(4)
|
Cash provided by financing activities consists primarily
of proceeds from stock option exercises and excess tax benefits. Refer to
Item 7 Managements Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital Resources
,
for more information concerning cash
provided by financing activities.
|
|
|
(5)
|
Free cash flow is considered a non-GAAP financial measure
under SEC regulations. We present this measure as supplemental information to
help investors better understand trends in our business results over time.
Our management team uses free cash flow to evaluate the performance of our
business. Free cash flow is not equivalent to any measure of performance
required to be reported under GAAP, nor should this data be considered an
indicator of our overall financial performance or liquidity. Moreover, the
free cash flow definition we use may not be comparable to similarly titled
measures reported by other companies.
|
|
|
(6)
|
We frequently invoice or collect cash in advance of providing
services or fulfilling subscriptions for our customers. These amounts are
recorded as deferred revenue on our Consolidated Balance Sheets.
|
|
|
(7)
|
In the second quarter of 2005, upon completion of our
initial public offering, we reclassified $24.9 million, related to stock
options accounted for as long-term liabilities, to additional paid-in
capital.
|
|
|
(8)
|
In May 2005, we completed our initial public offering
of 7,612,500 shares of our common stock. These shares commenced trading on
May 3, 2005 and now trade on the Nasdaq Global Select Market under the
symbol MORN. All of these shares were sold by affiliates of SOFTBANK
Finance Corporation, a wholly owned subsidiary of SOFTBANK Corp. We did not
receive any proceeds from the sale of these shares. In addition, we granted
the underwriters the right to purchase up to an additional 1,141,875 shares
at the initial public offering price to cover over-allotments. In
May 2005, the underwriters exercised their over-allotment option in
full. We received net proceeds of $18.1 million based on our initial public
offering price of $18.50 per share, after deducting the underwriting
discounts and commissions and approximately $2.6 million of offering
expenses.
|
40
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
The discussion included in this section, as well as other
sections of this Annual Report on Form 10-K, 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 current global financial uncertainty; 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 Item 1A Risk Factors of this Annual Report on Form 10-K.
If any of these risks and uncertainties materialize, our actual future results
may vary significantly from what we expected. 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
mission is to create great products that help investors reach their financial
goals. We offer an extensive line of data, software, and research 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.
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
through subscriptions or license agreements. The Investment Management segment
includes our asset management operations, which operate as registered
investment advisors and earn more than half of their revenue from asset-based
fees. We emphasize a decentralized approach to running our business to empower
our managers and to create a culture of responsibility and accountability.
Historically,
we have focused primarily on organic growth by introducing new products and
services and marketing 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 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.
Key Business Characteristics
Revenue
We
generate revenue by selling a variety of investment-related products and
services. We sell many of our offerings, such as newsletters, Principia
software, and Premium service on Morningstar.com, via subscriptions. These
subscriptions are mainly offered for a one-year term, although we also offer
terms ranging from one month to three years. We also sell advertising on our
websites throughout the world. Several of our other products are sold through
license agreements, including Morningstar Advisor Workstation, Morningstar
Equity Research, Morningstar Direct, Retirement Advice, and Licensed Data. Our
license agreements typically range from one to three years.
For
some of our other institutional services, mainly Investment Consulting, we
generally base our fees on the scope of work and the level of service we
provide and calculate them as a percentage of assets under advisement. We also
earn fees relating to Morningstar Managed Portfolios and the managed retirement
accounts offered through Morningstar Retirement Manager and
41
Advice
by Ibbotson that we calculate as a percentage of assets under management.
Overall, revenue tied to asset-based fees accounted for about 12% of our
consolidated revenue in 2009.
Deferred Revenue
We
frequently invoice our clients and collect cash in advance of providing
services or fulfilling subscriptions for our customers. As a result, we use
some of this cash to fund our operations and invest in new product development.
The businesses we acquired over the past several years have similar business
models, and as a result, we acquired their deferred revenue. Deferred
revenue is the largest liability on our Consolidated Balance Sheets and totaled
$127.1 million as of December 31, 2009 and $130.3 million as of December 31,
2008. We expect to recognize this deferred revenue in future periods as we
fulfill the service obligations under our subscription, license, and service
agreements.
Significant Operating Leverage
Our
business requires significant investments to create and maintain proprietary
databases and content. We strive to leverage these costs by selling a wide variety
of products and services to multiple investor segments, through multiple media,
and in many geographic markets. In general, our businesses have high fixed
costs, and we expect our revenue to increase or decrease more quickly than our
expenses. We believe that while the fixed costs of the investments in our
business are relatively high, the variable cost of adding customers is
considerably lower, particularly as a significant portion of our products and
services focus on Internet-based platforms and assets under management. At
times, we will make investments in building our databases and content that will
hurt our short-term operating results. During other periods, our profitability
will improve because were able to increase revenue without increasing our cost
base at the same rate. When revenue decreases, however, the significant
operating leverage in our business may reduce our profitability.
Operating Expense
We
classify our operating expense into separate categories for cost of goods sold,
development, sales and marketing, general and administrative, and depreciation
and amortization, as described below. We include stock-based compensation
expense, as appropriate, in each of these categories.
·
Cost of goods
sold.
This category includes compensation expense for employees who
produce the products and services we deliver to our customers. For example,
this category covers production teams and analysts who write investment
research reports. Cost of goods sold also includes other expense such as postage,
printing, and CD-ROM replication, as well as shareholder servicing fees for
Morningstar Managed Portfolios.
·
Development.
This
category includes compensation expense for programmers, designers, and other
employees who develop new products and enhance existing products. In some
cases, we capitalize the compensation costs associated with certain development
projects. This reduces the expense that we would otherwise report in this
category. We amortize these capitalized costs over the estimated economic life
of the software, which is generally three years, and include this expense in
depreciation and amortization.
·
Sales and
marketing.
This category includes compensation expense for our sales
teams, product managers, and other marketing professionals. We also include the
cost of advertising, direct mail campaigns, and other marketing programs to
promote our products.
·
General and
administrative.
This category consists mainly of compensation
expense for each segments management team, as well as human resources,
finance, and support employees for each segment. The category also includes
compensation expense for senior management and other corporate costs, including
corporate systems, finance and accounting, legal, and facilities expense.
·
Depreciation
and amortization.
Our capital expenditures consist of computers,
leasehold improvements, and capitalized product development costs related to
certain software development projects. We depreciate property and equipment
primarily using the straight-line method based on the useful life of the asset,
which ranges from three to seven years. We amortize leasehold improvements over
the lease term or their useful lives, whichever is shorter. We amortize
capitalized product development costs over their estimated economic life, which
is generally three years. We also include amortization related to intangible
assets, which is mainly driven by acquisitions, in this category. We amortize
intangible assets using the straight-line method over their estimated economic
useful lives, which range from one to 25 years.
42
International Operations
We have
majority-owned operations in 19 countries outside of the United States and
include these in our consolidated financial statements. We account for our
minority-owned investments in Japan, Denmark, and Sweden using the equity
method.
How We Evaluate Our Business
When
our analysts evaluate a stock, they focus on assessing the companys estimated
intrinsic valuethe value of the companys future cash flows, discounted to
their worth in todays dollars. Our approach to evaluating our own business
works the same way. Our goal is to increase the intrinsic value of our business
over time, which we believe is the best way to create value for our
shareholders.
We do
not make public financial forecasts for our business because we want to avoid
creating any incentives for our management team to make speculative statements
about our financial results that could influence the stock price, or to take
actions that help us meet short-term forecasts but may not be in the long-term
interest of building shareholder value.
We
provide three specific measures that can help investors generate their own
assessment of how our intrinsic value has changed over time:
·
Revenue
(including organic revenue);
·
Operating
income (loss); and
·
Free
cash flow, which we define as cash provided by or used for operating activities
less capital expenditures.
Organic
revenue is considered a non-GAAP financial measure under Securities and
Exchange Commission (SEC) regulations. We define organic revenue as
consolidated revenue excluding acquisitions and foreign currency translations.
We present organic revenue because we believe it helps investors better compare
our period-to-period results, and our management team uses this measure to
evaluate the performance of our business.
Free
cash flow is also considered a non-GAAP financial measure. We present this
measure as supplemental information to help investors better understand trends
in our business results over time. Our management team uses free cash flow to
evaluate the performance of our business. Free cash flow is not equivalent to
any measure of performance required under U.S. generally accepted accounting
principles (GAAP) and should not be considered an indicator of our overall
financial performance or liquidity. Moreover, the free cash flow definition we
use may not be comparable to similarly titled measures reported by other
companies.
To evaluate
how successful weve been in maintaining existing business for products and
services that have renewable revenue, we calculate a retention rate. We use two
different methods for calculating retention. For subscription-based products
(including our print newsletters, Morningstar.com Premium Membership service,
and Principia software), we track the number of subscriptions retained during
the year. For products sold through contracts and licenses, we use the contract
value method, which is based on tracking the dollar value of renewals compared
with the total dollar value of contracts up for renewal during the period. We
include changes in the contract value in the renewal amount, unless the change
specifically results from adding a new product that we can identify. We also
include variable-fee contracts in this calculation and use the previous quarters
actual revenue as the base rate for calculating the renewal percentage. The
retention rate excludes setup and customization fees, migrations to other Morningstar
products, and contract renewals that were pending as of January 31, 2010.
The Year 2009 in Review
Industry Overview
We
monitor developments in the economic and financial information industry on an
ongoing basis. We use these insights to help inform our company strategy,
product development plans, and marketing initiatives.
Following
the severe market downturn in 2008, the U.S. market rebounded sharply by the
end of 2009. Despite continued negative performance in the first quarter of
2009, the equity market gained 28.5% for the year as measured by Morningstars
U.S. Market Index, a broad market index. Global markets also rallied, as did
most fixed-income investments.
Total
U.S. mutual fund assets rose to $11.1 trillion as of December 31, 2009, compared
with $9.6 trillion as of December 31, 2008, based on data from the
Investment Company Institute (ICI). Although aggregate cash flows to mutual
funds were strong for the year, investors continued to show caution by heavily
favoring fixed-income funds rather than equity funds. U.S. stock funds had
negative net cash flows for the year, although less so than in 2008. Global
mutual fund assets showed a similar trend, with total assets rising after 2008s
decline, but asset flows weighted toward fixed-income portfolios.
43
The
downturn in 2008 also led to contraction in the number of funds. The number of
mutual funds in the United States fell to about 7,700 in 2009 (excluding
multiple share classes) from 8,000 in 2008, based on data from the ICI. Global
mutual funds also contracted, with the number of funds totaling 66,000 as of September 30,
2009, compared with more than 69,000 as of September 30, 2008, based on
ICI data.
Despite strong market performance in
2009,
we estimate that hedge funds
included in Morningstars database had about $55 billion in net outflows
through December 31, 2009, compared with about $57 billion for the same
period in 2008. However, many hedge-fund categories had positive inflows later
in the year.
Exchange-traded funds continued to
increase in popularity relative to traditional mutual funds. The U.S. ETF
industry closed out 2009 with $784.9 billion in assets under management based
on Morningstars data, up from $533.4 billion at the end of 2008.
Based on data from Nielsen/Net
Ratings, aggregate page views and the number of unique users for financial
and investment sites in 2009 both declined by about 5% to 10% compared with
2008, while the amount of time spent per visit was down more. We attribute
these trends to the unusual level of market volatility in 2008, which increased
investor interest in financial and investment sites in the year-ago period.
Although unique users and page views for Morningstar.com also declined
during 2009, the site continued to perform well based on metrics such as pages viewed
per visit and time spent per visit.
Economic uncertainty continued to
weigh on the global advertising market. Magna, a division of Interpublic Group,
estimates that industry-wide revenue for online advertising was down about 3%
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 in the financial services area remains under
pressure. Following 2009s downturn in advertising sales, several surveys
conducted by the American Marketing Association and other organizations have
projected moderate increases in overall ad spending for 2010.
Asset managers and other financial
services firms continued to consolidate in the wake of the global financial
crisis. If one of our clients is acquired, w
e may lose business if were not able to continue providing services or
expand our business with the combined organization.
The financial crisis of 2009 and
2008 caused sharp cutbacks in investment research spending by institutional
clients and financial advisors, many of whom had staff layoffs or other
reductions in spending. We believe individual investors also reduced discretionary
spending because of the weak economic environment in 2009.
Despite spending pressures, we
believe our clients continue to find value in our services. Some of our
products allow clients to streamline the number of third-party applications they
use and save money. Weve also created a new Enterprise Data Management
business that offers back-office service bureau and performance reporting
operations to financial advisors. By outsourcing these services, clients can
leverage our infrastructure and capabilities to offload non-core tasks and save
money.
The global financial crisis has led
to increased regulatory scrutiny of financial services around the world. In
Germany and France, for example, independent financial advisors have been under
pressure to provide more written evidence for their advice to clients. Hong
Kong regulators recently implemented increased regulatory requirements for risk
disclosure to retail clients.
The United Kingdoms Retail
Distribution Review (RDR), which emphasizes increased regulation of advisory
fees, higher professional standards for financial advisors, and an emphasis on whole
of market investment solutions, is scheduled to come into effect at the end of
2012. Because advisors will be obligated to give clients a choice of all
investment vehicles (including funds, ETFs, and structured products) and
demonstrate that they consider different investment options without bias, we
believe it may increase the business need for investment information on
multiple investment types, which we offer through products such as Morningstar
Direct and Morningstar Advisor Workstation.
The Obama administration has
proposed numerous financial regulatory reforms. We dont believe the majority
of these reforms would have a direct impact on our business, although they will
likely impact many of our clients. Several proposed regulations may also impact
investment advice and retirement plans, including additional regulations on
asset custody, privacy, and other investor protection issues. We continue to
monitor the potential impact of these proposed regulations on our business.
44
Overall, we remain cautious because
of the difficult market environment, which persisted in the wake of the
financial crisis that began in 2007. 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 2009, with
business trends improving toward the end of the year. As discussed in more
detail in the Consolidated Operating Income section below, in early 2010 we
began phasing in some of the benefits and other compensation-related expenses
we previously reduced.
Performance Summary
The list below summarizes the key
accomplishments and challenges that our management team has highlighted related
to our 2009 performance:
Accomplishments
·
We completed
six acquisitions, four of which were outside the United States. These
acquisitions represent approximately $38 million in annual revenue. We
increased our ownership interest in Morningstar Korea, making it one of our
majority-owned operations. We also integrated many capabilities from previous
acquisitions.
·
We continued
investing in our three key web-based platforms, Morningstar.com, Morningstar
Advisor Workstation, and Morningstar Direct. Licensed Data had strong renewal
rates and ranks as our largest product by revenue. Morningstar Direct continued
its strong growth and now ranks as our fifth-largest product by revenue.
·
We expanded
our research offerings, including the launch of corporate credit ratings on 100
public companies; basic profile reports for NASDAQ-listed companies;
target-date fund series ratings and research reports for 20 of the largest fund
series; qualitative research and ratings for more than 830 European and Asian
funds; and a Global Fund Investor Experience study across 16 countries.
·
In our
Investment Management segment, we continued our work in custom target-date
funds and lifetime financial advice and expanded our consulting services
internationally.
·
We added
database coverage of more than 75,000 securities and expanded our fundamental
data on global stocks and exchange-traded funds.
·
We created a
new Enterprise Data Management business that offers back-office service bureau
and performance reporting operations to financial advisors.
Challenges
·
Despite an
upturn in the market, revenue declined for the second time in our history, and
operating income fell 10%. Many of our clients were cutting budgets, reducing
staff, and experiencing the effects of industry consolidation, all of which had
a direct impact on our business.
·
We had lower
revenue for Investment Consulting because one client did not renew its contract
in the fourth quarter of 2008 and another client did not renew its contract in
May 2009.
·
The
independent equity research we provided to six banks under the terms of the
Global Analyst Research Settlement ended in July 2009. As a result, equity
research revenue was $9.4 million lower in 2009 versus 2008.
·
Internet
advertising sales were down sharply, Premium Membership subscriptions for
Morningstar.com fell 15%, and revenue for Morningstar Principia was down for
the year.
·
Our 2009
results include a total of $9.5 million in operating expense related to two
unanticipated matters. We recorded a $6.1 million operating expense related to
adjusting the tax treatment of some stock options that were originally
considered incentive stock options, and we incurred $3.4 million in operating
expense for penalties related to the timing of deposits for taxes withheld on
stock option exercises from 2006 through 2009.
Consolidated Results
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
2009 Change
|
|
2008 Change
|
|
Revenue
|
|
$
|
478,996
|
|
$
|
502,457
|
|
$
|
435,107
|
|
(4.7)%
|
|
15.5%
|
|
Operating income
|
|
125,320
|
|
139,119
|
|
117,254
|
|
(9.9)%
|
|
18.6%
|
|
Operating margin
|
|
26.2%
|
|
27.7%
|
|
26.9%
|
|
(1.5)pp
|
|
0.8pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
$
|
(174,675
|
)
|
$
|
(179,124
|
)
|
$
|
(102,838
|
)
|
(2.5)%
|
|
74.2%
|
|
Cash provided by financing
activities
|
|
30,394
|
|
47,630
|
|
52,465
|
|
(36.2)%
|
|
(9.2)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
96,182
|
|
$
|
152,446
|
|
$
|
112,368
|
|
(36.9)%
|
|
35.7%
|
|
Capital expenditures
|
|
(12,372
|
)
|
(48,519
|
)
|
(11,346
|
)
|
(74.5)%
|
|
327.6%
|
|
Free cash flow
|
|
$
|
83,810
|
|
$
|
103,927
|
|
$
|
101,022
|
|
(19.4)%
|
|
2.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pppercentage point(s)
As noted in
How We
Evaluate Our Business
, we define free cash flow as cash provided by
or used for operating activities less capital expenditures. Please refer to the
discussion on page 43 for more detail.
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 revenue from acquisitions and organic revenue, which
reflects our underlying business excluding revenue from acquisitions and the
impact of foreign currency translations. 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 other companies. Organic revenue should
not be considered an alternative to any measure of performance as promulgated
under GAAP.
45
The table below shows the periods in which we included each
acquired operation in revenue from acquisitions:
Consolidated Revenue
In 2009, our consolidated revenue decreased 4.7% to $479.0 million.
We had about $29.6 million in incremental revenue from acquisitions during the
year, mainly reflecting additional revenue from Tenfore Systems Limited
(Tenfore), as well as 10-K Wizard Technology, LLC (10-K Wizard), the equity
research and data business from C.P.M.S. (CPMS), Intech Pty Limited (Intech),
Fundamental Data Limited (Fundamental Data), and others. However, this was more
than offset by lower organic revenue, largely reflecting a drop in revenue from
Investment Consulting as well as lower Equity Research revenue related to the
Global Analyst Research Settlement. Investment Consulting revenue declined
because two clients did not renew their contracts, one in October 2008 and
the other in May 2009. The Global Analyst Research Settlement period
expired in July 2009.
Our 2009 results also suffered because of the continuing
effects of the severe market downturn in 2008, which put pressure on client
budgets and led to consolidation among some of our clients. Our organic growth
rate decelerated during 2008 because of these adverse market conditions and
continued deteriorating during the first half of 2009. While our organic
revenue was down for the year, we believe the trend in the second half is
encouraging. Our organic revenue fell 10.2% in the third quarter of 2009, but
only 6.6% in the fourth quarter.
46
Our consolidated revenue increased 15.5% to $502.5 million
in 2008, reflecting positive organic growth for the year as well as new revenue
from acquisitions, with the majority driven by the Hemscott businesses we
acquired in January 2008. Acquired operations contributed $27.1 million of
revenue and represented 6 percentage points of our consolidated revenue growth
in 2008.
The tables below reconcile consolidated revenue with organic
revenue (revenue excluding acquisitions and the impact of foreign currency
translations):
2009 vs. 2008 ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
Consolidated revenue
|
|
$
|
478,996
|
|
$
|
502,457
|
|
(4.7)%
|
|
Revenue from acquisitions
|
|
(29,590
|
)
|
|
|
NMF
|
|
Unfavorable impact of foreign
currency translations
|
|
8,987
|
|
|
|
NMF
|
|
Organic revenue
|
|
$
|
458,393
|
|
$
|
502,457
|
|
(8.8)%
|
|
2008 vs. 2007 ($000)
|
|
2008
|
|
2007
|
|
Change
|
|
Consolidated revenue
|
|
$
|
502,457
|
|
$
|
435,107
|
|
15.5%
|
|
Revenue from acquisitions
|
|
(27,125
|
)
|
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(1,850
|
)
|
|
|
NMF
|
|
Organic revenue
|
|
$
|
473,482
|
|
$
|
435,107
|
|
8.8%
|
|
2007 vs. 2006 ($000)
|
|
2007
|
|
2006
|
|
Change
|
|
Consolidated revenue
|
|
$
|
435,107
|
|
$
|
315,175
|
|
38.1%
|
|
Revenue from acquisitions
|
|
(44,226
|
)
|
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(3,808
|
)
|
|
|
NMF
|
|
Organic revenue
|
|
$
|
387,073
|
|
$
|
315,175
|
|
22.8%
|
|
While organic revenue and acquisitions had the most
significant impact on revenue in 2009 and 2008, we also enjoyed a benefit from
foreign currency translations because of the weakness in the U.S. dollar during
2007 and the first half of 2008. Late in 2008, the currency trend reversed. As
a result, foreign currency translations reduced revenue by nearly $9.0 million
in 2009.
Revenue for our Investment Information segment, which
accounts for about 81% of company-wide revenue, declined by 1% in 2009, as the
lower revenue across various product lines was partially offset by revenue from
acquisitions. Acquisitions contributed $25.9 million to segment revenue in
2009.
Investment Management segment revenue was down 17.4% in
2009, driven by the two Investment Consulting non-renewals mentioned above.
Combined, these contracts represented about $17 million of revenue in 2008.
Acquisitions contributed $3.7 million to segment revenue in 2009.
In 2008, Investment Information segment revenue rose 19.3%.
Acquisitions contributed $27.1 million to segment revenue for the year.
Software products, including Morningstar Advisor Workstation and Morningstar
Direct, were the largest drivers behind the revenue increase. Licensed Data was
another significant contributor to revenue growth, and investment research
revenue also rose for the year.
Investment Management segment revenue rose 3.7% in 2008.
Total assets under advisement for Investment Consulting declined approximately
32%, partly driven by the market downturn as well as the impact of one client
not renewing its contract. New client wins for Ibbotson Associates partly
offset the impact of these factors.
Revenue from international operations increased as a
percentage of total revenue in 2009 and 2008. Our non-U.S. revenue increased to
27.0% of consolidated revenue in 2009, compared with 24.2% in 2008 and 20.6% in
2007. Several of our recent acquisitions have extensive operations outside the
United States. The majority of our international revenue is from Europe,
Australia, and Canada. Acquisitions contributed $23.4 million to international
revenue in 2009 and $19.4 million in 2008.
47
Foreign currency translations reduced revenue by
approximately $9.0 million in 2009, reversing the trend from 2008, when foreign
currency translations had a positive impact of $1.9 million. Excluding
acquisitions and the impact of foreign currency translations, our non-U.S.
revenue declined 5.5% in 2009 and increased 11.7% in 2008.
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:
2009 vs. 2008 ($000)
|
|
2009
|
|
2008
|
|
Change
|
|
International revenue
|
|
$
|
129,160
|
|
$
|
121,436
|
|
6.4%
|
|
Revenue from acquisitions
|
|
(23,371
|
)
|
|
|
NMF
|
|
Unfavorable impact of foreign
currency translations
|
|
8,987
|
|
|
|
NMF
|
|
International organic revenue
|
|
$
|
114,776
|
|
$
|
121,436
|
|
(5.5)%
|
|
2008 vs. 2007 ($000)
|
|
2008
|
|
2007
|
|
Change
|
|
International revenue
|
|
$
|
121,436
|
|
$
|
89,680
|
|
35.4%
|
|
Revenue from acquisitions
|
|
(19,426
|
)
|
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(1,850
|
)
|
|
|
NMF
|
|
International organic revenue
|
|
$
|
100,160
|
|
$
|
89,680
|
|
11.7%
|
|
2007
vs. 2006 ($000)
|
|
2007
|
|
2006
|
|
Change
|
|
International revenue
|
|
$
|
89,680
|
|
$
|
44,276
|
|
102.5%
|
|
Revenue from acquisitions
|
|
(31,690
|
)
|
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(3,808
|
)
|
|
|
NMF
|
|
International organic revenue
|
|
$
|
54,182
|
|
$
|
44,276
|
|
22.4%
|
|
Our five largest products based on revenueLicensed Data,
Investment Consulting, Morningstar Advisor Workstation, Morningstar.com, and
Morningstar Directmade up about 61% of consolidated revenue in 2009. While the
percentage of revenue made up by our top five products has remained relatively
consistent over the past three years, the relative size of products within the
top five has changed each year. Licensed Data became our largest product in
2008 and continued increasing as a percentage of revenue in 2009, partly
because of incremental revenue from Tenfore, 10-K Wizard, and Fundamental Data.
Investment Consulting moved down to become the third-largest product in 2009,
while Morningstar Direct moved up to become the fifth-largest product because
of continued license growth.
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 websites. In addition,
were continuing to globalize the Premium subscriptions and advertising revenue
generated by Morningstar.com websites, 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 current-year presentation. These reclassifications did not
have any impact on the order of our top five products in 2008 or 2007.
48
Top Five Products (Segment) 2009
|
|
Revenue
($000)
|
|
% of
Consolidated
Revenue
|
|
Licensed Data (Investment
Information)
|
|
$
|
91,524
|
|
19.1%
|
|
Morningstar Advisor Workstation
(Investment Information)
|
|
65,673
|
|
13.7%
|
|
Investment Consulting (Investment
Management)
|
|
63,748
|
|
13.3%
|
|
Morningstar.com (Investment
Information)
|
|
39,454
|
|
8.2%
|
|
Morningstar Direct (Investment
Information)
|
|
29,968
|
|
6.3%
|
|
|
|
|
|
|
|
|
Top Five Products (Segment) 2008
|
|
Revenue
($000)
|
|
% of
Consolidated
Revenue
|
|
Licensed Data (Investment
Information)
|
|
$
|
78,329
|
|
15.6%
|
|
Investment Consulting (Investment
Management)
|
|
77,757
|
|
15.5%
|
|
Morningstar Advisor Workstation
(Investment Information)
|
|
64,222
|
|
12.8%
|
|
Morningstar.com (Investment
Information)
|
|
45,684
|
|
9.1%
|
|
Principia (Investment Information)
|
|
27,791
|
|
5.5%
|
|
|
|
|
|
|
|
|
Top Five Products (Segment) 2007
|
|
Revenue
($000)
|
|
% of
Consolidated
Revenue
|
|
Investment Consulting (Investment
Management)
|
|
$
|
75,595
|
|
17.4%
|
|
Licensed Data (Investment
Information)
|
|
59,207
|
|
13.6%
|
|
Morningstar Advisor Workstation
(Investment Information)
|
|
53,755
|
|
12.4%
|
|
Morningstar.com (Investment
Information)
|
|
39,367
|
|
9.0%
|
|
Principia (Investment Information)
|
|
28,760
|
|
6.6%
|
|
|
|
|
|
|
|
|
As discussed in
How We
Evaluate Our Business
, we calculate retention and renewal rates to
help measure how successful weve been in maintaining existing business for
products and services that have renewable revenue. The following graph
illustrates these two metrics over the past five years:
In 2009, we estimate that our retention rate for
subscription-based products, such as Principia, Morningstar.com Premium
Membership service, and print and online newsletters, was on the higher end of
the range between 55% and 60%, down from 60% to 65% in 2008. For contract-based
products and services, we estimate that our weighted average renewal rate was
on the low end of the range between 80% and 85% and was down about 9.5
percentage points from our renewal rate in 2008. The decline in renewal rates
in 2009 was largely driven by the end of the Global Analyst Research Settlement
period. Excluding this factor, the 2009 renewal rate declined about 3
percentage points from 2008. This decline reflects lower renewal rates for
several product lines, including Investment Consulting, institutional software,
and advisor software. Many of our clients were cutting budgets, reducing staff,
and experiencing the effects of industry consolidation during 2009. The figure
for contract-based products includes the impact of price changes and changes to
the contract value upon renewal, as well as changes in the value of
variable-fee contracts.
Consolidated Operating Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Operating expense
|
|
$
|
353,676
|
|
$
|
363,338
|
|
$
|
317,853
|
|
% change
|
|
(2.7)%
|
|
14.3%
|
|
33.7%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
73.8%
|
|
72.3%
|
|
73.1%
|
|
Change
|
|
1.5pp
|
|
(0.8)pp
|
|
(2.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consolidated operating expense decreased $9.6 million,
or 2.7%, in 2009. 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 $28.9 million in
2009. The significant reduction in bonus expense also reflects a slowdown in
our financial performance in 2009 compared with 2008.
49
We also suspended matching contributions to our 401(k) program
in the United States, which reduced operating expense by about $6.6 million. In
addition, we reduced discretionary spending in travel, advertising, and
marketing. Travel costs were about $4.5 million lower in 2009. Advertising and
marketing costs declined by $4.3 million in 2009. Weve been carefully
evaluating spending in this area and cutting back on programs with lower
returns. In addition, we discontinued three publications previously published,
which contributed to lower marketing expense in 2009.
The positive impact of these cost reductions was partially
offset by incremental costs from acquisitions. We completed six acquisitions in
2009 and six in 2008. Because of the timing of these acquisitions, our 2009
results include operating expense that did not exist in 2008. Headcount and
salary expense increased year over year, partly because of incremental
employees added through acquisitions. We had approximately 2,605 employees
worldwide as of December 31, 2009, a 9.7% increase, from 2,375 employees
as of December 31, 2008. We added approximately 170 employees through
acquisitions over the 12 months ending December 31, 2009. The remainder of
the increase in headcount reflects continued hiring for our development center
in China.
The cost reductions were further offset by a total of $9.5
million of operating expense for two separate matters. First, we recorded a
$6.1 million operating expense related to adjusting the tax treatment of
certain stock options that were originally considered incentive stock options (ISOs).
In 1998, 1999, and 2000, we granted ISOs to many employees. Upon exercise, ISOs
typically have a favorable tax treatment for the employee relative to the tax
treatment for non-qualified stock options (NQSOs). In 2009, we determined that
certain ISOs granted to one former and two current executives should have been
treated as NQSOs for the executives and our income tax purposes. As a result,
Morningstar will pay these individuals a total of $4.9 million to compensate
for the difference in tax treatment. We also recorded $1.2 million, primarily
for potential penalties related to this matter. This $6.1 million expense is
included in our operating expenses as a general and administrative expense.
Second, we recorded an operating expense of $3.4 million for
penalties related to the timing of deposits for taxes withheld on stock option
exercises. 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 companys regularly scheduled
payroll deposit. This approach, however, does not technically comply with
Internal Revenue Service (IRS) 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
was part of an IRS audit that began in 2009 and concluded in early 2010. We
have concluded the matter with the IRS and have increased the frequency of
deposits for taxes withheld on stock option exercises.
Our operating expense in 2009 also includes additional rent
expense of $2.7 million to increase a liability related to vacant office space,
primarily for the former Ibbotson headquarters. We increased the liability
because we anticipate receiving lower sublease income and expect it will take
more time than previously estimated to identify a tenant.
Despite significant reductions to bonus expense, operating
expense as a percentage of revenue increased 1.5 percentage points in 2009,
mainly driven by the $9.5 million of incremental operating expenses described
above and other expense increases.
In 2008, our consolidated operating expense increased $45.4
million, or 14.3%. Compensation-related expense, excluding bonuses, accounted
for two-thirds of the increase in 2008, mainly because of a 38% increase in
worldwide headcount and higher sales commission expense. Lower bonus expense
partially offset these increases. We had approximately 2,375 employees
worldwide as of December 31, 2008, compared with 1,720 as of December 31,
2007. Approximately half of the growth in headcount was from
acquisitions. In addition, in 2008 we hired 50 employees for the
Morningstar Development Program, a two-year rotational training program for
entry-level college graduates. Bonus expense declined $2.1 million because of
lower growth in our financial performance compared with the previous year.
Excluding compensation-related expense and bonus expense,
operating expense increased $18.5 million in 2008. About one-third of this
operating expense increase was from higher lease expense for our new headquarters
and other global offices. During 2008, we recorded lease expense for our new
headquarters as well as for our former headquarters, which was occupied until December 2008.
Depreciation and amortization rose $4.7 million in 2008, and we incurred additional
costs across all operating expense categories from acquisitions. Higher costs
in these areas were partially offset by lower legal and professional fees,
which declined $2.1 million. In 2007, we recorded $0.9 million in expense
related to the settlement of litigation in Australia. In addition, we had about
$1.6 million in product implementation costs for Advice by Ibbotson in 2007
that did not recur in 2008.
As a percentage of revenue, operating expense in 2008
declined 0.8 percentage points.
50
Cost of Goods Sold
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Cost of goods sold
|
|
$
|
128,616
|
|
$
|
130,085
|
|
$
|
113,777
|
|
% change
|
|
(1.1)%
|
|
14.3%
|
|
30.8%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
26.9%
|
|
25.9%
|
|
26.1%
|
|
Change
|
|
1.0pp
|
|
(0.2)pp
|
|
(1.5)pp
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
350,380
|
|
$
|
372,372
|
|
$
|
321,330
|
|
% change
|
|
(5.9)%
|
|
15.9%
|
|
40.8%
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
73.1%
|
|
74.1%
|
|
73.9%
|
|
Change
|
|
(1.0)pp
|
|
0.2pp
|
|
1.5pp
|
|
Cost of goods sold is our largest category of operating
expense, accounting for more than one-third of our total operating expense over
the past three years. 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 decreased $1.5 million in 2009, with the
majority of the decline driven by lower bonus expense and lower fulfillment
expense, partially offset by incremental costs from acquisitions.
Cost of goods sold increased $16.3 million in 2008.
Three-quarters of the increase was driven by higher compensation expense,
excluding incentive compensation, which was partly offset by a reduction in
product implementation expense. In 2007, we recorded $1.6 million for
outsourced product implementation expense associated with the Advice by
Ibbotson service. These costs did not recur in 2008. Incremental costs from
acquisitions contributed to the higher compensation expense, and were the
largest contributor to the remainder of the cost increases. Incentive
compensation in 2008 was about the same as in 2007.
Gross margin declined by about one percentage point in 2009,
reversing the trend in the two previous years.
Development Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Development expense
|
|
$
|
38,378
|
|
$
|
40,340
|
|
$
|
35,116
|
|
% change
|
|
(4.9)%
|
|
14.9%
|
|
19.1%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
8.0%
|
|
8.0%
|
|
8.1%
|
|
Change
|
|
|
|
(0.1)pp
|
|
(1.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense decreased $1.9 million in 2009, mainly
because of lower bonus expense, which was partially offset by incremental
compensation costs from acquisitions. Development expense as a percentage of
revenue in 2009 was consistent with 2008 and 2007.
Sales and Marketing Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Sales and marketing expense
|
|
$
|
71,772
|
|
$
|
81,651
|
|
$
|
68,835
|
|
% change
|
|
(12.1)%
|
|
18.6%
|
|
36.0%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
15.0%
|
|
16.3%
|
|
15.8%
|
|
Change
|
|
(1.3)pp
|
|
0.5pp
|
|
(0.3)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense decreased $9.9 million in
2009. Lower bonus expense and advertising and marketing were the two largest
factors driving this change, with each contributing about 40% of the decline.
We reduced advertising and marketing 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. Reduced spending on travel,
training, and conferences also contributed to the decrease, but to a lesser
extent.
51
Sales and marketing expense increased $12.9 million in 2008.
Higher compensation expense, including sales commissions, was the main
contributor to the change. In addition, we had incremental costs from
acquisitions because of growth in headcount and the number of products and
services sold.
As a percentage of revenue, sales and marketing expense
decreased about 1 percentage point in 2009, following a slight increase in
2008.
General and Administrative Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
General and administrative expense
|
|
$
|
82,949
|
|
$
|
85,266
|
|
$
|
78,868
|
|
% change
|
|
(2.7)%
|
|
8.1%
|
|
41.9%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
17.3%
|
|
17.0%
|
|
18.1%
|
|
Change
|
|
0.3pp
|
|
(1.1)pp
|
|
0.5pp
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative (G&A) expense decreased $2.3
million in 2009. Most of the decline reflects lower bonus expense included in
this category. Decreases in travel, training, and conferences also contributed
to lower expense in this area, but to a lesser extent.
These cost reductions were partially offset by the $6.1
million operating expense related to adjusting the tax treatment of certain
stock options originally considered incentive stock options as well as an
operating expense for the deposit penalty, which contributed $1.8 million to
general and administrative expense in 2009. We discuss both of these matters in
more detail in the Consolidated Operating Expense section, on page 50.
G&A expense increased $6.4 million in 2008 as lease
costs grew. In 2008, lease costs rose because we recorded lease expense for our
new Chicago headquarters as well as for the office space we occupied until December 2008.
Compensation expense also increased, but was offset by the favorable impact of
lower bonus expense. Increases in this cost category were also offset by a $2.1
million reduction in legal and professional fees.
As a percentage of revenue, G&A expense increased 0.3
percentage points in 2009.
Depreciation and Amortization Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Depreciation expense
|
|
$
|
12,998
|
|
$
|
9,348
|
|
$
|
8,488
|
|
Amortization expense
|
|
18,963
|
|
16,648
|
|
12,769
|
|
Total depreciation and
amortization expense
|
|
$
|
31,961
|
|
$
|
25,996
|
|
$
|
21,257
|
|
% change
|
|
22.9%
|
|
22.3%
|
|
41.9%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
6.7%
|
|
5.2%
|
|
4.9%
|
|
Change
|
|
1.5pp
|
|
0.3pp
|
|
0.1pp
|
|
Deprecation expense rose $3.7 million in 2009, primarily
from higher depreciation expense associated with our new corporate
headquarters. Amortization expense increased $2.3 million in 2009 and $3.8
million in 2008, reflecting amortization of intangible assets related to
acquisitions.
As a percentage of revenue, depreciation and amortization
increased 1.5 percentage points in 2009.
We expect that amortization of intangible assets will be an
ongoing cost for the remaining life of the assets. Based on acquisitions
completed through December 31, 2009, we estimate that aggregate amortization
expense for intangible assets will be $23.4 million in 2010. Our estimates of
future amortization expense for intangible assets may be affected by changes to
the preliminary purchase price allocations associated with our 2009
acquisitions.
52
Stock-Based Compensation Expense
Stock-based compensation expense is included in each of our
operating expense categories, as shown below:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Cost of goods sold
|
|
$
|
2,666
|
|
$
|
2,058
|
|
$
|
1,706
|
|
Development
|
|
1,570
|
|
1,402
|
|
1,256
|
|
Sales and marketing
|
|
1,587
|
|
1,449
|
|
1,397
|
|
General and administrative
|
|
5,770
|
|
6,372
|
|
6,619
|
|
Stock-based compensation expense
|
|
$
|
11,593
|
|
$
|
11,281
|
|
$
|
10,978
|
|
% change
|
|
2.8%
|
|
2.8%
|
|
28.0%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
2.4%
|
|
2.2%
|
|
2.5%
|
|
Change
|
|
0.2pp
|
|
(0.3)pp
|
|
(0.2)pp
|
|
Our stock based compensation expense mainly relates to
grants of restricted stock units, and to a lesser extent, to stock options
granted in previous years:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Restricted stock units
|
|
$
|
10,591
|
|
$
|
7,571
|
|
$
|
4,503
|
|
Stock options
|
|
1,002
|
|
3,710
|
|
6,475
|
|
Stock-based compensation expense
|
|
$
|
11,593
|
|
$
|
11,281
|
|
$
|
10,978
|
|
We began granting restricted stock units (RSUs) in May 2006
and made additional grants in 2007, 2008, and 2009, typically in the second
quarter of each year. We recognize the expense related to RSUs over the vesting
period, which is generally four years. We estimate forfeitures of all
stock-based awards and typically adjust the estimated forfeitures to actual
forfeiture experience in the second quarter, which is when most of our larger
equity grants typically vest. In the second quarters of 2009, 2008, and 2007,
we recorded approximately $0.2 million, $0.2 million, and $0.8 million,
respectively, of additional stock-based compensation expense as a result of
these adjustments.
Our stock-based compensation expense related to RSUs has
increased over the past three years, reflecting the additional RSU grants. In
contrast, the stock-based compensation expense related to stock options has
declined over the past three years reflecting no stock option grants in 2009
and 2008, a small grant in 2007, and that stock options granted prior to 2007
were fully expensed by 2009.
As discussed above, in 2009 we adjusted the tax treatment of
certain stock options that were originally considered incentive stock options.
This change did not impact the amount of stock-based compensation expense we
recorded related to these stock options.
Based on grants made through December 31, 2009, we
anticipate that stock-based compensation expense will be $10.3 million in
2010. This amount is subject to change based on additional equity grants
or changes in our estimated forfeiture rate related to these grants.
Bonus Expense
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Bonus expense
|
|
$
|
21,019
|
|
$
|
49,912
|
|
$
|
52,014
|
|
% change
|
|
(57.9)%
|
|
(4.0)%
|
|
35.7%
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
4.4%
|
|
9.9%
|
|
12.0%
|
|
Change
|
|
(5.5)pp
|
|
(2.1)pp
|
|
(0.2)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus expense, which we include in each of our operating
expense categories, declined $28.9 million in 2009. This reduction reflects
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. Overall, bonus expense as a
percentage of revenue declined about 5.5 percentage points in 2009.
In 2008, bonus expense declined about $2.1 million, or 4.0%.
Bonus expense declined to 9.9% of revenue in 2008, compared with 12.0% in 2007,
reflecting the lower operating income growth in 2008 compared with 2007.
53
The amount of bonus expense is not a fixed cost. Instead,
the size of the 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 of the following year.
Consolidated Operating Income
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Operating income
|
|
$
|
125,320
|
|
$
|
139,119
|
|
$
|
117,254
|
|
% change
|
|
(9.9)%
|
|
18.6%
|
|
51.2%
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
26.2%
|
|
27.7%
|
|
26.9%
|
|
Change
|
|
(1.5)pp
|
|
0.8pp
|
|
2.3pp
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income decreased $13.8 million in
2009, as the $23.5 million decline in revenue was partially offset by a $9.7
million reduction in operating expense. We took a number of steps to reduce our
cost structure in 2009mainly by reducing employee benefit costs and bonus
expense. While cost reductions began in 2008, the largest reductions were
effective January 1, 2009. We reduced our single largest discretionary
cost, bonus expense, by $28.9 million, with changes to the bonus plan in 2009.
We also suspended matching contributions to our 401(k) program in the
United States, which accounted for about $6.6 million of expense in 2008. In
addition, 2008 lease-related costs incurred in the fourth quarter of 2008 did
not recur in 2009 because we no longer incur lease costs for both our new and
former corporate headquarters in Chicago.
Although we reduced operating expense in several areas with
the cost-savings initiatives implemented at the beginning of 2009, we recorded
a total of $9.5 million of unanticipated expense for two separate matters,
including $6.1 million of operating expense related to adjusting the tax
treatment of incentive stock options granted in previous years and $3.4 million
of operating expense for penalties related to the timing of deposits for taxes
withheld on stock option exercises.
Because operating expense declined at a slower pace than
revenue, the 2009 operating margin was down about 1.5 percentage points from
2008s operating margin. The $9.5 million of operating expense described above
represented about 2 percentage points of the margin decline.
In 2010, we began phasing in some of the benefits we
temporarily suspended in 2009. Were now matching 50% of employee contributions
(up to 7% of salary) to our 401(k) plan in the United States, compared
with a full match up to 7% of salary before 2009. We kept salary levels flat
for nearly all of our employees in 2009, but expect to make some moderate
compensation increases later in 2010. Weve also been hiring for some
previously unfilled positions.
Consolidated operating income increased $21.8 million in
2008. In 2008, the operating margin increased by 0.8 percentage points partly
because of lower bonus expense and legal expense as a percentage of revenue, as
well as the $1.6 million decline in product implementation expense associated
with the Advice by Ibbotson service. Higher lease expense as a percentage of
revenue offset these positive factors and contributed to the lower operating
margin growth compared with the two previous years. Incremental costs added by
acquisitions, such as amortization of intangible assets and higher compensation
costs, also contributed to slower growth in the operating margin.
Importantly, the 2008 annual operating margin reflects a mix
of higher operating margins early in the year and lower margins in the latter
part of the year, which worsened as the business environment became more
challenging. Our operating margin was 24.1% in the fourth quarter of 2008,
compared with 28.2% in fourth quarter of 2007.
54
Consolidated Free Cash Flow
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 GAAP. Also, the free cash
flow definition we use may not be comparable to similarly titled measures used
by other companies.
We generated positive free cash flow in 2009, 2008, and 2007
as our cash provided by operating activities has consistently exceeded our
level of capital expenditures, as shown below:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
2009 Change
|
|
2008 Change
|
|
Cash provided by operating
activities
|
|
$
|
96,182
|
|
$
|
152,446
|
|
$
|
112,368
|
|
(36.9)%
|
|
35.7%
|
|
Capital expenditures
|
|
(12,372
|
)
|
(48,519
|
)
|
(11,346
|
)
|
(74.5)%
|
|
327.6%
|
|
Free cash flow
|
|
$
|
83,810
|
|
$
|
103,927
|
|
$
|
101,022
|
|
(19.4)%
|
|
2.9%
|
|
Free cash flow fell $20.1 million in 2009, reflecting a
$56.2 million decrease in cash provided by operating activities, which was
partially offset by a $36.1 million decrease in capital expenditures. Free cash
flow increased $2.9 million in 2008, reflecting a $40.1 million increase in
cash flow provided by operating activities, which was offset by a $37.2 million
increase in capital expenditures.
Cash provided by operating activities
: Cash
provided by operating activities decreased $56.2 million in 2009. The decline
in cash provided by operating activities reflects a lower cash benefit from
accrued compensation as well as an increase of $9.6 million for bonus payments.
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, cash provided by
operating activities in 2008 included a $16.3 million benefit from deferred
rent, primarily for tenant improvement allowances related to the construction
of our new corporate headquarters. This benefit did not recur in 2009. Excess
tax benefits declined $9.8 million in 2009 because of a reduction in the number
of options exercised and lower average stock prices on the exercise dates.
Cash provided by operating activities increased $40.1
million in 2008 compared with 2007. The increase resulted from the positive
impact of higher net income (adjusted for non-cash items) of $43.0 million and
an increase in deferred rent of $16.0 million. These increases were offset by
the impact of higher cash paid for bonuses of $14.0 million and a decrease in
the impact of accrued income taxes and accrued compensation. Deferred rent
includes the tenant improvement allowance received in connection with the
build-out of our new headquarters. The tenant improvement allowance will be
amortized over the lease term as a reduction in office lease expense.
55
To provide investors with additional insight into our
financial results, we provide a comparison between the change in consolidated
net income and the change in cash provided by operating activities:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
2009
Change
|
|
2008
Change
|
|
Consolidated net income
|
|
$
|
82,324
|
|
$
|
92,929
|
|
$
|
73,922
|
|
$
|
(10,605
|
)
|
$
|
19,007
|
|
Adjustments to reconcile
consolidated net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock
option exercises and vesting of restricted stock units
|
|
(13,767
|
)
|
(23,531
|
)
|
(30,428
|
)
|
9,764
|
|
6,897
|
|
Depreciation and amortization
expense
|
|
31,961
|
|
25,996
|
|
21,257
|
|
5,965
|
|
4,739
|
|
Stock-based compensation expense
|
|
11,593
|
|
11,281
|
|
10,978
|
|
312
|
|
303
|
|
All other non-cash items included
in net income
|
|
(1,537
|
)
|
8,889
|
|
(3,214
|
)
|
(10,426
|
)
|
12,103
|
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for bonuses
|
|
(58,867
|
)
|
(49,253
|
)
|
(35,269
|
)
|
(9,614
|
)
|
(13,984
|
)
|
Cash paid for income taxes
|
|
(38,009
|
)
|
(19,782
|
)
|
(27,795
|
)
|
(18,227
|
)
|
8,013
|
|
Accounts receivable
|
|
12,364
|
|
(658
|
)
|
(11,723
|
)
|
13,022
|
|
11,065
|
|
Deferred revenue
|
|
(8,704
|
)
|
(1,595
|
)
|
8,401
|
|
(7,109
|
)
|
(9,996
|
)
|
Income taxescurrent
|
|
49,685
|
|
41,860
|
|
53,024
|
|
7,825
|
|
(11,164
|
)
|
Accrued compensation
|
|
32,138
|
|
46,920
|
|
58,387
|
|
(14,782
|
)
|
(11,467
|
)
|
Deferred rent
|
|
(790
|
)
|
16,346
|
|
380
|
|
(17,136
|
)
|
15,966
|
|
Other assets
|
|
2,521
|
|
1,573
|
|
(3,536
|
)
|
948
|
|
5,109
|
|
Reduction of Australian litigation
reserve
|
|
|
|
|
|
(2,091
|
)
|
|
|
2,091
|
|
Accounts payable and accrued
liabilities
|
|
(3,654
|
)
|
3,008
|
|
2,729
|
|
(6,662
|
)
|
279
|
|
All other
|
|
(1,076
|
)
|
(1,537
|
)
|
(2,654
|
)
|
461
|
|
1,117
|
|
Cash provided by operating
activities
|
|
$
|
96,182
|
|
$
|
152,446
|
|
$
|
112,368
|
|
$
|
(56,264
|
)
|
$
|
40,078
|
|
In 2009, the decline in cash provided by operating
activities was greater than the decline in consolidated net income, reflecting
the difference in timing between cash receipts or disbursements and when these
items are recognized in revenue or expense. Deferred rent of $16.3 million,
primarily for tenant improvement allowances received in connection with the
build-out of our new headquarters benefited cash flow in 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 provided by operating activities.
The $18.2 million increase in tax payments as well as the $9.6 million increase
in bonuses paid in 2009 compared with 2008 also contributed to the difference
between net income and cash provided by operations. A lower cash flow benefit
from accrued compensation, primarily reflecting the reduction in the 2009 bonus
expense, also contributed to the difference between net income and cash from
operations.
The $40.1 million increase in cash provided by operating
activities in 2008 outpaced the $19.0 million increase in consolidated net
income. The tenant improvement allowance of $16.3 million received in
connection with the build-out of our new headquarters represented a significant
benefit to cash flow in 2008. Non-cash items included in net income were a
primary driver of the difference between net income and cash provided by
operations in 2008.
FASB ASC 718,
Compensation Stock Compensation
,
requires that we classify excess tax benefits as a financing activity, which
contributes to the difference between net income and cash from operations. In
2009, 2008, and 2007 we classified $13.8 million, $23.5 million, and $30.4
million of excess tax benefits, respectively, as financing activities. We
describe these excess tax benefits in the Liquidity and Capital Resources
section.
Capital expenditures
: Capital
expenditures decreased $36.1 million in 2009 mainly because of the timing of
payments related to our new corporate headquarters in Chicago. In 2008, capital
expenditures were $48.5 million, an increase of $37.2 million from 2007. The
2008 increase was almost entirely driven by capital expenditures for our new
headquarters.
56
Segment Results
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
2009
Change
|
|
2008
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
$
|
386,642
|
|
$
|
390,693
|
|
$
|
327,372
|
|
(1.0)%
|
|
19.3%
|
|
Investment Management
|
|
92,354
|
|
111,764
|
|
107,735
|
|
(17.4)%
|
|
3.7%
|
|
Consolidated revenue
|
|
$
|
478,996
|
|
$
|
502,457
|
|
$
|
435,107
|
|
(4.7)%
|
|
15.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
$
|
138,576
|
|
$
|
138,902
|
|
$
|
114,948
|
|
(0.2)%
|
|
20.8%
|
|
Investment Management
|
|
52,889
|
|
60,396
|
|
55,395
|
|
(12.4)%
|
|
9.0%
|
|
Intangible amortization and
corporate depreciation expense
|
|
(26,349
|
)
|
(20,550
|
)
|
(18,522
|
)
|
28.2%
|
|
10.9%
|
|
Corporate unallocated
|
|
(39,796
|
)
|
(39,629
|
)
|
(34,567
|
)
|
0.4%
|
|
14.6%
|
|
Consolidated operating income
|
|
$
|
125,320
|
|
$
|
139,119
|
|
$
|
117,254
|
|
(9.9)%
|
|
18.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
|
|
|
|
|
|
|
|
|
|
Investment Information
|
|
35.8%
|
|
35.6%
|
|
35.1%
|
|
0.2pp
|
|
0.5pp
|
|
Investment Management
|
|
57.3%
|
|
54.0%
|
|
51.4%
|
|
3.3pp
|
|
2.6pp
|
|
Consolidated operating margin
|
|
26.2%
|
|
27.7%
|
|
26.9%
|
|
(1.5)pp
|
|
0.8pp
|
|
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;
Morningstar Direct; and Morningstar Principia. Licensed Data is a set of
investment data spanning all of our investment databases, including real-time
pricing data, 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. From June 2004
through July 2009, our equity research was distributed through six major
investment banks to meet the requirements for independent research under the
Global Analyst Research Settlement (GARS). The period covered by GARS 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.
We also sell equity research 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.
We also offer a variety of financial communications and
newsletters, other investment software, and investment indexes.
This segment represented 80.7%, 77.8%, and 75.2% of our
consolidated revenue in 2009, 2008, and 2007, respectively.
Revenue
Revenue for our Investment Information segment declined $4.1
million in 2009. Acquisitions contributed $25.9 million to segment revenue in
2009, partially offsetting the decline across a number of our product lines. Revenue
from our investment research products was down 24.1%, mainly reflecting the end
of GARS and, to a lesser extent, lower revenue from investment newsletters.
Organic revenue for software product lines was down about 2.2%, driven by
declines in the U.S. version of Morningstar.com and, to a much lesser extent,
advisor software. These declines were partly offset by higher revenue for
institutional software and data-related products and services.
57
As mentioned above, the period covered by GARS expired at
the end of July 2009, and as previously disclosed, our post-settlement
equity research revenue was significantly lower in 2009. GARS revenue was $12.5
million in 2009, compared with $21.9 million in 2008. We entered into new
equity research contracts with two of the banks that were clients under GARS;
however, these contracts only represent about 10% of the previous annual GARS
revenue. In addition, were continuing to provide broad equity coverage to
individual investors, financial advisors, and institutions through a variety of
other channels. For further discussion about this issue, see Item 1ARisk
Factors.
Revenue from our other investment research products declined
in 2009 primarily because of lower revenue from 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:
Morningstar Funds 500
,
Morningstar Stocks
500
, and
Morningstar
ETFs 150
. Lower advertising revenue from publications sold in
Australia and lower revenue from the annual Morningstar Investment Conference
held in the second quarter also contributed to the decline.
The U.S. version of Morningstar.com, which includes Internet
advertising sales and Premium Membership subscriptions, was the second-largest
driver behind the revenue decline in the segment. Negative trends in Internet
advertising drove most of the decrease. In addition, subscriptions for the
Morningstar.com Premium service fell by 15.2% to 150,473 as of December 31,
2009, compared with 177,518 as of December 31, 2008 because of negative
trends in subscriber growth and new trials. However, we moderately increased
subscription prices for Premium Membership in both January 2009 and 2008,
which partially offset lower revenue from the subscription decline.
Advisor software revenue was down in 2009, reflecting lower
Principia revenue partially offset by higher revenue for Advisor Workstation
and other products. Principia subscriptions totaled 35,844 as of December 31,
2009, a 16.7% decrease from 43,019 as of December 31, 2008. The decline
partly reflects clients migrating from Principia to Advisor Workstation, but
also reflects a lower retention rate as the economic environment weakened.
Advisor Workstation revenue increased in 2009 because of
higher revenue in the first half of the year. The number of U.S. licenses for
Morningstar Advisor Workstation decreased to 148,392 as of December 31,
2009 compared with 151,874 as of December 31, 2008. The decrease reflects
clients migrating to Site Builder and a change in the scope of some licenses,
partially offset by new contracts in 2009. 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
websites. The number of Advisor Workstation licenses reported in 2008 has been
adjusted to reflect this change.
Higher revenue from our institutional software and data
product lines partially offset the declines in individual and advisor software.
Institutional software revenue increased mainly because of Morningstar Direct.
The number of licenses for Morningstar Direct grew 19.0% to 3,524 worldwide as
of December 31, 2009, compared with 2,961 as of December 31, 2008.
Revenue from Licensed Data also increased in 2009.
In 2008, revenue from the Investment Information segment
increased $63.3 million. Acquisitions contributed approximately $27.1 million
of revenue. Excluding acquisitions, the 2008 revenue expansion was driven by
Morningstar Advisor Workstation, Licensed Data, Morningstar Direct, and
Morningstar.com.
The number of U.S. licenses for Morningstar Advisor
Workstation increased to 151,874 as of December 31, 2008 compared with
150,505 as of December 31, 2007. The revenue growth reflects new client
contracts as well as additional users and functionality for existing clients. Part of
this growth reflects expansions in the scope of some contracts to full-site
licenses (where we include all eligible advisors in our total license count),
from tools-only licenses (where we include a smaller number of advisors based
on actual usage).
Licensed Data was also a major contributor to organic
revenue growth in this segment in 2008, as demand for data feeds and other
services remained strong for most of the year. Morningstar Direct also had a
positive impact, as the number of licenses for Morningstar Direct totaled 2,961
worldwide as of December 31, 2008, up 32.8% compared with 2,229 as of December 31,
2007.
Morningstar.com Premium Membership and Internet advertising
sales contributed to organic revenue growth in 2008, but slowed throughout the
year. Subscriptions for Morningstar.com Premium service fell slightly to
177,518 as of December 31, 2008 compared with 180,366 as of December 31,
2007 as general market weakness affected subscriber growth and new trials. In
addition, we moderately increased subscription prices for Premium Membership in
January 2008. As a result, revenue grew despite the decline in the number
of subscriptions.
58
Operating Income
In 2009, operating income for the Investment Information
segment was $138.6 million, a slight decrease compared with 2008, as the $4.1
million decline in revenue was partially offset by lower operating expense.
Operating expense decreased $3.8 million in 2009 as cost
reductions for discretionary expense such as bonuses, other compensation
expense, and advertising and marketing were partially offset by additional
operating expense from acquisitions. Bonus expense declined $11.0 million in
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. The reduction in bonus expense also reflects a slowdown in our
financial performance in 2009 compared with 2008. 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 $4.3
million in 2009.
Sales and marketing costs decreased $8.3 million in 2009.
Most of the decline reflects lower spending on advertising and marketing
(primarily direct mail expense) and lower travel costs, which we pared back
because of the challenging business environment. As mentioned above, we
discontinued three of the publications we previously published in the first
quarter of each year, and therefore didnt incur costs to promote these
publications in 2009.
Our Investment Information segment operating margin improved
slightly in 2009 because of operating expense reductions partially offset by
the impact of acquisitions in 2009.
Operating income for the segment increased $24.0 million in
2008. Operating expense increased $39.3 million, with compensation-related
expense generating most of the increase. Incremental costs added from acquired
businesses also accounted for a portion of the increase across all cost
categories. The operating margin in 2008 grew modestly, up 0.5 percentage
points, because operating expense grew at a slower rate than revenue.
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. Acquisitions, primarily the Intech
acquisition in Australia, contributed revenue of $3.7 million to this segment
in 2009.
This segment represented 19.3%, 22.2% and 24.8% of our
consolidated revenue in 2009, 2008, and 2007, respectively.
Revenue
Although revenue declined across all products in the
Investment Management segment, Investment Consulting, which has been a leading
contributor to revenue growth in previous years, accounted for about
three-fourths of the segments revenue decline in 2009 and was relatively flat
year over year in 2008. Our Investment Consulting business suffered in 2009
because one client did not renew its contract when it expired in the fourth
quarter of 2008 and another client did not renew its contract in May 2009.
Combined, these contracts represented about $17 million of revenue in 2008.
We provided advisory services on approximately $61.4 billion
in assets as of December 31, 2009, compared with approximately $66.2
billion as of December 31, 2008 and approximately $97.5 billion as of December 31,
2007. These asset totals include relationships for which we receive basis-point
fees, including consulting and agreements where we act as a portfolio
construction manager for a mutual fund or variable annuity. We also provide
Investment Consulting services for some assets under management for which we
receive a flat fee; these assets are not included in the total assets reported
above. Excluding changes related to contract wins or cancellations, changes in
the value of assets under advisement can come from two primary sources: gains
or losses related to overall trends in market performance, and net inflows or
outflows caused when investors add to or redeem shares from these portfolios.
59
Total assets under advisement for Investment Consulting as
of December 31, 2009 declined approximately 7.3% compared with December 31,
2008, as assets under advisement from Morningstar Associates declined 27.4%,
which was partially offset by assets under advisement from Ibbotson Associates,
which increased about 9.0%. The majority of the asset decline in 2009 reflects
the loss of one of the contracts discussed above, partially offset by positive
market performance, and, to a lesser extent, from net inflows and new client
wins in assets under advisement.
Total assets under advisement for Investment Consulting
declined approximately 32% as of December 31, 2008 compared with December 31,
2007. In 2008, the U.S. stock market fell about 37% and was the main factor
behind the decline in assets for most portfolios. The reduction in assets under
advisement compared with 2007 also reflects the client non-renewal in the
fourth quarter of 2008. As a result, assets under advisement for Morningstar
Associates declined more than the market for the year.
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
Assets under advisement for Investment Consulting ($ billions)
|
|
2009
|
|
2008
|
|
2007
|
|
Ibbotson Associates
|
|
$
|
39.9
|
|
$
|
36.6
|
|
$
|
40.9
|
|
Morningstar Associates
|
|
21.5
|
|
29.6
|
|
56.6
|
|
Total
|
|
$
|
61.4
|
|
$
|
66.2
|
|
$
|
97.5
|
|
In addition, total assets under management for Intech (now
doing business as Ibbotson Associates) were $3.4 million as of December 31,
2009.
Retirement Advice revenue was also down in 2009, although
less than Investment Consulting. We primarily earn license-based fees for the
advice and guidance services we provide through our Retirement Advice platform,
and revenue for these services declined because of several smaller client
nonrenewals in 2009. Assets under management for Retirement Advice increased to
$15.7 billion as of December 31, 2009, compared with $11.0 billion as of December 31,
2008 and $13.7 billion as of December 31, 2007. In 2008, Retirement Advice
revenue was up slightly compared with 2007.
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
Assets under management for
managed retirement accounts ($ billions)
|
|
2009
|
|
2008
|
|
2007
|
|
Advice by Ibbotson
|
|
$
|
14.2
|
|
$
|
10.0
|
|
$
|
12.7
|
|
Morningstar Retirement Manager
|
|
1.5
|
|
1.0
|
|
1.0
|
|
Total
|
|
$
|
15.7
|
|
$
|
11.0
|
|
$
|
13.7
|
|
The tables below show the breakdown of retirement plan
participants who had access to the services offered through Morningstar
Retirement Manager and Advice by Ibbotson, as well as the number of plan
sponsors and plan providers that provide this access.
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
Plan
Participants (millions)
|
|
2009
|
|
2008
|
|
2007
|
|
Advice by Ibbotson
|
|
9.5
|
|
8.9
|
|
6.6
|
|
Morningstar Retirement Manager
|
|
11.2
|
|
8.3
|
|
8.8
|
|
Total
|
|
20.7
|
|
17.2
|
|
15.4
|
|
|
|
|
|
|
|
|
|
Plan
Sponsors (approximate)
|
|
2009
|
|
2008
|
|
2007
|
|
Advice by Ibbotson
|
|
68,000
|
|
68,000
|
|
60,000
|
|
Morningstar Retirement Manager
|
|
83,000
|
|
72,000
|
|
75,000
|
|
Total
|
|
151,000
|
|
140,000
|
|
135,000
|
|
|
|
|
|
|
|
|
|
Plan Providers
|
|
2009
|
|
2008
|
|
2007
|
|
Advice by Ibbotson
|
|
7
|
|
7
|
|
8
|
|
Morningstar Retirement Manager
|
|
16
|
|
17
|
|
22
|
|
Total
|
|
23
|
|
24
|
|
30
|
|
60
Morningstar Managed Portfolios also contributed to the
segments revenue decline in 2009, although to a much lesser extent than
Investment Consulting. The lower revenue mainly reflects lower average asset
levels during 2009 compared with the same period in 2008. Assets under
management for Morningstar Managed Portfolios regained asset levels observed in
previous years, ending at $2.1 billion as of December 31, 2009 compared
with $1.6 billion as of December 31, 2008 and $2.2 billion as of December 31,
2007. Revenue for Morningstar Managed Portfolios was flat in 2008 compared with
2007.
Operating Income
Operating expense in the segment decreased $11.9 million, or
23.2%, in 2009. The decrease was primarily because of lower bonus and other
compensation-related expense, partially offset by the additional operating
expense related to the Intech acquisition. Bonus expense declined $10.4 million
in 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. The reduction in bonus expense also reflects a slowdown in our
financial performance in 2009 compared with 2008. 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 $1.3 million
in 2009. A slight reduction in product implementation fees related to our
Advice by Ibbotson service also contributed to the decrease.
Operating margin was 57.3% in 2009, an increase of 3.3
percentage points over 2008. Lower bonus expense as a percentage of revenue was
the main driver of the margin improvement. The decrease in other
compensation-related expense also contributed to the margin improvement,
although to a much lesser extent. These factors were offset by incremental
costs from the Intech acquisition and higher compensation expense as a
percentage of revenue.
Operating expense decreased $1.0 million in 2008, driven by
lower bonus expense and a reduction in product implementation fees related to
our Advice by Ibbotson service. The 2008 expense decrease was partially offset
by an increase in compensation expense, excluding bonus.
Operating margin was 54.0% in 2008 compared with 51.4% in
2007. Product implementation fees related to our Advice by Ibbotson service
represented 1.6% of revenue in 2007, but were significantly lower in 2008.
Lower bonus expense as a percentage of revenue also had a favorable impact on
the margin.
Corporate Items
This category includes corporate costs, which we do not
allocate to our business segments. The corporate items category also includes
amortization expense related to intangible assets recorded for acquisitions.
The table below shows the components of corporate items that impacted our
consolidated operating income:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Amortization expense
|
|
$
|
18,963
|
|
$
|
16,648
|
|
$
|
12,769
|
|
Depreciation expense
|
|
7,386
|
|
3,902
|
|
5,753
|
|
Corporate unallocated
|
|
39,796
|
|
39,629
|
|
34,567
|
|
Corporate items
|
|
$
|
66,145
|
|
$
|
60,179
|
|
$
|
53,089
|
|
% change
|
|
9.9%
|
|
13.4%
|
|
29.3%
|
|
Amortization of intangible assets increased $2.4 million in
2009 and $3.8 million in 2008. We paid $240.1 million for acquisitions during
the past three years. As of December 31, 2009 and December 31, 2008,
respectively, we had $135.5 million and $119.8 million recorded for net
intangible assets. We amortize these intangible assets over their estimated
lives, ranging from one to 25 years. Based on acquisitions completed through December 31,
2009, we estimate that aggregate amortization expense for intangible assets
will be $23.4 million in 2010. Some of the purchase price allocations are
preliminary, and the values assigned to intangible assets and the associated
amortization expense may change in future periods.
Depreciation expense for corporate departments increased
$3.5 million in 2009. We relocated to our new corporate headquarters in the
fourth quarter of 2008, resulting in higher depreciation expense. Depreciation
expense included in this category declined in 2008 because computer equipment
and internal product development costs capitalized in previous years were fully
depreciated.
Corporate unallocated increased $0.2 million in 2009. In
2009, this category includes $6.1 million of operating expense related to
adjusting the tax treatment of certain stock options originally considered
incentive stock options, as well as an operating expense for the deposit
penalty of $3.4 million. This category also includes a $2.7 million expense to
increase lease vacancy reserves, primarily for the former Ibbotson
headquarters. These additional costs were almost entirely offset by lower bonus
expense and other compensation-related expense, as well as lower travel
expense.
61
Corporate unallocated increased $5.0 million in 2008,
primarily because of higher lease expense. Lease costs rose because we recorded
lease expense for our new headquarters as well as for the former headquarters space
we occupied until December 2008. The higher lease expense was partially
offset by a decrease in professional fees. We recorded an expense of $0.9
million related to settling our Australian litigation in 2007, but this expense
did not recur in 2008 or 2009.
Equity in Net Income of Unconsolidated
Entities, Non-Operating Income, and Income Tax Expense
Equity in Net Income of Unconsolidated
Entities
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Equity in net income of
unconsolidated entities
|
|
$
|
1,165
|
|
$
|
1,321
|
|
$
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated entities includes our
portion of the net income (loss) of Morningstar Japan K.K. (MJKK), Morningstar
Danmark A/S, Morningstar Sweden AB, and Morningstar Korea Co., Ltd. In 2009, 2008, and 2007, equity in net income
of unconsolidated entities was primarily from our position in MJKK. In 2009, we
acquired an additional 40% ownership interest in Morningstar Korea, increasing
our ownership percentage to 80%. As a result of the majority ownership, we no
longer account for our investment in Morningstar Korea using the equity method.
Beginning in September 2009, we consolidate the assets, liabilities, and
results of operations of this operation in our Consolidated Financial
statements. We describe our investments in unconsolidated entities in more
detail in Note 7 of the Notes to our Consolidated Financial Statements.
Non-Operating Income
The following table presents the components of net
non-operating income:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Interest income, net
|
|
$
|
3,016
|
|
$
|
5,687
|
|
$
|
7,134
|
|
Other expense, net
|
|
(82
|
)
|
(1,435
|
)
|
(905
|
)
|
Non-operating income, net
|
|
$
|
2,934
|
|
$
|
4,252
|
|
$
|
6,229
|
|
Net interest income mainly reflects interest from our
investment portfolio. Net interest income decreased $2.7 million in 2009 and
$1.4 million during 2008. The decrease in both years reflects lower returns on
our invested balances during the year.
Other expense, net, mainly reflects 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. In 2009, this category
includes a holding gain of approximately $0.4 million resulting from the
difference between the fair value and the book value of our investment in
Morningstar Korea.
The larger expense in 2008 was influenced primarily by
foreign currency exchange losses in the fourth quarter driven by a
significantly stronger U.S. dollar.
Income Tax Expense
The following table summarizes our effective tax rate:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
$
|
128,254
|
|
$
|
143,371
|
|
$
|
123,483
|
|
Equity in net income of
unconsolidated entities
|
|
1,165
|
|
1,321
|
|
1,694
|
|
Net (income) loss attributable to
noncontrolling interests
|
|
132
|
|
(397
|
)
|
|
|
Total
|
|
$
|
129,551
|
|
$
|
144,295
|
|
$
|
125,177
|
|
Income tax expense
|
|
$
|
47,095
|
|
$
|
51,763
|
|
$
|
51,255
|
|
Effective tax rate
|
|
36.4%
|
|
35.9%
|
|
40.9%
|
|
For a reconciliation of the U.S. federal tax rate to our
effective income tax rate, refer to Note 14 of the Notes to our Consolidated
Financial Statements.
In 2009, our effective tax rate increased by 0.5 percentage
points compared with 2008, reflecting the net impact of a number of items.
State income taxes represented 2.7 percentage points of our effective tax rate
compared with 1.5 percentage points in 2008, due to a favorable impact from reducing
accruals for state income taxes in 2008 that did not recur in 2009.
62
Second, in 2009, we recorded an operating expense of $3.4
million for penalties related to the timing of deposits for taxes withheld on
stock option exercises. This penalty is not deductible for income tax purposes
and increased our effective tax rate by 1.1 percentage points.
A third item that increased the effective tax rate in 2009
relates to disqualifying dispositions of incentive stock options. A
disqualifying disposition occurs when the option holder sells shares within one
year of exercising an incentive stock option. We receive a cash tax benefit
when a disqualifying disposition occurs. A portion of this tax benefit is recorded
as a reduction to income tax expense in our Statement of Income, reducing our
effective income tax rate. In 2009, we adjusted the amount of the tax benefit
recognized in our previous years Statements of Income related to disqualifying
dispositions. While this adjustment did not impact the amount of cash tax
benefit we received for the disqualifying dispositions, it increased our
effective tax rate by 1.4 percentage points in 2009. As of December 2009,
all incentive stock options have been exercised, and therefore we do not expect
that disqualifying dispositions will impact our effective tax rate in the
future.
The $6.1 million of operating expense related to adjusting
the tax treatment of stock options originally considered incentive stock
options increased the effective tax rate by 0.8 percentage points, as these
operating expenses are subject to deduction limitations for income tax
purposes.
The above items, which increased our effective tax rate,
were partially offset by three primary items. First, research and development
and foreign tax credits, some from previous years, reduced the 2009 effective
tax rate by 2.5 percentage points. A
reversal of reserves for uncertain tax positions, primarily as a result of a
lapse in the statute of limitations, also reduced our effective tax rate by 1.4
percentage points in 2009. Lastly, our
income tax expense included a non-cash tax benefit of $1.3 million related to
adjusting the treatment of stock options that were originally considered ISOs.
This tax benefit lowered the effective tax rate by 1 percentage point.
In 2008, our effective tax rate declined 5.0 percentage
points. The 2008 effective tax rate reflects the favorable, but variable,
benefit from incentive stock-option transactions and a decrease in our U.S.
state tax rate following a 2007 change in state tax law. These reductions were
partially offset by an increase in liabilities for certain tax positions in the
companys U.S. and non-U.S. operations.
As of December 31, 2009, we had net operating loss
(NOL) carryforwards of $50.6 million related to our non-U.S. operations and
have recorded a valuation allowance against all but $4.4 million of these NOLs.
Because of the historical operating losses for certain non-U.S. operations, a
valuation allowance is required because we do not believe that we will be able
to use all of our non-U.S. NOLs.
Certain positions we have taken or intend to take on our
U.S. and non-U.S. tax returns may be reviewed by tax authorities in the
jurisdictions in which we operate. As of December 31, 2009, we had
approximately $6.1 million of gross unrecognized tax benefits, of which $5.3
million, if recognized, would reduce our effective income tax rate and decrease
our income tax expense by $4.7 million. In 2010, we expect changes to our
liability for uncertain tax positions of approximately $0.8 million for
settlements with tax authorities. It is not possible to estimate the impact of
current audits on previously recorded unrecognized tax benefits.
We anticipate that our effective income tax rate may
continue to fluctuate related to the creation or reversal of valuation
allowances for our non-U.S. operations as well as to changes in 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, emphasizing principal preservation, and invest a portion of these
assets in municipal securities with high-quality stand-alone credit
ratings. Investments in our portfolio
have a maximum maturity of two years; the weighted average maturity is
approximately one year.
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.
Over the past three years, we
invested $240.1 million for acquisitions, less cash acquired, with internally
generated funds.
63
Cash, Cash Equivalents, and Investments
As of December 31, 2009, we had cash, cash equivalents,
and investments of $342.6 million, an increase of $45.0 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
payments for acquisitions and capital expenditures.
We used a portion of our cash and investments balances in
the first quarter of 2010 to make annual bonus payments of approximately $21
million. In addition, in the first quarter of 2010, we paid $4.9 million to one
former and two current executives, related to adjusting the tax treatment of
certain stock options originally considered incentive stock options. We expect
that this payment will be partially offset by a cash tax benefit in the future.
Cash Provided by Operating Activities
Our main source of capital is cash generated from operating
activities.
In 2009, cash provided by operating
activities was $96.2 million driven by $110.6 million of net income (adjusted
for non-cash items) partially offset by $14.4 million in changes from our net
operating assets and liabilities, mainly driven by bonus payments. We paid $58.9 million for bonuses in 2009,
including $10.0 million in deferred payments from 2007. The cash flow impact of
these payments was partially offset by the cash flow benefit from accrued
compensation for the 2009 bonuses.
In 2008, cash provided by operating activities was $152.4
million, driven by $115.5 million of net income (adjusted for non-cash items)
and $36.9 million of changes in our net operating assets and liabilities.
Changes in our operating assets and liabilities mainly benefited from a $16.3
million increase in deferred rent related to tenant improvement allowances
received in connection with the build-out of our new headquarters, a $46.9
million increase in accrued compensation, and a $41.9 million increase in
income taxes payable. Bonus payments of approximately $49.3 million and tax
payments of $19.8 million offset these cash flow benefits.
In 2007, cash provided by operating activities was $112.4
million, driven by net income (adjusted for non-cash items) of $72.5 million,
and changes in our net operating assets and liabilities of $39.9 million.
Changes in net operating assets mainly benefited from a $58.4 million increase
in accrued compensation and a $53.0 million increase in income taxes payable.
These benefits were offset by bonus payments of $35.3 million and tax payments
of $27.8 million.
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
maturity or sale of investments), and capital expenditures. The level of cash
used for investing activities can vary from period to period depending on the
level of activity in these three categories. Cash used for investing activities
was $174.7 million in 2009, $179.1 million in 2008, and $102.8 million in 2007.
Cash used for acquisitions in 2009, net of cash acquired,
was $74.2 million. We completed six acquisitions in 2009. The majority of the
cash used for acquisitions was related to our purchase of Logical Information
Machines, Inc. and our acquisition of the equity research and data
business of C.P.M.S. Computerized Portfolio Management Services, Inc. In
2008, cash used for acquisitions, net of cash acquired, of $105.4 million. The
majority of this amount pertains to our acquisition of the Hemscott data,
media, and investor relations website businesses and Tenfore Systems Limited.
Cash used for acquisitions in 2007, net of cash acquired, was $60.5 million,
primarily related to our acquisition of the fund data business from Standard &
Poors.
Purchases of investments, net of proceeds from the maturity
or sale of investments, were $83.9 million, $24.9 million, and $31.0 million in
2009, 2008, and 2007, respectively. As of December 31, 2009 and 2008, we
had investments, consisting primarily of fixed-income securities, of $212.1
million and $123.7 million, respectively. As of December 31, 2009, our
investments represented approximately 62% of our total cash, cash equivalents,
and investments, up 20 percentage points compared with December 31, 2008,
primarily due to the significant cash outflow for the purchase of Logical
Information Machines, Inc. on December 31, 2009.
Capital expenditures were $12.4 million, $48.5 million, and
$11.3 million in 2009, 2008, and 2007, respectively. Capital expenditures
peaked in 2008 when we paid for the build-out of our new headquarters in
Chicago. Some of the cash outlay for this investment continued into 2009.
Capital expenditures in 2009 also include investment for a couple of our office
locations in Europe. Tenant improvement allowances of $16.3 million, which are
included in cash provided by operating activities, reduced the total amount of
cash we paid for the build-out in 2008. We expect to make capital expenditures
of approximately $16 million in 2010, primarily for leasehold improvements and
computer equipment.
64
In 2009, we used cash of approximately $4.2 million to
acquire minority equity stakes in Pitchbook Data, a private equity data
provider, and Bundle Corporation, a start-up company dedicated to helping
people make smarter spending and saving choices. This amount also includes the
cash we paid to increase our ownership interest in Morningstar Korea, making it
one of our majority-owned operations.
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, the vesting of restricted stock
units generates excess tax benefits 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 or upon vesting of restricted stock units. As a result, we expect
cash flow from financing activities to vary over time. Note 10 in the Notes to
our Consolidated Financial Statements includes additional information
concerning stock options and restricted stock units outstanding as of December 31,
2009.
In 2009, cash provided by financing activities was $30.4
million. Proceeds from stock option exercises totaled $16.4 million and excess
tax benefits related to stock option exercises and vesting of restricted stock
units totaled $13.8 million. In 2009, cash provided by financing activities
decreased by $17.2 million, or 36.2%, compared with 2008, driven mostly by a
$9.8 million decline in excess tax benefits, and to a lesser extent by a $7.0
million decline in proceeds from stock option exercises. The decrease mainly
reflects a lower average stock price at the time the stock options were
exercised and a decrease in the number of options exercised.
In 2008, cash provided by financing activities was $47.6
million. Proceeds from stock option exercises totaled $23.4 million and excess
tax benefits related to stock option exercises and vesting of restricted stock
units totaled $23.5 million. In 2008, cash provided by financing activities
decreased by $4.8 million, or 9.2%, compared with 2007, driven mostly by a $6.9
million decline in excess tax benefits. The decrease was due primarily to a
lower average stock price at the time the stock options were exercised.
Employees exercised approximately 1.4 million, 2.4 million,
and 2.5 million stock options in 2009, 2008, and 2007, respectively. The total
intrinsic value of options exercised during 2009, 2008, and 2007 was $37.4
million, $113.6 million, and $133.5 million, respectively.
Acquisitions
We invested a total of $240.1 million, less cash acquired,
related to acquisitions over the past three years. We describe these
acquisitions, including purchase price and product offerings, in Note 6 of the
Notes to our Consolidated Financial Statements.
Subsequent Event
See Note 16 in the Notes to our Condensed Consolidated
Financial Statements for information on events subsequent to December 31,
2009.
Application of Critical Accounting Policies
and Estimates
Our discussion and analysis of our financial condition and
results of operations are based on our Consolidated Financial Statements, which
have been prepared in accordance with GAAP. We discuss our significant
accounting policies in Note 2 of the Notes to our Consolidated Financial
Statements. The preparation of financial statements in accordance with GAAP
requires our management team to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expense, and related
disclosures included in our Consolidated Financial Statements.
We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and various other assumptions that we
believe are reasonable. Based on these assumptions and estimates, we make
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Our actual results could vary from these
estimates and
65
assumptions. If actual amounts are different from previous
estimates, we include revisions in our results of operations for the period in
which the actual amounts become known.
We believe the following critical accounting policies
reflect the significant judgments and estimates used in the preparation of our
Consolidated Financial Statements:
Revenue Recognition
Much of our revenue comes from the sale of subscriptions or
licenses for print publications, software, and Internet-based products and
services. We recognize this revenue in equal amounts over the term of the
subscription or license, which generally ranges from one to three years. We
also provide analysis, consulting, retirement advice, and other services. We
recognize this revenue when the service is provided or during the service
obligation period defined in the contract.
We make significant judgments related to revenue
recognition, including whether fees are fixed or determinable and whether the
collection of payment is probable. For contracts that combine multiple products
and services, we make judgments regarding the value of each element in the
arrangement based on selling prices of the items when sold separately. Delivery
of our products and services is a prerequisite to the recognition of
revenue. If arrangements include an acceptance provision, we begin
recognizing revenue upon the receipt of customer acceptance.
Deferred revenue is the amount invoiced or collected in
advance for subscriptions, licenses, or services that has not yet been
recognized as revenue. As of December 31, 2009, our deferred revenue was
$127.1 million. We expect to recognize this deferred revenue in future
periods as we fulfill our service obligations. The amount of deferred revenue
may increase or decrease primarily based on the mix of contracted products and
services and the volume of new and renewal subscriptions. The timing of future revenue
recognition may change depending on the terms of the license agreements and the
timing of fulfilling our service obligations. We believe that the estimate
related to revenue recognition is a critical accounting estimate, and to the
extent that there are material differences between our determination of
deferred revenue and actual results, our financial condition or results of
operations may be affected.
Purchase Price Allocation
Over the past several years, we have acquired several
companies that complement our business operations. Over the past three years,
the total cash paid for acquisitions, less cash acquired, was $240.1 million.
For each acquisition, we allocate the purchase price to the
assets acquired, liabilities assumed, and goodwill in accordance with FASB ASC
805,
Business Combinations
. We
recognize the assets and liabilities acquired related to these acquisitions at
their estimated fair values. As of December 31, 2009, we allocated $192.6
million of gross value to intangible assets, primarily for customer-related
assets, technology-based assets, and intellectual property. The estimated
useful lives of the intangible assets range from one to 25 years. As of December 31,
2009, we also have recorded $250.0 million of goodwill arising from acquisitions.
Management judgment is required in allocating the purchase
price to the acquired assets and liabilities. We use judgment to:
·
identify the
acquired assets,
·
estimate the fair
value of these assets,
·
estimate the useful
life of the assets; and
·
assess the
appropriate method for recognizing depreciation or amortization expense over
the assets useful life.
We believe that the accounting estimates related to purchase
price allocations are critical accounting estimates because the assumptions
impact the amounts and classifications of assets and liabilities presented in
our Consolidated Balance Sheets, the amount of amortization and depreciation
expense, if any, recorded in our Consolidated Statements of Income, and the
impairment testing performed in subsequent periods.
Goodwill
Goodwill recorded on our Consolidated Balance Sheet as of December 31,
2009 was $250.0 million. In accordance with FASB ASC 350,
Intangibles Goodwill and
Other
, we do not amortize goodwill. Instead, it is subject to at
least an annual test for impairment, or whenever indicators of impairment
exist, based on a discounted cash-flow model. An impairment would occur if the
carrying amount of a reporting unit, including goodwill, exceeded the fair
value of that reporting unit.
66
The process of evaluating the potential impairment of
goodwill is subjective and requires significant judgment. In estimating the
fair value of the reporting units, we make estimates and judgments about the
future cash flows of the reporting unit. These estimates include assumptions
about future market growth and trends, forecasted revenue and costs, capital
investments, appropriate discount rates, and other variables that can
significantly affect the value of the reporting unit.
Although our cash flow forecasts are based on assumptions
that are consistent with plans and estimates we use to manage the underlying
business, there is significant judgment in determining the cash flows
attributable to these businesses over a long-term horizon. We update these
assumptions and cash flow estimates at least annually.
We believe that the accounting estimate related to goodwill
impairment is a critical accounting estimate because the assumptions used are highly
susceptible to changes in the operating results and cash flows of the reporting
units included in our segments. If actual results differ from our estimates,
future tests may indicate an impairment of goodwill. This would result in a
non-cash charge, adversely affecting our results of operations.
Impairment of Long-Lived Assets
Our Consolidated Balance Sheet as of December 31, 2009
includes property, equipment, and capitalized software, net of accumulated
depreciation, of $59.8 million and intangible assets, net of accumulated
amortization, of $135.5 million. In accordance with FASB ASC 360-10-35
, Subsequent
MeasurementImpairment or Disposal of Long-Lived Assets
, we
review our property, equipment, capitalized software, and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Such events or changes may include
deterioration in the business climate for a specific product or service. If the
total of projected future undiscounted cash flows is less than the carrying
amount of an asset, we may need to record an impairment loss based on the
excess of the carrying amount over the fair value of the assets.
Estimates of future cash flows and the estimated useful
lives associated with these assets are critical to the assessment of
recoverability and fair values. They are susceptible to change from period to
period because of the requirement to make assumptions about future cash flows
generated over extended periods of time. Changes in these estimates could
result in a determination of asset impairment, which would result in a
reduction to the carrying value and could adversely affect our operating
results in the related period.
Stock-Based Compensation
We include stock-based compensation expense in each of our
operating expense categories. Over the past three years, we have mainly granted
restricted stock units (RSUs) to employees. Because of these additional RSU
grants, stock-based compensation expense related to RSUs has increased over the
past three years. In contrast, stock-based compensation expense related to
stock options has declined over the past three years reflecting no stock option
grants in 2009 and 2008, a small grant in 2007, and that stock options granted
prior to 2007 were fully expensed by the end of 2009.
Under FASB ASC 718
, Compensation Stock
Compensation
, stock-based compensation expense is measured at the
grant date based on the fair value of the award, and the cost is recognized as
expense ratably over the awards vesting period. We measure the fair value of
our restricted stock units on the date of grant based on the market price of
the underlying common stock as of the close of trading on the day prior to
grant. For stock options, we measured the fair value on the date of grant using
a Black-Scholes option-pricing model. We estimate expected forfeitures of
stock-based awards at the grant date and recognize compensation cost only for
those awards expected to vest. We ultimately adjust this forfeiture assumption
to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions
do not impact the total amount of expense ultimately recognized over the
vesting period. Instead, different forfeiture assumptions would only impact the
timing of expense recognition over the vesting period.
Because our largest annual equity grants typically have
vesting dates in the second quarter of the year, we adjust the stock-based
compensation expense at that time to reflect those awards that ultimately
vested. In addition, we update our estimate of the forfeiture rate that will be
applied to awards not yet vested. In 2009 and 2008, we recorded
approximately $0.2 million of additional stock-based compensation expense
related to these changes in estimates.
We believe that the estimates related to stock-based
compensation expense are critical accounting estimates because the assumptions
used could significantly impact the timing and amount of stock-based
compensation expense recorded in our Consolidated Financial Statements.
67
Income Taxes
Our effective tax rate is based on the mix of income and
losses in our U.S. and non-U.S. operations, statutory tax rates, and
tax-planning opportunities available to us in the various jurisdictions in
which we operate. Significant judgment is required to evaluate our tax
positions.
Tax law requires us to include items in our tax return at
different times from when these items are reflected in our Consolidated Income
Statement. As a result, the effective tax rate reflected in our Consolidated
Financial Statements is different from the tax rate reported on our tax return
(our cash tax rate). Some of these differences, such as expenses that are not
deductible in our tax return, are permanent. Other differences, such as
depreciation expense, reverse over time. These timing differences create
deferred tax assets and liabilities. We determine our deferred tax assets and
liabilities based on temporary differences between the financial reporting and
the tax basis of assets and liabilities. The excess tax benefits
associated with stock option exercises and vesting of restricted stock units
also create a difference between our cash tax rate and the effective tax rate
in our Consolidated Income Statement.
As of December 31, 2009, we had gross deferred tax
assets of $48.9 million and gross deferred tax liabilities of $39.6 million.
The deferred tax assets include $14.0 million of deferred tax assets related to
$50.6 million of NOLs of our non-U.S. operations. Because of the historical
operating losses of certain of the non-U.S. operations that generated these
NOLs, we have recorded a valuation allowance against all but approximately $4.4
million of the NOLs, reflecting the likelihood that the benefit of the NOLs
will not be realized. In assessing the realizability of our deferred tax
assets, we consider whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, we consider
both positive and negative evidence, including tax-planning strategies,
projected future taxable income, and recent financial performance. If we
determine a lesser allowance is required at some point in the future, we would
record a reduction to our tax expense and valuation allowance. These
adjustments would be made in the same period we determined the change in the
valuation allowance was needed. This would cause our income tax expense,
effective tax rate, and net income to fluctuate.
We assess uncertain tax positions in accordance with FASB ASC 740
,
Income Taxes.
We use judgment to identify, recognize, and
measure the amounts to be recorded in the financial statements related to tax
positions taken or expected to be taken in a tax return. We recognize
liabilities to represent our potential future obligations to taxing authorities
for the benefits taken in our tax returns. We adjust these liabilities,
including any impact of the related interest and penalties, in light of changing
facts and circumstances such as the progress of a tax audit. A number of years
may elapse before a particular matter for which we have established a reserve
is audited and finally resolved. The number of years with open tax audits
varies depending on the tax jurisdiction.
We use judgment to classify unrecognized tax benefits as
either current or noncurrent liabilities in our Consolidated Balance Sheets.
Settlement of any particular issue would usually require the use of cash. We
generally classify liabilities associated with unrecognized tax benefits as
noncurrent liabilities. It typically takes several years between our initial
tax return filing and the final resolution of any uncertain tax positions with
the tax authority. We recognize favorable resolutions of tax matters for
which we have previously established reserves as a reduction to our income tax
expense when the amounts involved become known.
Assessing the future tax consequences of events that have
been recognized in our Consolidated Financial Statements or tax returns
requires judgment. Variations in the actual outcome of these future tax
consequences could materially impact our financial position, results of
operations, or cash flows.
Contingencies
We are subject to various claims and contingencies related
to legal proceedings and investigations, which we describe in Note 15 of the
Notes to our Consolidated Financial Statements. These legal proceedings involve
inherent uncertainties including, but not limited to, court rulings,
negotiations between affected parties, and government actions. Assessing the
probability of loss for such contingencies and determining how to accrue the
appropriate liabilities requires judgment. If actual results differ from our
assessments, our financial position, results of operations, or cash flows would
be impacted.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards
Update (ASU) No. 2009-16
, Transfers and Servicing
(Topic 860): Accounting for Transfers of Financial Assets
and ASU No. 2009-17,
Consolidations (Topic 810): Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities.
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 ASU No. 2009-16
consists of the removal of the concept of a Qualifying Special-Purpose Entity
(QSPE) from ASC 860,
Transfers and Services
. ASU No. 2009-17 addresses the effects of
68
eliminating the QSPE concept from ASC 860,
Transfers and Services,
and responds to concerns about the
application of certain key provisions of ASC 810,
Consolidation
,
including concerns over the transparency of enterprises involvement with Variable
Interest Entities (VIEs). We adopted ASU No. 2009-16 and ASU No. 2009-17
effective January 1, 2010 and do not anticipate any impact on our
Consolidated Financial Statements.
In October 2009, the FASB issued ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements.
ASU 2009-13 supersedes EITF Issue 00-21,
Revenue Arrangements with Multiple Deliverables
. ASU 2009-13
establishes the accounting and reporting guidance for arrangements when a
vendor performs multiple revenue-generating activities, addresses how to
separate deliverables, and how to measure and allocate arrangement
consideration. Vendors often provide multiple products or services to
customers. Because products and services are often provided at different points
in time or over different time periods within the same contractual arrangement,
this guidance enables vendors to account for products or services separately
rather than as a combined unit.
Also in October 2009, the FASB issued ASU No. 2009-14,
Software (Topic 985): Certain Revenue Arrangements
That Include Software Elements,
and affects vendors that sell or
lease tangible products in an arrangement that contains software that is more
than incidental to the tangible product as a whole. ASU No. 2009-14 does
not affect software revenue arrangements that do not include tangible products.
They also do not affect software revenue arrangements that include services if
the software is essential to the functionality of those services.
For Morningstar, ASU No. 2009-13 and ASU No. 2009-14
will be effective prospectively for revenue arrangements entered into from January 1,
2011. Early adoption is permitted. We are in the process of determining the
impact, if any, these accounting standard updates will have on our Consolidated
Financial Statements.
In January 2010, the FASB
issued ASU No. 2010-06,
Fair Value Measurements
and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements
.
ASU No. 2010-06 requires additional disclosures regarding fair value
measurements. The amended guidance requires entities to disclose additional
information regarding assets and liabilities that are transferred between
levels of the fair value hierarchy. Entities are also required to disclose
information in the Level 3 rollforward about purchases, sales, issuances and
settlements on a gross basis. In addition to these new disclosure requirements,
ASU 2010-06 also amends Topic 820 to further clarify existing guidance
pertaining to the level of disaggregation at which fair value disclosures
should be made and the disclosure requirements regarding the valuation
techniques and inputs used in estimating Level 2 and Level 3 fair value
measurements.
For Morningstar, the requirement to disclose additional
information regarding assets and liabilities that are transferred between
levels of the fair value hierarchy will be effective beginning with our 2010
Consolidated Financial Statements. The requirement to separately disclose
purchases, sales, issuances, and settlements in the Level 3 rollforward will be
effective beginning with our 2011 Consolidated Financial Statements. We are in the process of determining the
impact, if any, these accounting pronouncements will have on our Consolidated
Financial Statements.
69
Contractual Obligations
The table below shows our known contractual obligations as
of December 31, 2009 and the expected timing of cash payments related to
these contractual obligations:
($000)
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
Total
|
|
Minimum commitments on
non-cancelable operating lease obligations (1)
|
|
$
|
17,107
|
|
$
|
15,446
|
|
$
|
12,572
|
|
$
|
10,538
|
|
$
|
10,792
|
|
$
|
74,044
|
|
$
|
140,499
|
|
Unrecognized tax benefits (2)
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
981
|
|
Total
|
|
$
|
18,088
|
|
$
|
15,446
|
|
$
|
12,572
|
|
$
|
10,538
|
|
$
|
10,792
|
|
$
|
74,044
|
|
$
|
141,480
|
|
(1)
|
|
The non-cancelable operating lease obligations are mainly
for lease commitments for office space.
|
|
|
|
(2)
|
|
Represents unrecognized tax benefits (including penalties
and interest, less the impact of any associated tax benefits) recorded in
accordance with FASB ASC 740,
Income Taxes
. The
amount included in the table represents amounts we anticipate may be settled
in 2010. The table excludes $5.4 million of unrecognized tax benefits,
included as a long-term liability in our Consolidated Balance Sheet as of
December 31, 2009, for which we cannot make a reasonably reliable
estimate of the period of payment.
|
There are no purchase commitments as of December 31,
2009 that we believe would have a significant impact on our financial position
or cash flows.
Item 7A. 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 December 31, 2009, our cash, cash equivalents, and investments
balance was $342.6 million. Based on our estimates, a 100 basis-point change in
interest rates would have increased or decreased the fair value of our
investment portfolio by approximately $1.0 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 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.
70
Item 8. Financial Statements and
Supplementary Data
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders
Morningstar, Inc.
We have audited the accompanying
consolidated balance sheets of Morningstar, Inc. and subsidiaries as of December 31,
2009 and 2008, and the related consolidated statements of income, shareholders
equity and comprehensive income (loss), and cash flows for each of the three
years in the period ended December 31, 2009. Our audits also included the
financial statement schedule presented in Item 15(a). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Morningstar, Inc. and subsidiaries as
of December 31, 2009 and 2008, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As described in Note 2 to the
consolidated financial statements, effective January 1, 2009, the Company
adopted new rules regarding the accounting for noncontrolling interests.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Morningstar, Inc.s and subsidiaries internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 1,
2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, IL
March 1, 2010
71
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders
Morningstar, Inc.
We have audited Morningstar, Inc.
and subsidiaries internal control over financial reporting as of December 31,
2009, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Morningstar, Inc. and subsidiaries management is
responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the companys internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Morningstar, Inc.
and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the
COSO criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Morningstar, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, shareholders equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended December 31,
2009 of Morningstar, Inc. and subsidiaries and our report dated March 1,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, IL
March 1, 2010
72
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31 (in thousands except per share amounts)
|
|
2009
|
|
2008
|
|
2007
|
|
Revenue
|
|
$
|
478,996
|
|
$
|
502,457
|
|
$
|
435,107
|
|
Operating expenses: (1)
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
128,616
|
|
130,085
|
|
113,777
|
|
Development
|
|
38,378
|
|
40,340
|
|
35,116
|
|
Sales and marketing
|
|
71,772
|
|
81,651
|
|
68,835
|
|
General and administrative
|
|
82,949
|
|
85,266
|
|
78,868
|
|
Depreciation and amortization
|
|
31,961
|
|
25,996
|
|
21,257
|
|
Total operating expense
|
|
353,676
|
|
363,338
|
|
317,853
|
|
Operating income
|
|
125,320
|
|
139,119
|
|
117,254
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
Interest income, net
|
|
3,016
|
|
5,687
|
|
7,134
|
|
Other expense, net
|
|
(82
|
)
|
(1,435
|
)
|
(905
|
)
|
Non-operating income, net
|
|
2,934
|
|
4,252
|
|
6,229
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
128,254
|
|
143,371
|
|
123,483
|
|
Income tax expense
|
|
47,095
|
|
51,763
|
|
51,255
|
|
Equity in net income of
unconsolidated entities
|
|
1,165
|
|
1,321
|
|
1,694
|
|
Consolidated net income
|
|
82,324
|
|
92,929
|
|
73,922
|
|
Net (income) loss attributable to
noncontrolling interests
|
|
132
|
|
(397
|
)
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
82,456
|
|
$
|
92,532
|
|
$
|
73,922
|
|
|
|
|
|
|
|
|
|
Net income per share attributable
to Morningstar, Inc.:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.71
|
|
$
|
2.01
|
|
$
|
1.71
|
|
Diluted
|
|
$
|
1.66
|
|
$
|
1.88
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
48,112
|
|
46,139
|
|
43,216
|
|
Diluted
|
|
49,793
|
|
49,213
|
|
48,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
(1)
|
|
Includes stock-based compensation
expense of:
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
2,666
|
|
$
|
2,058
|
|
$
|
1,706
|
|
|
|
Development
|
|
1,570
|
|
1,402
|
|
1,256
|
|
|
|
Sales and marketing
|
|
1,587
|
|
1,449
|
|
1,397
|
|
|
|
General and administrative
|
|
5,770
|
|
6,372
|
|
6,619
|
|
Total stock-based compensation expense
|
|
$
|
11,593
|
|
$
|
11,281
|
|
$
|
10,978
|
|
See notes to consolidated financial statements.
73
Morningstar, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31 (in thousands except share amounts)
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
130,496
|
|
$
|
173,891
|
|
Investments
|
|
212,057
|
|
123,686
|
|
Accounts receivable, less
allowance of $1,339 and $466, respectively
|
|
82,330
|
|
89,537
|
|
Deferred tax asset, net
|
|
1,109
|
|
3,538
|
|
Income tax receivable, net
|
|
5,541
|
|
9,193
|
|
Other
|
|
12,564
|
|
13,891
|
|
Total current assets
|
|
444,097
|
|
413,736
|
|
Property, equipment, and
capitalized software, net
|
|
59,828
|
|
58,822
|
|
Investments in unconsolidated
entities
|
|
24,079
|
|
20,404
|
|
Goodwill
|
|
249,992
|
|
187,242
|
|
Intangible assets, net
|
|
135,488
|
|
119,812
|
|
Other assets
|
|
6,099
|
|
3,924
|
|
Total assets
|
|
$
|
919,583
|
|
$
|
803,940
|
|
|
|
|
|
|
|
Liabilities
and equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
29,901
|
|
$
|
30,071
|
|
Accrued compensation
|
|
48,902
|
|
73,012
|
|
Deferred revenue
|
|
127,114
|
|
130,270
|
|
Other
|
|
962
|
|
88
|
|
Total current liabilities
|
|
206,879
|
|
233,441
|
|
Accrued compensation
|
|
4,739
|
|
3,611
|
|
Deferred tax liability, net
|
|
4,678
|
|
7,531
|
|
Other long-term liabilities
|
|
26,413
|
|
23,428
|
|
Total liabilities
|
|
242,709
|
|
268,011
|
|
|
|
|
|
|
|
Morningstar, Inc.
shareholders equity:
|
|
|
|
|
|
Common stock, no par value,
200,000,000 shares authorized, of which 48,768,541 and 47,282,958 shares were
outstanding as of December 31, 2009 and 2008, respectively
|
|
5
|
|
4
|
|
Treasury stock at cost, 222,653
shares as of December 31, 2009 and 233,332 shares as of
December 31, 2008
|
|
(3,130
|
)
|
(3,280
|
)
|
Additional paid-in capital
|
|
432,052
|
|
390,404
|
|
Retained earnings
|
|
246,745
|
|
164,289
|
|
Accumulated other comprehensive
income (loss):
|
|
|
|
|
|
Currency translation adjustment
|
|
(337
|
)
|
(16,366
|
)
|
Unrealized gain on
available-for-sale securities
|
|
370
|
|
481
|
|
Total accumulated other
comprehensive income (loss)
|
|
33
|
|
(15,885
|
)
|
Total Morningstar, Inc.
shareholders equity
|
|
675,705
|
|
535,532
|
|
Noncontrolling interests
|
|
1,169
|
|
397
|
|
Total equity
|
|
676,874
|
|
535,929
|
|
Total liabilities and equity
|
|
$
|
919,583
|
|
$
|
803,940
|
|
See notes to consolidated financial statements.
74
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Equity and
Comprehensive Income (Loss)
|
|
Morningstar, Inc. Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Additional
|
|
Retained
|
|
Other
|
|
Non
|
|
|
|
|
|
Shares
|
|
Par
|
|
Treasury
|
|
Paid-In
|
|
Earnings
|
|
Comprehensive
|
|
Controlling
|
|
Total
|
|
(in thousands except share amounts)
|
|
Outstanding
|
|
Value
|
|
Stock
|
|
Capital
|
|
(Deficit)
|
|
Income (Loss)
|
|
Interests
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
42,228,418
|
|
$
|
4
|
|
$
|
(3,280
|
)
|
$
|
268,721
|
|
$
|
(2,165
|
)
|
$
|
2,824
|
|
$
|
|
|
$
|
266,104
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
73,922
|
|
|
|
|
|
73,922
|
|
Unrealized gains on
available-for-sale investments, net of tax of $67
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
99
|
|
Foreign currency translation
adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
4,735
|
|
|
|
4,735
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
73,922
|
|
4,834
|
|
|
|
78,756
|
|
Issuance of common stock related to
stock option exercises and vesting of restricted stock units, net
|
|
2,614,748
|
|
|
|
|
|
22,037
|
|
|
|
|
|
|
|
22,037
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
10,978
|
|
|
|
|
|
|
|
10,978
|
|
Excess tax benefit derived from
stock option exercises and vesting of restricted stock units
|
|
|
|
|
|
|
|
30,428
|
|
|
|
|
|
|
|
30,428
|
|
Balance
as of December 31, 2007
|
|
44,843,166
|
|
4
|
|
(3,280
|
)
|
332,164
|
|
71,757
|
|
7,658
|
|
|
|
408,303
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
92,532
|
|
|
|
397
|
|
92,929
|
|
Unrealized gains on
available-for-sale investments, net of income tax of $252
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
429
|
|
Foreign currency translation
adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
(23,972
|
)
|
|
|
(23,972
|
)
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
92,532
|
|
(23,543
|
)
|
397
|
|
69,386
|
|
Issuance of common stock related to
stock option exercises and vesting of restricted stock units, net
|
|
2,439,792
|
|
|
|
|
|
23,428
|
|
|
|
|
|
|
|
23,428
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
11,281
|
|
|
|
|
|
|
|
11,281
|
|
Excess tax benefit derived from
stock option exercises and vesting of restricted stock units
|
|
|
|
|
|
|
|
23,531
|
|
|
|
|
|
|
|
23,531
|
|
Balance
as of December 31, 2008
|
|
47,282,958
|
|
4
|
|
(3,280
|
)
|
390,404
|
|
164,289
|
|
(15,885
|
)
|
397
|
|
535,929
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
82,456
|
|
|
|
(132
|
)
|
82,324
|
|
Unrealized loss on
available-for-sale investments, net of income tax of $66
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
(111
|
)
|
Foreign currency translation
adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
16,029
|
|
(29
|
)
|
16,000
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
82,456
|
|
15,918
|
|
(161
|
)
|
98,213
|
|
Issuance of common stock related to
stock option exercises and vesting of restricted stock units, net
|
|
1,485,583
|
|
1
|
|
150
|
|
16,288
|
|
|
|
|
|
|
|
16,439
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
11,593
|
|
|
|
|
|
|
|
11,593
|
|
Excess tax benefit derived from
stock option exercises and vesting of restricted stock units
|
|
|
|
|
|
|
|
13,767
|
|
|
|
|
|
|
|
13,767
|
|
Non-controlling interest in
Morningstar Korea
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
933
|
|
Balance
as of December 31, 2009
|
|
48,768,541
|
|
$
|
5
|
|
$
|
(3,130
|
)
|
$
|
432,052
|
|
$
|
246,745
|
|
$
|
33
|
|
$
|
1,169
|
|
$
|
676,874
|
|
See notes to consolidated financial statements.
75
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31 (in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
82,324
|
|
$
|
92,929
|
|
$
|
73,922
|
|
Adjustments to reconcile
consolidated net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
31,961
|
|
25,996
|
|
21,257
|
|
Deferred income tax expense
(benefit)
|
|
(1,887
|
)
|
9,241
|
|
(1,048
|
)
|
Stock-based compensation
|
|
11,593
|
|
11,281
|
|
10,978
|
|
Provision for (recovery of) bad
debt
|
|
1,292
|
|
242
|
|
(54
|
)
|
Equity in net income of
unconsolidated entities
|
|
(1,165
|
)
|
(1,321
|
)
|
(1,694
|
)
|
Excess tax benefits from stock
option exercises and vesting of restricted stock units
|
|
(13,767
|
)
|
(23,531
|
)
|
(30,428
|
)
|
Other, net
|
|
223
|
|
727
|
|
(418
|
)
|
Changes in operating assets and
liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
12,364
|
|
(658
|
)
|
(11,723
|
)
|
Other assets
|
|
2,521
|
|
1,573
|
|
(3,536
|
)
|
Accounts payable and accrued
liabilities
|
|
(3,654
|
)
|
3,008
|
|
638
|
|
Accrued compensation
|
|
(26,729
|
)
|
(2,333
|
)
|
23,118
|
|
Deferred revenue
|
|
(8,704
|
)
|
(1,595
|
)
|
8,401
|
|
Income taxes payable
|
|
11,676
|
|
22,078
|
|
25,229
|
|
Deferred rent
|
|
(790
|
)
|
16,346
|
|
380
|
|
Other liabilities
|
|
(1,076
|
)
|
(1,537
|
)
|
(2,654
|
)
|
Cash provided by operating
activities
|
|
96,182
|
|
152,446
|
|
112,368
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Purchases of investments
|
|
(176,770
|
)
|
(134,117
|
)
|
(159,693
|
)
|
Proceeds from maturities and sales
of investments
|
|
92,851
|
|
109,172
|
|
128,713
|
|
Capital expenditures
|
|
(12,372
|
)
|
(48,519
|
)
|
(11,346
|
)
|
Acquisitions, net of cash acquired
|
|
(74,175
|
)
|
(105,410
|
)
|
(60,508
|
)
|
Other, net
|
|
(4,209
|
)
|
(250
|
)
|
(4
|
)
|
Cash used for investing activities
|
|
(174,675
|
)
|
(179,124
|
)
|
(102,838
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds from stock option
exercises
|
|
16,439
|
|
23,428
|
|
22,037
|
|
Excess tax benefits from stock
option exercises and vesting of restricted stock units
|
|
13,767
|
|
23,531
|
|
30,428
|
|
Other, net
|
|
188
|
|
671
|
|
|
|
Cash provided by financing
activities
|
|
30,394
|
|
47,630
|
|
52,465
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
4,704
|
|
(6,637
|
)
|
1,441
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
(43,395
|
)
|
14,315
|
|
63,436
|
|
Cash and cash equivalents
Beginning of year
|
|
173,891
|
|
159,576
|
|
96,140
|
|
Cash and cash equivalents End of
year
|
|
$
|
130,496
|
|
$
|
173,891
|
|
$
|
159,576
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
38,009
|
|
$
|
19,782
|
|
$
|
27,795
|
|
|
|
|
|
|
|
|
|
Supplemental
information of non-cash investing and financing activities
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale investments
|
|
$
|
(177
|
)
|
$
|
672
|
|
$
|
142
|
|
See notes to consolidated financial statements.
76
MORNINGSTAR, INC.
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
1.
Description of Business
Morningstar, Inc.
and its subsidiaries (Morningstar, we, our), is a provider of independent
investment research to investors around the world. We offer an extensive line
of data, software, and research products for individual investors, financial
advisors, and institutional clients. We also offer asset management services
for advisors, institutions, and retirement plan participants.
2.
Summary of Significant Accounting Policies
Accounting
Standards Codification
.
In 2009, we adopted the Financial Accounting Standard Boards (FASB)
Accounting Standards Codification (ASC)
. The FASBs ASC is
the source of authoritative U.S. accounting and reporting standards for
nongovernmental entities, in addition to guidance issued by the Securities and
Exchange Commission (SEC). The Codification reorganizes the thousands of U.S.
generally accepted accounting principles (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. We have updated our financial statement
disclosures to reflect the relevant references to the FASBs ASC.
Principles
of Consolidation.
We conduct our business operations through wholly owned or majority-owned
operating subsidiaries. The accompanying consolidated financial statements
include the accounts of Morningstar, Inc. and our subsidiaries. The
assets, liabilities, and results of operations of subsidiaries in which we have
a controlling interest have been consolidated. All significant intercompany
accounts and transactions have been eliminated.
Effective January 1,
2009, we began accounting and reporting the noncontrolling (minority) interests
in our Consolidated Financial Statements in accordance with FASB ASC 810,
Consolidation
. A noncontrolling interest is the portion of
equity (net assets) in a subsidiary not attributable, directly or indirectly,
to the parent company. The noncontrolling interest is reported in our
Consolidated Balance Sheet within equity, separately from the shareholders
equity attributable to Morningstar, Inc. In addition, we present the
net income (loss) and comprehensive income (loss) attributed to Morningstar, Inc.s
shareholders and the noncontrolling interest in our Consolidated Statements of
Income and Consolidated Statements of Equity and Comprehensive Income (Loss).
We account for
investments in entities in which we exercise significant influence, but do not
control, using the equity method.
Use
of Estimates.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses during the reporting period. Actual results may differ from
these estimates.
Reclassifications
. Certain amounts reported in previous years have been
reclassified to conform to the 2009 presentation.
Cash
and Cash Equivalents.
Cash and cash equivalents consist of cash and investments with original
maturities of three months or less. We state them at cost, which approximates
fair value.
Investments.
We account for our investments in accordance with FASB ASC
320,
InvestmentsDebt and Equity Securities.
We classify our investments into three categories: held-to-maturity, trading,
and available-for-sale.
·
Held-to-maturity: We classify certain investments,
consisting primarily of certificates of deposit, as held-to-maturity
securities, based on our intent and ability to hold these securities to
maturity. We record held-to-maturity investments at amortized cost in our
Consolidated Balance Sheets.
·
Trading: We classify certain other investments,
consisting primarily of equity securities, as trading securities, primarily to
satisfy the requirements of one of our wholly owned subsidiaries, which is a
registered broker-dealer. We include realized and unrealized gains and losses
associated with these investments as a component of our operating income in the
Consolidated Statements of Income. We record these securities at their fair
value in our Consolidated Balance Sheets.
·
Available-for-sale: Investments not considered
held-to-maturity or trading securities are classified as available-for-sale
securities. Available-for-sale securities primarily consist of fixed-income
securities. We report unrealized gains and losses for available-for-sale
securities as other comprehensive income (loss), net of related income taxes.
We record these securities at their fair value in our Consolidated Balance
Sheets.
77
Fair
Value Measurements.
We
follow FASB ASC 820,
Fair Value Measurements
and Disclosures
. FASB ASC 820 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Under FASB ASC 820, fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The standard
applies whenever other standards require (or permit) assets or liabilities to
be measured at fair value. The standard does not expand the use of fair value
in any new circumstances and does not require any new fair value measurements.
FASB ASC 820 uses a
fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value with three broad levels as described below:
·
Level 1: Valuations based on quoted prices in active
markets for identical assets or liabilities that the Company has the ability to
access.
·
Level 2: Valuations based on quoted prices in markets
that are not active or for which all significant inputs are observable, either
directly or indirectly.
·
Level 3: Valuations based on inputs that are
unobservable and significant to the overall fair value measurement.
We provide additional
information about our investments that are subject to valuation under FASB ASC
820 in Note 5 and Note 7 in these Notes to our Consolidated Financial
Statements.
The
Fair Value Option for Financial Assets and Financial Liabilities.
FASB ASC 825,
Financial Instruments
, permits
entities the option to measure many financial instruments and certain other
items at fair value with changes in fair value recognized in earnings each
period. FASB ASC 825 allows the fair value option to be elected on an
instrument-by-instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting for that
instrument. Effective January 1, 2008, we chose not to apply this fair
value option to any of our eligible assets.
Concentration
of Credit Risk.
No single customer is large enough to pose a significant credit risk to our
operations or financial condition. For the years ended December 31, 2009,
2008, and 2007, no single customer represented 10% or more of our consolidated
revenue. If receivables from our customers become delinquent, we begin a
collections process. We maintain an allowance for doubtful accounts based on
our estimate of the probable losses of accounts receivable.
Property,
Equipment, and Depreciation.
We state property and equipment at historical cost, net of accumulated
depreciation. We depreciate property and equipment primarily using the
straight-line method based on the useful life of the asset, which ranges from
three to seven years. We amortize leasehold improvements over the lease term or
their useful lives, whichever is shorter.
Computer
Software and Internal Product Development Costs.
We capitalize certain costs in accordance with FASB ASC
350-40,
Internal-Use Software
, or FASB ASC
350-50,
Website Development Costs,
or FASB ASC
985,
Software
. Internal product development
costs mainly consist of employee costs for developing new web-based products
and certain major enhancements of existing products. We amortize these costs on
a straight-line basis over the estimated economic life, which is generally
three years.
Business
Combinations
.
Over the past several years, we
have acquired companies that complement our business operations. For each
acquisition, we allocate the purchase price to the assets acquired, liabilities
assumed, and goodwill. For acquisitions completed in 2009, we follow the FASB
ASC 805,
Business Combinations
, which became
effective on January 1, 2009. We 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. In addition, direct costs incurred in connection with
a business combination, such as advisory, accounting, legal, valuation, and
other professional fees are expensed as incurred. Restructuring costs,
including severance and relocation for employees of the acquired entity, are
recognized separately from the business combination as post-combination
expenses unless the target entity meets the criteria of FASB ASC 420,
Exit or Disposal Cost Obligations
on the acquisition date.
Prior to January 1, 2009, acquisition-related costs and restructuring
costs were generally included as part of the cost of the acquired business.
In conjunction with
the purchase price allocation, we follow the requirements of FASB ASC 740,
Income Taxes
.
As part of the purchase price allocation, we establish deferred tax assets or
liabilities reflecting the difference between the values assigned for financial
statement purposes and values applicable for income tax purposes. In certain
acquisitions the goodwill resulting from the purchase price allocation may not
be deductible for income tax purposes. FASB ASC 740 prohibits recognition of a
deferred tax asset or liability for temporary differences in goodwill if
goodwill is not amortizable and deductible for tax purposes.
78
Goodwill
. Changes in the carrying amount of our recorded
goodwill are mainly the result of business acquisitions. In accordance with
FASB ASC 350,
Intangibles Goodwill and Other
,
we do not amortize goodwill; instead, goodwill is subject to at least an annual
test for impairment, or whenever indicators of impairment exist. An impairment
would occur if the carrying amount of a reporting unit exceeded the fair value
of that reporting unit. Our reporting units are components of our reportable
segments. We performed annual impairment reviews in the fourth quarter of 2009,
2008, and 2007 and did not record any impairment losses in these years.
Intangible
Assets.
We amortize
intangible assets using the straight-line method over their estimated economic
useful lives, which range from one to 25 years. In accordance with FASB ASC
360-10-35,
Subsequent Measurement - Impairment or Disposal of
Long Lived Assets
, we review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If the value of future undiscounted cash flows is
less than the carrying amount of an asset, we record an impairment loss based
on the excess of the carrying amount over the fair value of the asset. We did
not record any impairment losses in 2009, 2008, or 2007.
Revenue
Recognition.
We
earn revenue by selling a variety of investment-related products and services.
We sell many of our offerings, such as our newsletters, Principia software, and
Premium service on Morningstar.com, via subscriptions. These subscriptions are
mainly offered for a one-year term, although we also offer terms ranging from
one month to three years. We also sell advertising on our websites
throughout the world. Several of our other products are sold through license
agreements, including Morningstar Advisor Workstation, Morningstar Equity
Research, Morningstar Direct, Retirement Advice, and Licensed Data. Our license
agreements typically range from one to three years.
For some of our other
institutional services, mainly Investment Consulting, we generally base our
fees on the scope of work and the level of service we provide and earn fees as
a percentage of assets under management. We also earn fees relating to
Morningstar Managed Portfolios as a percentage of assets under management. A portion of the fees for managed retirement
accounts offered through Morningstar Retirement Manager and Advice by Ibbotson
are earned as a percentage of assets under management.
Deferred revenue
represents the portion of subscriptions billed or collected in advance of the service
being provided, which we expect to recognize to revenue in future periods.
We follow the
standards established in FASB ASC 605,
Revenue Recognition
,
including subtopic 25,
Multiple-Element
Arrangements
, and FASB ASC 985-605,
Software
Revenue Recognition
.
We recognize revenue
from subscription sales in equal installments over the term of the
subscription. We recognize revenue from Investment Consulting, Retirement
Advice, Internet advertising, and other non-subscription products and services
when the product or service is delivered or, when applicable, over the service
obligation period defined by the terms of the contract. Revenue from
Internet advertising is generated primarily from impression-based
contracts. For advertisers who use our cost-per-impression pricing, we
charge fees each time their ads are displayed on our site. We recognize
asset-based fees once the fees are fixed and determinable assuming all other
revenue recognition criteria are met. For contracts that combine multiple products
and services, we assign the fair value of each element in the arrangement based
on selling prices of the items when sold separately. Delivery of our products
and services is a prerequisite for recognition of revenue. If arrangements
include an acceptance provision, we generally begin recognizing revenue upon
the receipt of customer acceptance.
We record taxes
imposed on revenue-producing transactions (such as sales, use, value-added, and
some excise taxes) on a net basis; therefore, such taxes are excluded from
revenue in our Consolidated Statements of Income.
Advertising
Costs.
Advertising costs
include expenses incurred for various print and Internet ads, search engine
fees, and direct mail campaigns. We expense advertising costs as incurred. The
following table summarizes our advertising expense for the past three years:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Advertising
expense
|
|
$
|
7,361
|
|
$
|
10,549
|
|
$
|
8,987
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense.
We account for our stock-based compensation expense in accordance with FASB ASC
718,
CompensationStock Compensation
. Our
stock-based compensation expense reflects grants of restricted stock units and
stock options. We granted restricted stock units for the first time in May 2006.
We measure the fair value of our restricted stock units on the date of grant
based on the closing market price of Morningstars 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.
We did not grant any
stock options during 2009 and 2008. For stock options granted in 2007 and prior
years, we estimated the fair value of our stock options on the date of grant
using a Black-Scholes option-pricing model.
79
We estimate expected
forfeitures of all employee stock-based awards and recognize compensation cost
only for those awards expected to vest. We determine forfeiture rates based on
historical experience and adjust the estimated forfeitures to actual forfeiture
experience as needed.
Liability
for Sabbatical Leave.
In certain of our operations, we offer employees a sabbatical leave. Although
the sabbatical policy varies by region, in general, Morningstars full-time
employees are eligible for six weeks of paid time off after four years of
continuous service. We account for our sabbatical liability in accordance with
FASB ASC 710-10-25
, Compensated Absences
. We record
a liability for employees sabbatical benefits over the period employees earn
the right for sabbatical leave.
Income
Taxes.
We record deferred
income taxes for the temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used
for income tax purposes in accordance with FASB ASC 740,
Income Taxes
.
FASB ASC 740 prescribes the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements, and also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, and disclosure for uncertain tax
positions.
We recognize interest
and penalties related to unrecognized tax benefits as a component of income tax
expense in our Consolidated Statements of Income. We classify liabilities
related to unrecognized tax benefits as a current liability to the extent that
we expect to make a payment within a year. We include liabilities, which are
not expected to be paid within a year, as Other long-term liabilities in our
Consolidated Balance Sheet.
Income
per Share.
We compute
and present income per share in accordance with FASB ASC 260,
Earnings Per Share
. The difference between weighted average
shares outstanding and diluted shares outstanding reflects the dilutive effect
of employee stock options and restricted stock units.
Foreign
Currency.
We translate the
financial statements of non-U.S. subsidiaries to U.S. dollars using the
period-end exchange rate for assets and liabilities and an average exchange
rate for revenue and expense. We use the local currency as the functional
currency for all of our non-U.S. subsidiaries. We record translation
adjustments for non-U.S. subsidiaries as a component of Accumulated other
comprehensive income (loss) in our Consolidated Statements of Equity and
Comprehensive Income (Loss). We include exchange gains and losses arising from
transactions denominated in currencies other than the functional currency in Other
expense, net in our Consolidated Statements of Income.
80
3.
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. We
reflect the dilutive effect of outstanding employee stock options and
restricted stock units in the denominator for diluted income per share using
the treasury stock method.
The following table
reconciles our net income attributable to Morningstar, Inc. and the number of
shares used in computing basic and diluted income per share:
(in thousands, except per share amounts)
|
|
2009
|
|
2008
|
|
2007
|
|
Basic net income per share attributable
to Morningstar, Inc.:
|
|
|
|
|
|
|
|
Net
income attributable to Morningstar, Inc.
|
|
$
|
82,456
|
|
$
|
92,532
|
|
$
|
73,922
|
|
Weighted
average common shares outstanding
|
|
48,112
|
|
46,139
|
|
43,216
|
|
Basic
net income per share attributable to Morningstar, Inc.
|
|
$
|
1.71
|
|
$
|
2.01
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
Diluted net income per share attributable
to Morningstar, Inc.:
|
|
|
|
|
|
|
|
Net
income attributable to Morningstar, Inc.
|
|
$
|
82,456
|
|
$
|
92,532
|
|
$
|
73,922
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
48,112
|
|
46,139
|
|
43,216
|
|
Net
effect of dilutive stock options and restricted stock units
|
|
1,681
|
|
3,074
|
|
4,949
|
|
Weighted
average common shares outstanding for computing diluted income per share
|
|
49,793
|
|
49,213
|
|
48,165
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share attributable to Morningstar, Inc.
|
|
$
|
1.66
|
|
$
|
1.88
|
|
$
|
1.53
|
|
4.
Segment and Geographical Area Information
Beginning in 2009, we
changed our organizational structure into 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 based on 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 prior years 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, Morningstar Direct, and Morningstar Principia.
Licensed Data is a set of investment data spanning all of our investment
databases, including real-time pricing data, 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. From June 2004 through July 2009,
our equity research was distributed through six major investment banks to meet
the requirements for independent research under the Global Analyst Research
Settlement. 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 research to their clients. We also sell
Equity Research to other companies that purchase our research for their own use
or provide our research to their affiliated advisors or individual investor
clients.
Investment
Management.
The
Investment Management segment includes all of our asset management operations,
which 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.
81
Our segment
accounting policies are the same as those described in Note 2, except for the
capitalization and amortization of internal product development costs,
amortization of intangible assets, and costs related to corporate functions. We
exclude these items from our operating segment results to provide our chief
operating decision maker with a better indication of each 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 are consistent with
the business segment information provided to our chief operating decision maker
on a recurring basis; for that reason, we dont present balance sheet
information by segment. We disclose goodwill by segment in accordance with the
requirements of FASB ASC 350-20-35,
Assigning Goodwill to
Reporting Units
.
The following tables
present information about our operating segments:
2009
Segment Information
|
|
Year
ended December 31, 2009
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
386,642
|
|
$
|
92,354
|
|
$
|
|
|
$
|
478,996
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
236,954
|
|
37,296
|
|
35,872
|
|
310,122
|
|
Stock-based
compensation expense
|
|
5,704
|
|
1,965
|
|
3,924
|
|
11,593
|
|
Depreciation
and amortization
|
|
5,408
|
|
204
|
|
26,349
|
|
31,961
|
|
Operating
income (loss)
|
|
$
|
138,576
|
|
$
|
52,889
|
|
$
|
(66,145
|
)
|
$
|
125,320
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
10,633
|
|
$
|
651
|
|
$
|
1,088
|
|
$
|
12,372
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
349,836
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
129,160
|
|
|
|
As
of December 31, 2009
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Goodwill
|
|
$
|
217,758
|
|
$
|
32,234
|
|
$
|
|
|
$
|
249,992
|
|
|
|
|
|
|
|
|
|
|
|
U.S. long-lived
assets
|
|
|
|
|
|
|
|
$
|
42,884
|
|
Non-U.S. long-lived
assets
|
|
|
|
|
|
|
|
$
|
16,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
2008
Segment Information
|
|
Year
ended December 31, 2008
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
390,693
|
|
$
|
111,764
|
|
$
|
|
|
$
|
502,457
|
|
Operating expense, excluding stock-based compensation
expense, depreciation, and amortization
|
|
241,435
|
|
49,010
|
|
35,616
|
|
326,061
|
|
Stock-based compensation expense
|
|
5,271
|
|
1,997
|
|
4,013
|
|
11,281
|
|
Depreciation and amortization
|
|
5,085
|
|
361
|
|
20,550
|
|
25,996
|
|
Operating income (loss)
|
|
$
|
138,902
|
|
$
|
60,396
|
|
$
|
(60,179
|
)
|
$
|
139,119
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
34,878
|
|
$
|
5,991
|
|
$
|
7,650
|
|
$
|
48,519
|
|
|
|
|
|
|
|
|
|
|
|
U.S. revenue
|
|
|
|
|
|
|
|
$
|
381,021
|
|
Non-U.S. revenue
|
|
|
|
|
|
|
|
$
|
121,436
|
|
|
|
As
of December 31, 2008
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Goodwill
|
|
$
|
155,772
|
|
$
|
31,470
|
|
$
|
|
|
$
|
187,242
|
|
|
|
|
|
|
|
|
|
|
|
U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
45,763
|
|
Non-U.S. long-lived assets
|
|
|
|
|
|
|
|
$
|
13,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Segment Information
|
|
Year
ended December 31, 2007
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Revenue
|
|
$
|
327,372
|
|
$
|
107,735
|
|
$
|
|
|
$
|
435,107
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
204,700
|
|
50,124
|
|
30,794
|
|
285,618
|
|
Stock-based
compensation expense
|
|
5,174
|
|
2,031
|
|
3,773
|
|
10,978
|
|
Depreciation
and amortization
|
|
2,550
|
|
185
|
|
18,522
|
|
21,257
|
|
Operating
income (loss)
|
|
$
|
114,948
|
|
$
|
55,395
|
|
$
|
(53,089
|
)
|
$
|
117,254
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
7,400
|
|
$
|
151
|
|
$
|
3,795
|
|
$
|
11,346
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
345,427
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
89,680
|
|
|
|
As
of December 31, 2007
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
Goodwill
|
|
$
|
96,662
|
|
$
|
31,479
|
|
$
|
|
|
$
|
128,141
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
long-lived assets
|
|
|
|
|
|
|
|
$
|
9,560
|
|
Non-U.S.
long-lived assets
|
|
|
|
|
|
|
|
$
|
9,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
5.
Investments and Fair Value Measurements
We account for our
investments in accordance with FASB ASC 320,
InvestmentsDebt
and Equity Securities.
We classify our investments into three
categories: available-for-sale, held-to-maturity, and trading. We monitor the
concentration, diversification, maturity, and liquidity of our investment
portfolio, which is primarily invested in fixed-income securities, and classify
our investment portfolio as shown below:
|
|
As
of December 31
|
|
($000)
|
|
2009
|
|
2008
|
|
Available-for-sale
|
|
$
|
197,306
|
|
$
|
116,867
|
|
Held-to-maturity
|
|
10,588
|
|
3,497
|
|
Trading
securities
|
|
4,163
|
|
3,322
|
|
Total
|
|
$
|
212,057
|
|
$
|
123,686
|
|
The following table
shows the cost, unrealized gains (losses), and fair values related to
investments classified as available-for-sale and held-to-maturity:
|
|
As
of December 31, 2009
|
|
As
of December 31, 2008
|
|
($000)
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
obligations
|
|
$
|
174,433
|
|
$
|
439
|
|
$
|
(50
|
)
|
$
|
174,822
|
|
$
|
111,513
|
|
$
|
806
|
|
$
|
(27
|
)
|
$
|
112,292
|
|
Corporate
bonds
|
|
12,268
|
|
44
|
|
(1
|
)
|
12,311
|
|
3,595
|
|
1
|
|
(21
|
)
|
3,575
|
|
Commercial
paper
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
1,000
|
|
Equity
securities
|
|
2,013
|
|
188
|
|
(28
|
)
|
2,173
|
|
|
|
|
|
|
|
|
|
Mutual
funds
|
|
8,000
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196,714
|
|
$
|
671
|
|
$
|
(79
|
)
|
$
|
197,306
|
|
$
|
116,108
|
|
$
|
807
|
|
$
|
(48
|
)
|
$
|
116,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
10,588
|
|
$
|
|
|
$
|
|
|
$
|
10,588
|
|
$
|
3,497
|
|
$
|
|
|
$
|
|
|
$
|
3,497
|
|
As of December 31,
2009 and 2008, investments with unrealized losses for greater than a 12-month
period were not material to the Consolidated Balance Sheets and were not deemed
to have other than temporary declines in value.
The table below shows
the cost and fair value of investments classified as available-for-sale and
held-to-maturity based on their contractual maturities as of December 31,
2009 and 2008. The expected maturities of certain fixed-income securities
may differ from their contractual maturities because some of these
holdings have call features that allow the issuers the right to prepay
obligations without penalties.
|
|
As
of December 31, 2009
|
|
As
of December 31, 2008
|
|
($000)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
161,453
|
|
$
|
161,817
|
|
$
|
72,910
|
|
$
|
73,376
|
|
Due
in one to three years
|
|
25,248
|
|
25,316
|
|
43,198
|
|
43,491
|
|
Equity
securities and mutual funds
|
|
10,013
|
|
10,173
|
|
|
|
|
|
Total
|
|
$
|
196,714
|
|
$
|
197,306
|
|
$
|
116,108
|
|
$
|
116,867
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
10,587
|
|
$
|
10,587
|
|
$
|
3,350
|
|
$
|
3,350
|
|
Due
in one to three years
|
|
1
|
|
1
|
|
147
|
|
147
|
|
Total
|
|
$
|
10,588
|
|
$
|
10,588
|
|
$
|
3,497
|
|
$
|
3,497
|
|
Held-to-maturity
investments include a $1,600,000 certificate of deposit held as collateral
against two bank guarantees for our office lease in Australia.
84
The following table
shows the realized gains and losses arising from sales of our investments
classified as available-for-sale recorded in our Consolidated Statements of
Income:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Realized
gains
|
|
$
|
|
|
$
|
1
|
|
$
|
78
|
|
Realized
losses
|
|
|
|
(5
|
)
|
(8
|
)
|
Realized
gains (loss), net
|
|
$
|
|
|
$
|
(4
|
)
|
$
|
70
|
|
The following table
shows the net unrealized gains (losses) on trading securities as recorded in
our Consolidated Statements of Income:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Unrealized
gains (losses), net
|
|
$
|
1,233
|
|
$
|
(971
|
)
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
as of
|
|
December 31, 2009 Using Fair Value Hierarchy
|
|
($000)
|
|
December 31, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Available-for-sale
investments
|
|
$
|
197,306
|
|
$
|
197,306
|
|
$
|
|
|
$
|
|
|
Trading
securities
|
|
4,163
|
|
4,163
|
|
|
|
|
|
Total
|
|
$
|
201,469
|
|
$
|
201,469
|
|
$
|
|
|
$
|
|
|
|
|
Fair Value
|
|
Fair Value Measurements as of
|
|
|
|
as of
|
|
December 31, 2008 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 we have the ability to access.
Level 2:
Valuations based on quoted prices in markets that are not active or for which
all significant inputs are observable, either directly or indirectly.
Level 3:
Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
85
6.
Acquisitions, Goodwill, and Other Intangible Assets
We completed several
acquisitions over the past three years, which we describe below:
2009 Acquisitions
Equity research
and data business of C.P.M.S. Computerized Portfolio Management Services Inc.
In May 2009, we
acquired the equity research and data business of C.P.M.S. Computerized Portfolio
Management Services Inc. (CPMS) for $13,885,000 in cash. CPMS tracks fundamental
equity data for approximately 4,000 securities in the United States and Canada
and provides earnings estimates for Canadian stocks. In addition, CPMS
flagship software platform, the Equity Market Service, fully integrates
fundamental and expected earnings data to generate a wide range of applications
such as stock, industry, and market analysis; construction of long and short
strategies with its proprietary ranking and screening system; stock and
portfolio sensitivity analysis; and portfolio analytics. CPMS equity research
and data business also includes eight distinct quantitatively driven model
portfolios covering value, growth, income generating, momentum, and
short-selling investment styles for the U.S. and Canadian equity markets. We
began including the financial results of this acquisition in our Consolidated
Financial Statements on May 1, 2009.
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 date of
acquisition:
|
|
($000)
|
|
Accounts
receivable
|
|
$
|
352
|
|
Other
current assets
|
|
54
|
|
Other
assets non-current
|
|
354
|
|
Intangible
assets
|
|
8,588
|
|
Goodwill
|
|
5,976
|
|
Deferred
revenue
|
|
(237
|
)
|
Accounts
payable and accrued liabilities
|
|
(145
|
)
|
Other liabilities non-current
|
|
(1,057
|
)
|
Total
purchase price
|
|
$
|
13,885
|
|
The preliminary
purchase price allocation includes $8,588,000 of acquired intangible assets, as
follows:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
5,118
|
|
13
|
|
Technology-based
assets
|
|
3,210
|
|
8
|
|
Intellectual
property (trademarks and trade names)
|
|
260
|
|
10
|
|
Total
intangible assets
|
|
$
|
8,588
|
|
11
|
|
Goodwill of
$5,976,000 represents the premium we paid over the fair value of the acquired
net tangible and intangible assets. We paid this premium for a number of
reasons including the strategic benefit of expanding our Canadian equity
research and data offerings.
The goodwill and
intangible assets are amortizable for tax purposes for a period of approximately
15 years from the date of acquisition.
Logical
Information Machines, Inc.
In December 2009,
we acquired Logical Information Machines, Inc. (LIM), a leading provider
of data and analytics for energy, financial, and agriculture sectors, for
$53,529,000 in cash, subject to post-closing adjustments. LIM is a pioneer in
providing market pricing data, securities reference data, historical event
data, predictive analytics, and advanced data management solutions that help
customers manage large sets of time-series data. LIM collects, unifies, and
conducts quality assurance on data from more than 180 providers in the energy,
financial, and agriculture sectors and provides clients with one central source
for data intelligence and analysis. LIMs clients also have the flexibility to
use LIMs tools for analyzing their own proprietary data.
86
The following table
summarizes our preliminary allocation of the purchase price to the estimated
fair values of the assets acquired and liabilities assumed at December 31,
2009, the date of acquisition, for LIM:
|
|
($000)
|
|
Investments
|
|
$
|
2,233
|
|
Accounts
receivable
|
|
1,551
|
|
Other
current assets
|
|
1,784
|
|
Property
and equipment
|
|
589
|
|
Other
assets non-current
|
|
1,805
|
|
Intangible
assets
|
|
23,370
|
|
Goodwill
|
|
34,550
|
|
Deferred
revenue
|
|
(511
|
)
|
Accounts
payable and accrued liabilities
|
|
(806
|
)
|
Other
current liabilities
|
|
(1,171
|
)
|
Other
liabilities non-current
|
|
(1,078
|
)
|
Deferred
tax liability non-current
|
|
(8,787
|
)
|
Total
purchase price
|
|
$
|
53,529
|
|
The preliminary
allocation includes $23,370,000 of acquired intangible assets. These assets
primarily include customer-related and technology-based assets, including
software and databases. The deferred tax liability of $8,787,000 is primarily
because the amortization expense related to certain intangible assets is not
deductible for income tax purposes.
Goodwill of
$34,550,000 represents the premium we paid over the fair value of the net
tangible and intangible assets we acquired for LIM. We paid this premium for a
number of reasons including the strategic benefit of expanding our core data
and software businesses, and gaining access to several new industries via a new
distribution channel for Morningstar. LIM currently serves about 130 clients
including some of the worlds largest asset managers, banks, oil companies,
power and natural gas trading firms, utilities, risk managers, and agriculture
and commodities trading firms. The goodwill we recorded is not considered
deductible for income tax purposes.
Other
Acquisitions in 2009
We completed four
other acquisitions in 2009, as follows:
·
Global financial filings database business of Global Reports
LLC (Global Reports) provides timely online access to full-color financial
filings from more than 37,000 publicly traded companies in approximately 130
countries and offers more than 500,000 current and historical filings and
reports, such as annual and interim reports, initial public offerings, and
Corporate and Social Responsibility reports, in their native languages and in
English when available. We began including the financial results of this
acquisition in our Consolidated Financial Statements on April 20, 2009.
·
Andex Associates, Inc. (Andex) is known for its Andex
Charts, which illustrate 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. We began
including the financial results of this acquisition in our Consolidated
Financial Statements on May 1, 2009.
·
Intech Pty Ltd (Intech) is a leading provider of multimanager
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. We began including the financial results of this
acquisition in our Consolidated Financial Statements on June 30, 2009.
·
Canadian Investment
Awards and Gala is Canadas marquee investment awards program, recognizing
excellence in products and firms within the financial services industry.
We
began including the financial results of this acquisition
in our Consolidated Financial Statements on December 17, 2009.
87
The total purchase
price of these four acquisitions was $5,696,000, net of cash acquired.
Substantially all of this amount was paid in 2009. The following table
summarizes our preliminary allocation of the purchase prices to the estimated
fair values of the assets acquired and liabilities assumed at the dates of
acquisition for these four acquisitions:
|
|
($000)
|
|
Cash
and cash equivalents
|
|
$
|
1,295
|
|
Accounts
receivable
|
|
2,342
|
|
Other
current assets
|
|
515
|
|
Other
non-current assets
|
|
195
|
|
Intangible
assets
|
|
4,151
|
|
Goodwill
|
|
3,717
|
|
Accounts
payable and accrued liabilities
|
|
(4,026
|
)
|
Deferred
tax liability non-current
|
|
(897
|
)
|
Other
non-current liabilities
|
|
(301
|
)
|
Total
purchase price
|
|
$
|
6,991
|
|
The preliminary
allocation includes $4,151,000 of acquired intangible assets. These assets
primarily include customer-related assets and technology-based assets, including
software and databases. The deferred tax liability of $897,000 is primarily
because the amortization expense related to certain intangible assets is not
deductible for income tax purposes. Approximately $1,330,000 of the intangible
assets is deductible for income tax purposes over a period of approximately 15
years from the acquisition date.
Goodwill of
$3,717,000 represents the premium we paid over the fair value of the net
tangible and intangible assets we acquired with these acquisitions. We paid
this premium for a number of reasons, including the strategic benefit of
broadening our database to include a global financial filings database,
expanding our library of market analysis communications materials to include
financial charts and communication materials for financial advisors in Canada,
expanding our international presence in fund-of-funds investment management to
Australia, and continuing to build our brand name by acquiring and rebranding
Canadas marquee investment awards program, which recognizes excellence in
products and firms within the financial services industry.
Approximately
$1,113,000 of the goodwill is deductible for income tax purposes over a period
of approximately 15 years from the acquisition date.
Increased
Investment in Morningstar Korea Co., Ltd.
In 2009, we acquired
an additional 40% ownership in Morningstar Korea Co., Ltd. (Morningstar Korea),
increasing our ownership interest to 80%. Morningstar Korea provides financial
information and services for investors in South Korea and offers consulting and
advisory services through its subsidiary, Morningstar Associates Korea.
Upon acquiring the
majority ownership, we increased our investment to reflect the fair value of
the assets and liabilities acquired and recorded an unrealized holding gain of
$352,000. The preliminary fair value allocation includes $1,148,000 of goodwill
and $761,000 of acquired intangible assets. We recognized a deferred tax
liability of $286,000 mainly because the amortization expense related to certain
intangible assets is not deductible for income tax purposes. We also recognized
the fair value of the non-controlling interest in Morningstar Korea. The amount
of $820,000, representing the non-controlling interest in Morningstar Korea, is
included in our Consolidated Balance Sheet as of December 31, 2009.
See Note 7 for
additional information concerning our investment in Morningstar Korea.
2008 Acquisitions
Acquisition
of the Hemscott data, media, and investor relations website businesses
In January 2008,
we acquired the Hemscott data, media, and investor relations website businesses
from Ipreo Holdings, LLC for $51,279,000 in cash including post-closing
adjustments and transaction costs directly related to the acquisition, less
acquired cash. The acquisition includes Hemscott Data, which has more than 20
years of comprehensive fundamental data on virtually all publicly listed
companies in the United States, Canada, the United Kingdom, and Ireland;
Hemscott Premium and Premium Plus, subscription-based investment research and
data services; Hemscott IR, which provides online investor relations services
in the United Kingdom; and Hemscott.com, a free investment research website in
the United Kingdom. In addition, Hemscott India operates a data collection center
in New Delhi, India. We began including the financial results of this
acquisition in our Consolidated Financial Statements on January 9, 2008.
88
The following table
summarizes our allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
1,223
|
|
Accounts
receivable
|
|
3,640
|
|
Other
current assets
|
|
1,117
|
|
Property
and equipment
|
|
1,356
|
|
Other
non-current assets
|
|
305
|
|
Intangible
assets
|
|
20,260
|
|
Goodwill
|
|
35,683
|
|
Deferred
revenue
|
|
(4,601
|
)
|
Accounts
payable and accrued liabilities
|
|
(2,959
|
)
|
Deferred
tax liability non-current
|
|
(3,522
|
)
|
Total
purchase price
|
|
$
|
52,502
|
|
The purchase price
allocation includes $20,260,000 of acquired intangible assets:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
12,460
|
|
8
|
|
Technology-based
assets (software and database assets)
|
|
6,600
|
|
9
|
|
Intellectual
property (trademarks and trade names)
|
|
1,200
|
|
3
|
|
Total
intangible assets
|
|
$
|
20,260
|
|
8
|
|
The deferred tax
liability of $3,522,000 results primarily because the amortization expense
related to certain intangible assets is not deductible for income tax purposes.
Approximately $7,680,000 of the intangible assets is deductible for U.S. income
tax purposes over a period of 15 years from the acquisition date.
Goodwill of
$35,683,000 represents the premium we paid over the fair value of the net
tangible and intangible assets we acquired. We paid this premium for a number
of reasons, including the strategic benefits of expanding our equity data,
especially in North America and Europe; expanding our international brand
presence, products, and services; and enhancing our offshore data facilities.
The UK-based investor relations website business is a new market for us that
leverages our data and analytics.
Approximately
$8,900,000 of the goodwill is deductible for U.S. income tax purposes over a
period of 15 years from the acquisition date.
89
Fundamental
Data Limited
In October 2008,
we acquired Fundamental Data Limited (Fundamental Data), a leading provider of
data on closed-end funds in the United Kingdom for $18,497,000 in cash
including post-closing adjustments and transaction costs directly related to
the acquisition, less acquired cash. Fundamental Datas flagship product is
FundWeb, an online subscription service allowing clients access to the companys
comprehensive database. Fundamental Data also provides data feeds, website
feeds, and report outsourcing services including production of fund fact
sheets. It also offers an online database of publicly issued documents
relating to closed-end funds. We began including the financial results of this
acquisition in our Consolidated Financial Statements on October 2, 2008.
The following table
summarizes our allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
1,691
|
|
Accounts
receivable
|
|
785
|
|
Other
current assets
|
|
179
|
|
Property
and equipment
|
|
170
|
|
Intangible
assets
|
|
9,276
|
|
Goodwill
|
|
12,844
|
|
Deferred
revenue
|
|
(1,058
|
)
|
Accounts
payable and accrued liabilities
|
|
(409
|
)
|
Other
current liabilities
|
|
(511
|
)
|
Deferred
tax liability non-current
|
|
(2,597
|
)
|
Other
non-current liabilities
|
|
(182
|
)
|
Total
purchase price
|
|
$
|
20,188
|
|
The purchase price
allocation includes $9,276,000 of acquired intangible assets, as follows:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
4,422
|
|
8
|
|
Technology-based
assets
|
|
4,780
|
|
7
|
|
Intellectual
property (trademarks and trade names)
|
|
74
|
|
5
|
|
Total
intangible assets
|
|
$
|
9,276
|
|
8
|
|
Based on the purchase
price allocation, we recorded $12,844,000 of goodwill. Goodwill for Fundamental
Data represents the premium we paid over the fair value of the net tangible and
intangible assets we acquired. We paid this premium for a number of reasons,
including Fundamental Datas leadership position in global closed-end fund
data.
The deferred tax
liability of $2,597,000 results mainly because the amortization expense related
to the intangible assets is not deductible for income tax purposes. The
goodwill we recorded is also not considered deductible for income tax purposes.
10-K Wizard
Technology, LLC
In December 2008,
we acquired 10-K Wizard Technology, LLC (10-K Wizard), a leading provider of
real-time SEC filing research services for $11,508,000 in cash including
post-closing adjustments and transaction costs directly related to the
acquisition, less acquired cash. The companys flagship product, 10-K Wizard,
offers full-text searching capabilities for real-time and historical SEC
filings. Available via subscription or custom data feed, 10-K Wizard also
provides global company profiles that contain hyperlinks to annual reports and
peer companies as well as stock news and charts. We began including the
financial results of this acquisition in our Consolidated Financial Statements
on December 4, 2008. Subsequent to the acquisition, we rebranded the 10-K
Wizard product offerings as part of Morningstar Document Research.
90
The following table
summarizes our allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
241
|
|
Accounts
receivable
|
|
475
|
|
Fixed
assets
|
|
260
|
|
Deferred
tax asset non-current
|
|
38
|
|
Intangible
assets
|
|
5,500
|
|
Goodwill
|
|
8,340
|
|
Deferred
revenue
|
|
(1,755
|
)
|
Accounts
payable and accrued liabilities
|
|
(1,350
|
)
|
Total
purchase price
|
|
$
|
11,749
|
|
The purchase price
allocation includes $5,500,000 of acquired intangible assets, as follows:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
3,040
|
|
10
|
|
Technology-based
assets
|
|
2,430
|
|
9
|
|
Intellectual
property (trademarks and trade names)
|
|
30
|
|
1
|
|
Total
intangible assets
|
|
$
|
5,500
|
|
9
|
|
Based on the purchase
price allocation, we recorded $8,340,000 of goodwill. Goodwill for 10-K Wizard
represents the premium we paid over the fair value of the net tangible and
intangible assets we acquired. We paid this premium for a number of reasons,
including the strategic benefit of the combined company and its fit with our
goal of bringing greater transparency to equity investments. The combination
also leverages Morningstars existing client base with a robust and intuitive
data mining application and 10-K Wizards expertise in database search and
retrieval.
The goodwill and
intangible assets are amortizable for U.S. income tax purposes for a period of
15 years from the date of acquisition.
Tenfore
Systems Limited
In December 2008,
we also acquired Tenfore Systems Limited (Tenfore), a global provider of
real-time market data and financial data workstations for $19,284,000 in cash
including estimated post-closing adjustments and transaction costs directly
related to the acquisition, less acquired cash. Tenfore collects data on global
equities, commodities, derivatives, indexes, and foreign currencies from more
than 160 sources and consolidates the data for real-time distribution to
clients. Tenfores flagship products include Consolidated Real-Time Market Data
Feed, QuoteSpeed Workstation, Tenfore Intraday Exchange (TIX), Tenfore Direct
Exchange (TDX), and Tenforex. We began including the results of this
acquisition in our Consolidated Financial Statements on December 17, 2008.
Subsequent to the acquisition, we refer to this business as Morningstar
Real-Time Data.
The following table
summarizes our allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
194
|
|
Accounts
receivable
|
|
1,130
|
|
Other
current assets
|
|
483
|
|
Fixed
assets
|
|
737
|
|
Other
non-current assets
|
|
256
|
|
Intangible
assets
|
|
3,095
|
|
Goodwill
|
|
19,837
|
|
Deferred
revenue
|
|
(1,003
|
)
|
Accounts
payable and accrued liabilities
|
|
(3,683
|
)
|
Other
current liabilities
|
|
(702
|
)
|
Deferred
tax liability non-current
|
|
(866
|
)
|
Total
purchase price
|
|
$
|
19,478
|
|
91
The purchase price
allocation includes $3,095,000 of acquired intangible assets, as follows:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
1,917
|
|
8
|
|
Technology-based
assets
|
|
1,178
|
|
3
|
|
Total
intangible assets
|
|
$
|
3,095
|
|
6
|
|
Based on the purchase
price allocation, we recorded $19,837,000 of goodwill. Goodwill for Tenfore
represents the premium we paid over the fair value of the net tangible and
intangible assets we acquired. We paid this premium for a number of reasons,
including the strategic benefits of adding real-time stock quotes from nearly
all of the worlds major stock exchanges. We also expect to leverage our
existing client base and geographic presence with the ability to offer a key
data feed to institutions around the world.
The deferred tax
liability of $866,000 results mainly because the amortization expense related
to the intangible assets is not deductible for income tax purposes. The
goodwill we recorded is not considered deductible for income tax purposes.
Other
Acquisitions in 2008
We also completed two
other acquisitions in 2008:
·
Financial Computer Support, Inc. (FCSI) is a leading
provider of practice management software for independent advisors. FCSIs
flagship product, dbCAMS+, is a portfolio management system that allows
advisors to easily track and produce client reports as well as manage client
contact information and billing. We incorporated dbCAMS+ into our Morningstar
Principia product line in 2009. We began including the financial results of
this acquisition in our Consolidated Financial Statements on September 2,
2008.
·
InvestData (Proprietary) Limited (InvestData) is a leading
provider of fund information in South Africa. We began including the financial
results of this acquisition in our Consolidated Financial Statements on December 29,
2008.
The combined purchase
price for these two acquisitions was $5,694,000 including post-closing
adjustments and transaction costs directly related to the acquisitions, less
acquired cash. Substantially all of the purchase price was paid in cash during
2008, with approximately $147,000 paid in December 2009.
For these two
acquisitions, the following table summarizes our allocation of the purchase
price to the estimated fair values of the assets acquired and liabilities
assumed at the dates of acquisition:
|
|
($000)
|
|
Cash
|
|
$
|
261
|
|
Accounts
receivable
|
|
47
|
|
Other
current assets
|
|
311
|
|
Fixed
assets
|
|
65
|
|
Intangible
assets
|
|
2,324
|
|
Goodwill
|
|
4,143
|
|
Deferred
revenue
|
|
(210
|
)
|
Accounts
payable and accrued liabilities
|
|
(23
|
)
|
Other
current liabilities
|
|
(98
|
)
|
Deferred
tax liability non-current
|
|
(865
|
)
|
Total
purchase price
|
|
$
|
5,955
|
|
92
The purchase price
allocation includes $2,324,000 of acquired intangible assets, as follows:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
1,810
|
|
15
|
|
Technology-based
assets
|
|
506
|
|
6
|
|
Non-competition
agreement
|
|
8
|
|
1
|
|
Total
intangible assets
|
|
$
|
2,324
|
|
13
|
|
Based on the purchase
price allocation, we recorded $4,143,000 of goodwill for FCSI and InvestData.
Goodwill for FCSI and InvestData represents the premium we paid over the fair
value of the net tangible and intangible assets we acquired. For FCSI, we paid
this premium for a number of reasons, including the strategic benefits of
bringing together two popular software applications in a single product suite
and adding functionality and capabilities in portfolio management, accounting,
and performance reporting.
For
InvestData, we paid this premium for a number of reasons, including the
strategic benefits of a more diversified global managed funds database and the
ability to leverage Morningstars existing client base in a new geographic
region.
Because amortization
expense related to certain intangible assets is not deductible for income tax
purposes, we recorded a deferred tax liability of $865,000 related to these
acquisitions. The goodwill we recorded is not considered deductible for income
tax purposes.
2007 Acquisitions
Acquisition
of the fund data business from Standard & Poors
In March 2007,
we acquired the fund data business from Standard & Poors for
$57,983,000 in cash including post-closing adjustments and transaction costs
directly related to the acquisition, less acquired cash. We began including the
financial results of this acquisition in our Consolidated Financial Statements
on March 16, 2007.
The following table
summarizes our allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition.
|
|
($000)
|
|
Cash
|
|
$
|
2,974
|
|
Accounts
receivable
|
|
7,529
|
|
Other
current assets
|
|
1,849
|
|
Property
and equipment
|
|
126
|
|
Intangible
assets
|
|
34,080
|
|
Goodwill
|
|
36,851
|
|
Deferred
revenue
|
|
(16,450
|
)
|
Accrued
liabilities
|
|
(4,246
|
)
|
Deferred
tax liability non-current
|
|
(1,626
|
)
|
Other
non-current liabilities
|
|
(130
|
)
|
Total
purchase price
|
|
$
|
60,957
|
|
The purchase price
allocation includes a liability of $1,685,000 for severance and lease
termination costs. Substantially all of these liabilities were paid as of December 31,
2008.
The purchase price
allocation includes $34,080,000 of acquired intangible assets:
|
|
($000)
|
|
Weighted
Average
Useful Life
(years)
|
|
Customer-related
assets
|
|
$
|
13,040
|
|
10
|
|
Technology-based
assets
|
|
20,580
|
|
9
|
|
Non-competition
agreement
|
|
460
|
|
5
|
|
Total
intangible assets
|
|
$
|
34,080
|
|
9
|
|
93
The deferred tax
liability of $1,626,000 results primarily because the amortization expense
related to certain of these intangible assets is not deductible for income tax
purposes.
Based on the purchase
price allocation, we recorded $36,851,000 of goodwill. The goodwill we recorded
is not considered deductible for income tax purposes. In 2008, we recorded an
income tax benefit of $820,000 related to this acquisition with a corresponding
reduction to goodwill.
Goodwill for the fund
data business acquired from Standard & Poors represents the premium
we paid over the fair value of the net tangible and intangible assets we acquired.
We paid this premium for a number of reasons, including the strategic benefit
of expanding our global database on managed products. Also, the acquisition
expands our international brand presence. Approximately 80% of Standard &
Poors fund data business was outside the United States. The acquisition also
expanded our client base and media partnerships in Europe and Asia, including
more than 1,100 institutions that use the acquired fund data products, about
10,000 new advisors outside the United States, and more than 200 publications
and media outlets worldwide.
If this acquisition
had occurred as of January 1, 2007, our results of operations would not
have been significantly different from the amounts reported in 2007.
Acquisition
of the minority interest of Morningstar Europe
Morningstar Europe BV
(Morningstar Europe) is a holding company for Morningstars European
subsidiaries. In April 2007, Morningstar, Inc., the U.S. parent
company, acquired the remaining 2% share ownership in Morningstar Europe from Stadsporten
Citygate AB (Citygate) for $1,000,000 in cash. Prior to acquiring the 2% share
ownership, Morningstar, Inc. owned 98% of the shares of Morningstar
Europe. As a majority-owned subsidiary, the financial results of
Morningstar Europe have been included in our Consolidated Financial Statements
for all periods presented. We assigned the purchase price of $1,000,000 to
goodwill.
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 years ended December 31, 2009 and 2008 as if
we had completed the 2009 and 2008 acquisitions and had consolidated
Morningstar Korea as of January 1 of each of these years. In calculating
the pro forma information below, we included and estimate of amortization
expense related to the intangible assets acquired.
Unaudited Pro Forma Financial Information ($000)
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
505,798
|
|
$
|
563,664
|
|
Operating
income
|
|
$
|
125,254
|
|
$
|
136,143
|
|
Net
income
|
|
$
|
82,253
|
|
$
|
90,621
|
|
|
|
|
|
|
|
Basic
net income per share attributable to Morningstar, Inc.
|
|
$
|
1.71
|
|
$
|
1.96
|
|
Diluted
net income per share attributable to Morningstar, Inc.
|
|
$
|
1.65
|
|
$
|
1.84
|
|
Goodwill
The following table
shows the changes in our goodwill balances from January 1, 2008 to December 31,
2009:
|
|
($000)
|
|
Balance
as of January 1, 2008
|
|
$
|
128,141
|
|
2008 acquisitions:
|
|
|
|
Acquisition
of the Hemscott data, media, and investor relations website businesses
|
|
35,683
|
|
Acquisition
of Fundamental Data
|
|
12,844
|
|
Acquisition
of 10-K Wizard
|
|
8,340
|
|
Acquisition
of Tenfore
|
|
19,837
|
|
Acquisition
of FCSI and InvestData
|
|
4,143
|
|
|
|
|
|
2009 acquisitions:
|
|
|
|
Acquisition
of the equity research and data business of CPMS
|
|
5,976
|
|
Acquisition
of LIM
|
|
34,550
|
|
Goodwill
for four other acquisitions completed in 2009
|
|
3,717
|
|
Goodwill
of Morningstar Korea
|
|
1,148
|
|
Other,
primarily currency translation
|
|
(4,387
|
)
|
Balance
as of December 31, 2009
|
|
$
|
249,992
|
|
94
We did not record any
goodwill impairment losses in 2009, 2008, or 2007, respectively.
Intangible
Assets
The following table
summarizes our intangible assets:
|
|
As of December 31, 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
|
|
$
|
28,472
|
|
$
|
(12,147
|
)
|
$
|
16,325
|
|
10
|
|
$
|
26,198
|
|
$
|
(8,338
|
)
|
$
|
17,860
|
|
10
|
|
Customer-related
assets
|
|
87,635
|
|
(27,405
|
)
|
60,230
|
|
10
|
|
67,325
|
|
(17,620
|
)
|
49,705
|
|
10
|
|
Supplier
relationships
|
|
240
|
|
(60
|
)
|
180
|
|
20
|
|
240
|
|
(48
|
)
|
192
|
|
20
|
|
Technology-based
assets
|
|
49,276
|
|
(16,694
|
)
|
32,582
|
|
9
|
|
34,845
|
|
(9,525
|
)
|
25,320
|
|
9
|
|
Non-competition
agreement
|
|
820
|
|
(547
|
)
|
273
|
|
5
|
|
810
|
|
(375
|
)
|
435
|
|
5
|
|
Intangible
assets related to acquisitions with preliminary purchase price allocations
|
|
26,129
|
|
(231
|
)
|
25,898
|
|
5
|
|
29,962
|
|
(662
|
)
|
26,300
|
|
5
|
|
Total
intangible assets
|
|
$
|
192,572
|
|
$
|
(57,084
|
)
|
$
|
135,488
|
|
9
|
|
$
|
156,380
|
|
$
|
(36,568
|
)
|
$
|
119,812
|
|
9
|
|
The following table
summarizes our amortization expense related to intangible assets:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Amortization
expense
|
|
$
|
18,963
|
|
$
|
16,648
|
|
$
|
12,769
|
|
|
|
|
|
|
|
|
|
|
|
|
We amortize
intangible assets using the straight-line method over their expected economic
useful lives.
Based on acquisitions
completed through December 31, 2009, we expect intangible amortization
expense for 2010 and subsequent years as follows:
|
|
($000)
|
|
2010
|
|
$
|
23,427
|
|
2011
|
|
21,851
|
|
2012
|
|
20,607
|
|
2013
|
|
18,652
|
|
2014
|
|
17,706
|
|
|
|
|
|
|
Our estimates of
future amortization expense for intangible assets may be affected by changes to
the preliminary purchase price allocations, additional acquisitions, and
currency translations.
95
7.
Investments in Unconsolidated Entities
Our investments in
unconsolidated entities consist of the following:
|
|
As
of December 31
|
|
($000)
|
|
2009
|
|
2008
|
|
Investment
in MJKK
|
|
$
|
18,413
|
|
$
|
18,083
|
|
Other
equity method investments
|
|
577
|
|
2,000
|
|
Investments
accounted for using the cost method
|
|
5,089
|
|
321
|
|
Total
investments in unconsolidated entities
|
|
$
|
24,079
|
|
$
|
20,404
|
|
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. We account for our investment in MJKK using the
equity method. The following table summarizes our ownership percentage in
Morningstar Japan K.K. and the market value of this investment based on MJKKs
publicly quoted share price:
|
|
As
of December 31
|
|
|
|
2009
|
|
2008
|
|
Morningstars
approximate ownership of MJKK
|
|
34%
|
|
34%
|
|
|
|
|
|
|
|
Approximate
market value of Morningstars ownership in MJKK:
|
|
|
|
|
|
Japanese
yen (¥000)
|
|
¥
|
2,600,000
|
|
¥
|
2,900,000
|
|
Equivalent
U.S. dollars ($000)
|
|
$
|
28,507
|
|
$
|
32,536
|
|
|
|
|
|
|
|
|
|
|
Other
Equity Method Investments
. As
of December 31, 2009 and December 31, 2008, other equity-method
investments include 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 December 31, 2009 and December 31, 2008.
As of December 31,
2008, other equity-method investments also included our investment in
Morningstar Korea. As of December 31, 2008, our ownership interest and
profit- and loss-sharing interest in Morningstar Korea was 40%, and our
investment was $1,560,000. In 2009, we acquired additional shares in
Morningstar Korea, increasing our ownership interest to 80%. Through August 2009,
we accounted for this investment using the equity method. Beginning in September 2009,
as Morningstar Korea is a majority-owned subsidiary, we no longer account for
our investment using the equity method. We include the assets, liabilities, and
results of operations of Morningstar Korea in our Consolidated Financial
Statements on a consolidated basis. See Note 6 for additional information
related to the increase in our ownership of Morningstar Korea.
Cost Method
Investments.
As of December 31,
2009, our cost method investments consist mainly of minority investments in
Pitchbook Data, Inc. (Pitchbook) and Bundle Corporation (Bundle).
Pitchbook offers detailed data and information about private equity
transactions, investors, companies, limited partners, and service providers.
Bundle is a social media company dedicated to helping people make smarter
spending and saving choices. Its website, Bundle.com, features a money
comparison tool that shows spending trends across the United States, along with
a range of information on saving, investing, and budgeting. We paid
approximately $4,200,000 for these two minority equity stakes in 2009. We did
not record any impairment losses on our cost method investments in 2009, 2008,
or 2007, respectively.
96
8. Property, Equipment, and Capitalized
Software
The following table shows our property, equipment, and
capitalized software summarized by major category:
|
|
As of December 31
|
|
($000)
|
|
2009
|
|
2008
|
|
Computer equipment
|
|
$
|
29,907
|
|
$
|
31,208
|
|
Capitalized software
|
|
25,659
|
|
18,281
|
|
Furniture and fixtures
|
|
17,057
|
|
14,044
|
|
Leasehold improvements
|
|
39,216
|
|
34,839
|
|
Telephone equipment
|
|
2,199
|
|
2,243
|
|
Construction in progress
|
|
560
|
|
2,109
|
|
Property, equipment, and
capitalized software, at cost
|
|
114,598
|
|
102,724
|
|
Less accumulated depreciation
|
|
(54,770
|
)
|
(43,902
|
)
|
Property, equipment, and
capitalized software, net
|
|
$
|
59,828
|
|
$
|
58,822
|
|
The following table summarizes our depreciation expense:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Depreciation expense
|
|
$
|
12,998
|
|
$
|
9,348
|
|
$
|
8,488
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Operating Leases
The following table shows our minimum future rental
commitments due in each of the next five years and thereafter for all
non-cancelable operating leases, consisting primarily of leases for office
space:
Minimum Future Rental Commitments
|
|
($000)
|
|
2010
|
|
$
|
17,107
|
|
2011
|
|
15,446
|
|
2012
|
|
12,572
|
|
2013
|
|
10,538
|
|
2014
|
|
10,792
|
|
Thereafter
|
|
74,044
|
|
Total
|
|
$
|
140,499
|
|
The following table summarizes our rent expense including
taxes, insurance, and other operating costs:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Rent expense
|
|
$
|
18,842
|
|
$
|
16,674
|
|
$
|
11,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent relates to build-out and rent abatement
allowances received, which are amortized over the remaining portion of the
original term of the lease as a reduction in office lease expense. We include
deferred rent, as appropriate, in Accounts payable and accrued liabilities
and Other long-term liabilities on our Consolidated Balance Sheets.
|
|
As of December 31
|
|
($000)
|
|
2009
|
|
2008
|
|
Deferred rent
|
|
$
|
16,851
|
|
$
|
17,586
|
|
|
|
|
|
|
|
|
|
97
In 2009, we recorded changes to our liability for vacant
office space, primarily for the former Ibbotson headquarters. We increased the
liability related to this vacant office space because we anticipate receiving
lower sublease income and expect it will take more time than previously
estimated to identify a tenant.
The following table shows the change in our liability for
vacant office space from December 31, 2008 to December 31, 2009:
Liability for vacant office space
|
|
($000)
|
|
Balance as of December 31,
2008
|
|
$
|
761
|
|
Increase liability for vacant
office space recorded in 2009
|
|
2,672
|
|
Reduction of liability for lease
payments made in 2009
|
|
(978
|
)
|
Increase liability for vacant
office space related to acquisitions
|
|
1,320
|
|
Other, primarily currency
translation
|
|
40
|
|
Balance as of December 31,
2009
|
|
$
|
3,815
|
|
|
10. Stock-Based Compensation
Stock-Based Compensation Plans
In November 2004, we adopted the 2004 Stock Incentive
Plan. The 2004 Stock Incentive Plan provides for grants of options, stock
appreciation rights, restricted stock units, and performance shares. 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.
Since the adoption of the 2004 Stock Incentive Plan, we have
granted stock options and, beginning in 2006, restricted stock units. Stock
options granted under the 2004 Stock Incentive 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 Stock Incentive Plan have a premium feature
in which the exercise price increases over the term of the option at a rate
equal to the 10-year Treasury bond yield as of the date of grant. 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 Stock Incentive
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.
The following table summarizes the number of shares
available for future grants under our 2004 Stock Incentive Plan:
|
|
As of December 31
|
|
(000)
|
|
2009
|
|
2008
|
|
Shares available for future grants
|
|
2,143
|
|
2,500
|
|
Prior to November 2004, 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). All options granted under the Prior Plans were vested as of December 31,
2009; however, because the options under all three plans expire 10 years after
the date of grant, some options granted under these plans remain outstanding as
of December 31, 2009. The 2004 Stock Incentive Plan amends and restates
the Prior Plans. Under the 2004 Stock Incentive 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 Stock
Incentive Plan.
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 had an
expiration date of February 2009. On the date of grant, 1,138,560 options
were exercisable and an additional 36,144 shares became exercisable each year
from 1999 through 2008. As of December 31, 2008, there were 30,576 options
remaining to be exercised. In 2009, Don exercised these remaining options prior
to the February 2009 expiration date.
98
Accounting for Stock-Based Compensation
Awards
The following table summarizes our stock-based compensation
expense and the related income tax benefit we recorded in the past three years:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Stock-based compensation expense
restricted stock units
|
|
$
|
10,591
|
|
$
|
7,571
|
|
$
|
4,503
|
|
Stock-based compensation expense
stock options
|
|
1,002
|
|
3,710
|
|
6,475
|
|
Total stock-based compensation
expense
|
|
$
|
11,593
|
|
$
|
11,281
|
|
$
|
10,978
|
|
|
|
|
|
|
|
|
|
Income tax benefit related to the
stock-based compensation expense
|
|
$
|
3,625
|
|
$
|
3,544
|
|
$
|
3,968
|
|
In accordance with FASB ASC 718,
Compensation
Stock Compensation
, we estimate forfeitures of all employee
stock-based awards and recognize compensation cost only for those awards
expected to vest. Because our largest annual equity grants typically have
vesting dates in the second quarter, we adjust the stock-based compensation
expense at that time to reflect those awards that ultimately vested and update
our estimate of the forfeiture rate that will be applied to awards not yet vested.
These two factors accounted for approximately $214,000 and $210,000 of
additional stock-based compensation expense in 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 our common stock on the
last trading day prior to grant. We amortize that value to stock-based
compensation expense, net of estimated forfeitures, ratably over the vesting
period. We granted restricted stock units for the first time in May 2006.
The following table summarizes restricted stock unit activity during the past
three years:
Restricted Stock Units (RSUs)
|
|
Unvested
|
|
Vested
but
Deferred
|
|
Total
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
RSUs outstandingJanuary 1,
2007
|
|
260,462
|
|
|
|
260,462
|
|
$
|
44.01
|
|
Granted
|
|
248,584
|
|
|
|
248,584
|
|
51.72
|
|
Vested
|
|
(64,792
|
)
|
|
|
(64,792
|
)
|
47.21
|
|
Vested but deferred
|
|
(6,621
|
)
|
6,621
|
|
|
|
|
|
Forfeited
|
|
(23,351
|
)
|
|
|
(23,351
|
)
|
46.78
|
|
RSUs outstandingDecember 31,
2007
|
|
414,282
|
|
6,621
|
|
420,903
|
|
48.41
|
|
Granted
|
|
213,623
|
|
|
|
213,623
|
|
63.96
|
|
Vested
|
|
(96,187
|
)
|
|
|
(96,187
|
)
|
47.89
|
|
Vested but deferred
|
|
(15,403
|
)
|
15,403
|
|
|
|
|
|
Forfeited
|
|
(21,815
|
)
|
|
|
(21,815
|
)
|
50.26
|
|
RSUs outstandingDecember 31,
2008
|
|
494,500
|
|
22,024
|
|
516,524
|
|
55.17
|
|
Granted
|
|
373,829
|
|
|
|
373,829
|
|
38.89
|
|
Vested
|
|
(150,031
|
)
|
|
|
(150,031
|
)
|
53.27
|
|
Vested but deferred
|
|
(17,570
|
)
|
17,570
|
|
|
|
|
|
Forfeited
|
|
(19,303
|
)
|
|
|
(19,303
|
)
|
50.05
|
|
RSUs outstandingDecember 31,
2009
|
|
681,425
|
|
39,594
|
|
721,019
|
|
46.99
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the total amount of
unrecognized stock-based compensation expense related to restricted stock units
was approximately $23,591,000. We expect to recognize this expense over an
average period of approximately 32 months.
99
Stock Option Fair Value
We did not grant any stock options during 2009 and 2008. For
stock options granted in 2007, we estimated the fair value of our stock options
on the date of grant using a Black-Scholes option-pricing model. The fair value
of options granted during 2007 using this model was $34.15 per share, based on
the following assumptions:
·
Expected life: We expected these stock options would be outstanding
for a period of two years.
·
Expected volatility: Because we had limited historical data on the
price of our stock at the stock option grant date, we did not base our
volatility assumption on our own stock price. The volatility factor of 43% used
in our assumptions is based on an average of the historical stock prices of a group
of our peers over the most recent period commensurate with the expected term of
the stock option award.
·
Dividend yield: We used a dividend yield of zero in our
assumptions.
·
Interest rate: We based the risk-free interest rate used in
our assumptions on the implied yield of 4.95% available on U.S. Treasury
zero-coupon issues with a remaining term that approximates the stock option
awards expected life.
·
Expected exercise price: We assumed an expected exercise price of
$14.70, equal to the strike price of the option grant.
Stock Option Activity
The following tables summarize stock option activity 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.
|
|
2009
|
|
2008
|
|
2007
|
|
Options Granted At an Exercise Price
Below the Fair Value Per Share on the
Grant Date
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options outstandingbeginning of
year
|
|
1,110,652
|
|
$
|
15.33
|
|
2,068,590
|
|
$
|
12.84
|
|
2,871,310
|
|
$
|
11.11
|
|
Granted
|
|
|
|
|
|
|
|
|
|
569
|
|
14.70
|
|
Canceled
|
|
(175
|
)
|
15.14
|
|
(7,565
|
)
|
15.92
|
|
(22,683
|
)
|
16.36
|
|
Exercised
|
|
(301,308
|
)
|
10.75
|
|
(950,373
|
)
|
10.54
|
|
(780,606
|
)
|
7.44
|
|
Options outstandingend of year
|
|
809,169
|
|
17.75
|
|
1,110,652
|
|
15.33
|
|
2,068,590
|
|
12.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
809,169
|
|
$
|
17.75
|
|
1,110,627
|
|
$
|
15.33
|
|
1,719,184
|
|
$
|
12.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
All Other Option Grants, Excluding
Activity Shown Above
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options outstandingbeginning of
year
|
|
2,942,706
|
|
$
|
15.14
|
|
4,377,089
|
|
$
|
13.61
|
|
6,098,594
|
|
$
|
12.55
|
|
Canceled
|
|
(3,127
|
)
|
21.99
|
|
(21,412
|
)
|
21.36
|
|
(39,216
|
)
|
20.12
|
|
Exercised
|
|
(1,071,171
|
)
|
13.95
|
|
(1,412,971
|
)
|
10.81
|
|
(1,682,289
|
)
|
10.07
|
|
Options outstandingend of year
|
|
1,868,408
|
|
16.15
|
|
2,942,706
|
|
15.14
|
|
4,377,089
|
|
13.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
1,858,865
|
|
$
|
16.02
|
|
2,714,417
|
|
$
|
14.39
|
|
3,890,824
|
|
$
|
12.49
|
|
100
The following table summarizes the total intrinsic value
(difference between the market value of our stock on the date of exercise and
the exercise price of the option) of options exercised:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Intrinsic value of options
exercised
|
|
$
|
37,356
|
|
$
|
113,645
|
|
$
|
133,509
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below shows additional information for options
outstanding and options exercisable as of December 31, 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
|
|
1,317,931
|
|
1.77
|
|
$
|
12.03
|
|
$
|
47,851
|
|
1,317,931
|
|
1.77
|
|
$
|
12.03
|
|
$
|
47,851
|
|
$18.16 - $41.13
|
|
1,359,646
|
|
5.16
|
|
21.09
|
|
37,054
|
|
1,350,103
|
|
5.15
|
|
20.95
|
|
36,985
|
|
$8.57 - $41.13
|
|
2,677,577
|
|
3.49
|
|
16.63
|
|
$
|
84,905
|
|
2,668,034
|
|
3.48
|
|
16.54
|
|
$
|
84,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
or Expected to Vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.57 - $41.13
|
|
2,677,577
|
|
3.49
|
|
$
|
16.63
|
|
$
|
84,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the tables above represents
the total pretax intrinsic value all option holders would have received if they
had exercised all outstanding options on December 31, 2009. The intrinsic
value is based on our closing stock price of $48.34 on that date.
As of December 31, 2009, there was no unrecognized
stock-based compensation expense related to stock options. All outstanding options were vested as of January 1,
2010.
Excess Tax Benefits Related to Stock-Based
Compensation
FASB ASC 718,
Compensation Stock
Compensation,
requires that we classify the cash flows that result
from excess tax benefits as financing cash flows. Excess tax benefits
correspond to the portion of the tax deduction taken on our income tax return
which exceeds the amount of tax benefit related to the compensation cost
recognized in our Statement of Income. The following table summarizes our
excess tax benefits for the past three years:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Excess tax benefits related to
stock-based compensation
|
|
$
|
13,767
|
|
$
|
23,531
|
|
$
|
30,428
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Related Party Transactions
In 2009, we recorded an operating expense of $4,887,000
related to adjusting the tax treatment of certain stock options that were
originally considered incentive stock options. In 2009, we determined that
certain incentive stock options granted to one former and two current
executives, including Tao Huang, our Chief Operating Officer, should have been
treated as non-qualified stock options for the executives and our income tax
purposes. As a result, Morningstar will pay these individuals $4,887,000 in the
first quarter of 2010 to compensate for the difference in tax treatment.
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
exercised the right to purchase shares under the 1999 Plan, we paid 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 was not increased by any
imputed interest or earnings amount.
As of December 31, 2008, our
Consolidated Balance Sheet included a liability of $82,000 for the Agreement. We
paid this amount to Don in 2009 in accordance with the Agreement.
12. Defined Contribution Plan
We sponsor a defined contribution 401(k) plan, which
allows our U.S.-based employees to voluntarily contribute pre-tax dollars up to
a maximum amount allowable by the U.S. Internal Revenue Service. In 2009, we
suspended matching contributions to our 401(k) program in the United
States. In 2008 and 2007, we contributed an amount equal to the employees
contributions, up to 7% of the employees salary.
101
The following table summarizes our matching contributions:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
401(k) matching contributions
|
|
$
|
|
|
$
|
6,584
|
|
$
|
5,840
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Non-Operating Income
The following table presents the components of our net
non-operating income:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Interest income, net
|
|
$
|
3,016
|
|
$
|
5,687
|
|
$
|
7,134
|
|
Other expense, net
|
|
(82
|
)
|
(1,435
|
)
|
(905
|
)
|
Non-operating income, net
|
|
$
|
2,934
|
|
$
|
4,252
|
|
$
|
6,229
|
|
Interest income primarily reflects interest from our
investment portfolio. Other expense, net primarily represents foreign currency
exchange gains and losses arising from the ordinary course of business related
to non-U.S. operations. It also includes royalty income from MJKK and realized
gains and losses from our investment portfolio. In 2009, this category also
includes the holding gain of $352,000 resulting from the difference between the
fair value and the book value of our investment in Morningstar Korea. See Notes
6 and 7 for additional information concerning Morningstar Korea.
Prior to January 1, 2009, the net income or loss attributable
to the noncontrolling (minority) interests was included in other non-operating
expense, net. Effective January 1, 2009, we began accounting and reporting
for the noncontrolling interests in our Consolidated Financial Statements in
accordance with FASB ASC 810,
Consolidation
.
The prior-year amounts have been reclassified to conform to the 2009
presentation.
14. Income Taxes
Income Tax Expense and Effective Tax Rate
The following table shows our income tax expense and our
effective tax rate:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
$
|
128,254
|
|
$
|
143,371
|
|
$
|
123,483
|
|
Equity in net income of
unconsolidated entities
|
|
1,165
|
|
1,321
|
|
1,694
|
|
Net (income) loss attributable to
noncontrolling interests
|
|
132
|
|
(397
|
)
|
|
|
Total
|
|
$
|
129,551
|
|
$
|
144,295
|
|
$
|
125,177
|
|
Income tax expense
|
|
$
|
47,095
|
|
$
|
51,763
|
|
$
|
51,255
|
|
Effective tax rate
|
|
36.4%
|
|
35.9%
|
|
40.9%
|
|
102
The following table reconciles our income tax expense at the
U.S. federal income tax rate of 35% to income tax expense as recorded:
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
($000, except percentages)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Income tax expense at U.S. federal
rate
|
|
$
|
45,343
|
|
35.0
|
%
|
$
|
50,503
|
|
35.0
|
%
|
$
|
43,800
|
|
35.0
|
%
|
State income taxes, net of federal
income tax benefit
|
|
3,470
|
|
2.7
|
|
2,249
|
|
1.5
|
|
6,252
|
|
5.0
|
|
State income taxes, impact of
enacted law change on deferred tax assets
|
|
|
|
|
|
|
|
|
|
761
|
|
0.6
|
|
Stock option activity
|
|
116
|
|
0.1
|
|
638
|
|
0.4
|
|
432
|
|
0.3
|
|
Disqualifying dispositions on
incentive stock options
|
|
1,789
|
|
1.4
|
|
(3,215
|
)
|
(2.2
|
)
|
(241
|
)
|
(0.2
|
)
|
Non-U.S. withholding taxes, net of
federal income tax effect, and foreign tax credits
|
|
(1,311
|
)
|
(1.0
|
)
|
808
|
|
0.6
|
|
311
|
|
0.2
|
|
Net change in valuation allowance
related to non-U.S. deferred tax assets, primarily net operating losses
|
|
1,221
|
|
0.9
|
|
(1,209
|
)
|
(0.8
|
)
|
(1,921
|
)
|
(1.5
|
)
|
Impact of equity in net income of
unconsolidated entities
|
|
(288
|
)
|
(0.2
|
)
|
(353
|
)
|
(0.2
|
)
|
(436
|
)
|
(0.3
|
)
|
Difference between U.S. federal
statutory and foreign tax rates
|
|
238
|
|
0.2
|
|
(699
|
)
|
(0.5
|
)
|
(810
|
)
|
(0.6
|
)
|
Non-deductible deposit penalty
|
|
1,384
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Expenses related to treatment of
stock options originally considered incentive stock options, subject to
limitation for tax purposes
|
|
1,082
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Recognize deferred tax asset for
stock options originally considered incentive stock options
|
|
(1,349
|
)
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Change in unrecognized tax benefits
|
|
(1,786
|
)
|
(1.4
|
)
|
3,008
|
|
2.1
|
|
2,711
|
|
2.2
|
|
Other tax credits
|
|
(1,923
|
)
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Other net
|
|
(891
|
)
|
(0.7
|
)
|
33
|
|
|
|
396
|
|
0.2
|
|
Total income tax expense
|
|
$
|
47,095
|
|
36.4
|
%
|
$
|
51,763
|
|
35.9
|
%
|
$
|
51,255
|
|
40.9
|
%
|
Income tax expense consists of the following:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
Current tax expense:
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
Federal
|
|
$
|
41,347
|
|
$
|
37,143
|
|
$
|
36,425
|
|
State
|
|
4,942
|
|
3,179
|
|
9,697
|
|
Non-U.S.
|
|
3,856
|
|
2,875
|
|
3,544
|
|
|
|
50,145
|
|
43,197
|
|
49,666
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
Federal
|
|
(592
|
)
|
7,979
|
|
187
|
|
State
|
|
(38
|
)
|
524
|
|
1,352
|
|
Non-U.S.
|
|
(2,420
|
)
|
63
|
|
50
|
|
|
|
(3,050
|
)
|
8,566
|
|
1,589
|
|
Income tax expense
|
|
$
|
47,095
|
|
$
|
51,763
|
|
$
|
51,255
|
|
103
The following table provides our income before income taxes
and equity in net income of unconsolidated entities, generated by our U.S. and
non-U.S. operations:
($000)
|
|
2009
|
|
2008
|
|
2007
|
|
U.S.
|
|
$
|
123,948
|
|
$
|
135,997
|
|
$
|
107,774
|
|
Non-U.S.
|
|
4,306
|
|
7,374
|
|
15,709
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
$
|
128,254
|
|
$
|
143,371
|
|
$
|
123,483
|
|
Deferred Tax Assets and Liabilities
We recognize deferred income taxes for the temporary
differences between the carrying amount of assets and liabilities for financial
statement purposes and their tax basis. The tax effects of the temporary
differences that give rise to the deferred income tax assets and liabilities
are as follows:
|
|
As of December 31
|
|
|
($000)
|
|
2009
|
|
2008
|
|
Deferred tax assets:
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
15,641
|
|
$
|
13,263
|
|
Accrued liabilities
|
|
6,263
|
|
5,683
|
|
Net operating loss carryforwards
U.S.
|
|
1,933
|
|
1,244
|
|
Net operating loss carryforwards
Non-U.S.
|
|
14,022
|
|
12,552
|
|
Research and development
|
|
253
|
|
504
|
|
Deferred royalty revenue
|
|
470
|
|
485
|
|
Allowance for doubtful accounts
|
|
533
|
|
582
|
|
Deferred rent
|
|
9,587
|
|
7,212
|
|
Other
|
|
160
|
|
66
|
|
Total deferred tax assets
|
|
48,862
|
|
41,591
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Acquired intangible assets
|
|
(26,034
|
)
|
(22,935
|
)
|
Property, equipment, and
capitalized software
|
|
(9,086
|
)
|
(7,062
|
)
|
Unrealized exchange gains, net
|
|
(258
|
)
|
(1,074
|
)
|
Prepaid expenses
|
|
(2,833
|
)
|
(2,612
|
)
|
Accrued liabilities
|
|
(1,322
|
)
|
|
|
Other
|
|
(64
|
)
|
(288
|
)
|
Total deferred tax liabilities
|
|
(39,597
|
)
|
(33,971
|
)
|
Net deferred tax assets before
valuation allowance
|
|
9,265
|
|
7,620
|
|
Valuation allowance
|
|
(12,834
|
)
|
(11,613
|
)
|
Net deferred tax liability
|
|
$
|
(3,569
|
)
|
$
|
(3,993
|
)
|
The deferred tax assets and liabilities are included in our
Consolidated Balance Sheets as follows:
|
|
As of December 31
|
|
|
($000)
|
|
2009
|
|
2008
|
|
Deferred tax asset, net current
|
|
$
|
1,109
|
|
$
|
3,538
|
|
Deferred tax liability, net
non-current
|
|
(4,678
|
)
|
(7,531
|
)
|
Net deferred tax liability, net
|
|
$
|
(3,569
|
)
|
$
|
(3,993
|
)
|
The following table summarizes our U.S. NOL carryforwards:
|
|
As of December 31
|
|
|
|
|
|
($000)
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
Expiration Date
|
|
|
|
Expiration Date
|
|
U.S. NOLs subject to expiration
dates
|
|
$
|
5,084
|
|
2023 through 2029
|
|
$
|
3,261
|
|
2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in U.S. NOL carryforwards at December 31,
2009 compared with the prior year primarily reflects NOLs from acquisitions.
Approximately $3,036,000 of our U.S. NOL carryforward at December 31, 2009
is subject to limitations on the use of the NOL imposed by the U.S. Internal
Revenue Code, and therefore is limited to approximately $225,000 per year.
104
The following table summarizes our NOL carryforwards for our
non-U.S. operations:
|
|
As of December 31
|
|
($000)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Non-U.S. NOLs subject to
expiration dates from 2015 through 2020
|
|
$
|
3,235
|
|
$
|
4,387
|
|
Non-U.S. NOLs with no expiration
date
|
|
47,366
|
|
40,558
|
|
Total
|
|
$
|
50,601
|
|
$
|
44,945
|
|
|
|
|
|
|
|
Non-U.S. NOLs not subject to
valuation allowances
|
|
$
|
4,430
|
|
$
|
3,640
|
|
The increase in non-U.S. NOL carryforwards at December 31,
2009 compared with the prior year primarily reflects additional losses in our
non-U.S. operations as well as the impact of currency translation.
Federal and state income taxes have not been provided on
accumulated undistributed earnings of certain foreign subsidiaries aggregating
approximately $19,700,000 as of December 31, 2009, as such earnings have
been permanently reinvested. It is not practicable to determine the amount
of the unrecognized deferred tax liability related to the undistributed
earnings.
Accounting for Uncertainty in Tax
Positions
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. In 2009, the statute of limitations lapsed on our
2005 U.S. federal tax returns. The open tax years for our U.S. Federal tax
returns and most state tax returns include the years 2006 to the present. In
non-U.S. jurisdictions, the statute of limitations generally extends to years
prior to 2003.
We are currently under audit by the U.S. federal and various
state and local tax authorities in the United States as well as tax authorities
in certain non-U.S. jurisdictions. It is likely that the examination phase
of some of these U.S. federal, state, local, and non-U.S. audits will conclude
in 2010. It is not possible to estimate the impact of current audits on
previously recorded unrecognized tax benefits.
As of December 31, 2009, our Consolidated Balance Sheet
included a current liability of $981,000 and a non-current liability of
$5,369,000 for unrecognized tax benefits. These amounts include interest and
penalties, less any associated tax benefits.
The table below reconciles the beginning and ending amount
of the gross unrecognized tax benefits as follows:
($000)
|
|
2009
|
|
2008
|
|
Gross unrecognized tax benefits
beginning of the year
|
|
$
|
7,674
|
|
$
|
7,195
|
|
Increases as a result of tax
positions taken during a prior-year period
|
|
2,298
|
|
2,905
|
|
Decreases as a result of tax
positions taken during a prior-year period
|
|
|
|
(2,383
|
)
|
Increases as a result of tax
positions taken during the current period
|
|
667
|
|
709
|
|
Decreases relating to settlements
with tax authorities
|
|
(3,210
|
)
|
(562
|
)
|
Reductions as a result of lapse of
the applicable statute of limitations
|
|
(1,360
|
)
|
(190
|
)
|
Gross unrecognized tax benefits
end of the year
|
|
$
|
6,069
|
|
$
|
7,674
|
|
In 2009, we reversed $4,570,000 of gross unrecognized tax
benefits, of which $2,864,000 decreased our income tax expense by $2,616,000.
In addition, we reduced our gross unrecognized tax benefits for $1,706,000 of
payments to tax authorities.
The
substantial majority of the $2,965,000 increase in the gross unrecognized tax
benefits was recorded, net of any tax benefits, to income tax expense in our
Consolidated Statement of Income.
As of December 31, 2009, we had $6,069,000 of gross
unrecognized tax benefits, of which $5,263,000, if recognized, would reduce our
effective income tax rate and decrease our income tax expense by $4,749,000.
We record interest and penalties related to uncertain tax
positions as part of our income tax expense. The following table
summarizes our gross liability for interest and penalties:
|
|
As of December 31
|
|
|
($000)
|
|
2009
|
|
2008
|
|
Liabilities for interest and
penalties
|
|
$
|
958
|
|
$
|
934
|
|
|
|
|
|
|
|
|
|
105
We recorded the increase in the liability, net of any tax benefits,
to income tax expense in our Consolidated Statement of Income in 2009.
15. Contingencies
Business Logic
In November 2009, Business
Logic Holding Corporation filed a complaint in the Circuit Court of Cook
County, Illinois against Ibbotson Associates, Inc. and Morningstar, Inc.
relating to Ibbotsons prior commercial relationship with Business Logic.
Business Logic is alleging that Ibbotson Associates and Morningstar violated
Business Logics rights by using its trade secrets to develop a proprietary web
service software and user interface that connects plan participant data with
the Ibbotson Wealth Forecasting Engine. Business Logic seeks, among other
things, injunctive relief and unspecified damages. While Morningstar and
Ibbotson Associates are vigorously contesting the claims against them, we
cannot predict the outcome of the proceeding.
Online News Link LLC
In October 2009, Online News
Link LLC filed a complaint in the United States District Court for the Eastern
District of Texas against Morningstar, Inc. and several other providers of
online information alleging that each defendant infringes U.S. Patent No. 7,508,789,
which relates to ways for delivering online information. Online News Link
seeks, among other things, unspecified damages and costs incurred by Online
News Link because of defendants infringing activities. The complaint does not
include specific allegations against Morningstar. Morningstar is evaluating the
lawsuit but cannot predict the outcome of the proceeding.
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 its data in order to build a competing product to deliver SEC-filed mutual
fund disclosure documents online. In February 2009, the case was removed
to the United States District Court for the District of Massachusetts. In September 2009,
Morningstar and NewRiver resolved the litigation. Morningstar has agreed
not to engage in the conduct that NewRiver alleges prompted it to file suit,
and NewRiver has agreed to dismiss its lawsuit. The settlement does not include
any payments by either party, and Morningstar maintains its denial of NewRivers
allegations. All other settlement terms are confidential.
Morningstar Associates, LLC
Subpoenas from the Securities and Exchange Commission, the Department of Labor,
and the New York Attorney Generals Office
·
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.
·
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 was conducting. The Department of Labor subpoena was
substantially similar in scope to the SEC subpoena.
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.
In September 2009,
the Department of Labor notified Morningstar Associates that it ended its
investigation, with no enforcement action, fines, or penalties.
106
·
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 and Department of Labor subpoenas 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.
In addition to these proceedings, we
are involved in legal proceedings and litigation that have arisen in the normal
course of our business. Although the outcome of a particular proceeding can
never be predicted, we do not believe that the result of any of these other
matters will have a material adverse effect on our business, operating results,
or financial condition.
16. Subsequent Events
In February 2010, we acquired the Footnoted business of
Financial Fineprint Inc., a privately held firm based in Peekskill, N.Y. The
acquisition includes the Footnoted.org website and the Footnoted Pro service.
Terms were not disclosed. Footnoted.org
was founded in 2003 by Michelle Leder, author and journalist. Footnoteds
research staff pores over hundreds of SEC filings a day to unearth critical
information buried in the fine print. Footnoteds free site has become a
must-read for professional money managers and analysts, as well as
sophisticated individual investors. Footnoted Pro, a service for institutional investors,
provides insight on actionable items and trends in SEC filings.
17. Recently Issued Accounting
Pronouncements
In June 2009, the FASB issued Accounting Standards
Update (ASU) No. 2009-16
, Transfers and Servicing
(Topic 860): Accounting for Transfers of Financial Assets
and ASU No. 2009-17,
Consolidations (Topic 810): Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities.
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 ASU No. 2009-16
consists of the removal of the concept of a Qualifying Special-Purpose Entity
(QSPE) from ASC 860,
Transfers and Services
.
ASU No. 2009-17 addresses the effects of eliminating the QSPE concept from
ASC 860,
Transfers and Services,
and responds to
concerns about the application of certain key provisions of ASC 810,
Consolidation
, including concerns over the transparency of
enterprises involvement with Variable Interest Entities (VIEs). We adopted ASU
No. 2009-16 and ASU No. 2009-17 effective January 1, 2010 and do
not anticipate any impact on our Consolidated Financial Statements.
In October 2009, the FASB issued ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements.
ASU 2009-13 supersedes EITF Issue 00-21,
Revenue Arrangements with Multiple Deliverables
. ASU 2009-13
establishes the accounting and reporting guidance for arrangements when a
vendor performs multiple revenue-generating activities, addresses how to
separate deliverables, and how to measure and allocate arrangement
consideration. Vendors often provide multiple products or services to
customers. Because products and services are often provided at different points
in time or over different time periods within the same contractual arrangement,
this guidance enables vendors to account for products or services separately
rather than as a combined unit.
Also in October 2009, the FASB issued ASU No. 2009-14,
Software (Topic 985): Certain Revenue Arrangements
That Include Software Elements,
and affects vendors that sell or
lease tangible products in an arrangement that contains software that is more
than incidental to the tangible product as a whole. ASU No. 2009-14 does
not affect software revenue arrangements that do not include tangible products.
They also do not affect software revenue arrangements that include services if
the software is essential to the functionality of those services.
107
For Morningstar, ASU No. 2009-13 and ASU No. 2009-14
will be effective prospectively for revenue arrangements entered into from January 1,
2011. Early adoption is permitted. We are in the process of determining the
impact, if any, these accounting standard updates will have on our Consolidated
Financial Statements.
In January 2010, the FASB
issued ASU No. 2010-06,
Fair Value Measurements
and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements
.
ASU No. 2010-06 requires additional disclosures regarding fair value
measurements. The amended guidance requires entities to disclose additional
information regarding assets and liabilities that are transferred between
levels of the fair value hierarchy. Entities are also required to disclose
information in the Level 3 rollforward about purchases, sales, issuances, and
settlements on a gross basis. In addition to these new disclosure requirements,
ASU 2010-06 also amends Topic 820 to further clarify existing guidance
pertaining to the level of disaggregation at which fair value disclosures
should be made and the disclosure requirements regarding the valuation
techniques and inputs used in estimating Level 2 and Level 3 fair value
measurements.
For Morningstar, the requirement to disclose additional
information regarding assets and liabilities that are transferred between
levels of the fair value hierarchy will be effective for our 2010 Consolidated
Financial Statements. The requirement to separately disclose purchases, sales,
issuances, and settlements in the Level 3 rollforward will be effective for our
2011 Consolidated Financial Statements. We are in the process of determining
the impact, if any, these accounting pronouncements will have on our Consolidated
Financial Statements.
108
18. Selected Quarterly Financial
Data (unaudited)
|
|
2008
|
|
2009
|
|
(in thousands except per share
amounts)
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Revenue
|
|
$
|
125,444
|
|
$
|
132,237
|
|
$
|
125,505
|
|
$
|
119,271
|
|
$
|
116,732
|
|
$
|
119,533
|
|
$
|
120,088
|
|
$
|
122,643
|
|
Total operating expense (1)
|
|
90,759
|
|
90,667
|
|
91,329
|
|
90,583
|
|
82,107
|
|
86,845
|
|
86,405
|
|
98,319
|
|
Operating income
|
|
34,685
|
|
41,570
|
|
34,176
|
|
28,688
|
|
34,625
|
|
32,688
|
|
33,683
|
|
24,324
|
|
Non-operating income (expense), net
|
|
1,791
|
|
1,147
|
|
1,327
|
|
(13
|
)
|
534
|
|
1,972
|
|
793
|
|
(365
|
)
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
36,476
|
|
42,717
|
|
35,503
|
|
28,675
|
|
35,159
|
|
34,660
|
|
34,476
|
|
23,959
|
|
Income tax expense
|
|
13,504
|
|
15,076
|
|
13,547
|
|
9,636
|
|
10,668
|
|
14,024
|
|
12,407
|
|
9,996
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
352
|
|
445
|
|
268
|
|
256
|
|
382
|
|
(21
|
)
|
429
|
|
375
|
|
Consolidated net income
|
|
23,324
|
|
28,086
|
|
22,224
|
|
19,295
|
|
24,873
|
|
20,615
|
|
22,498
|
|
14,338
|
|
Net (income) loss attributable to
the noncontrolling interests
|
|
(248
|
)
|
(87
|
)
|
(37
|
)
|
(25
|
)
|
89
|
|
(71
|
)
|
22
|
|
92
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
23,076
|
|
$
|
27,999
|
|
$
|
22,187
|
|
$
|
19,270
|
|
$
|
24,962
|
|
$
|
20,544
|
|
$
|
22,520
|
|
$
|
14,430
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.51
|
|
$
|
0.61
|
|
$
|
0.48
|
|
$
|
0.41
|
|
$
|
0.53
|
|
$
|
0.43
|
|
$
|
0.46
|
|
$
|
0.30
|
|
Weighted average common shares
outstandingbasic
|
|
45,224
|
|
45,921
|
|
46,499
|
|
46,902
|
|
47,378
|
|
47,941
|
|
48,457
|
|
48,652
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.47
|
|
$
|
0.57
|
|
$
|
0.45
|
|
$
|
0.39
|
|
$
|
0.51
|
|
$
|
0.41
|
|
$
|
0.45
|
|
$
|
0.29
|
|
Weighted average common shares
outstandingdiluted
|
|
49,010
|
|
49,290
|
|
49,421
|
|
49,124
|
|
49,167
|
|
49,631
|
|
50,048
|
|
50,248
|
|
(1) Includes stock-based
compensation expense of:
|
|
$
|
2,744
|
|
$
|
2,969
|
|
$
|
2,818
|
|
$
|
2,750
|
|
$
|
2,725
|
|
$
|
3,068
|
|
$
|
2,863
|
|
$
|
2,937
|
|
109
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of 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 December 31,
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) Managements Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
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 our internal control over
financial reporting based on the framework set forth in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31,
2009. Ernst & Young LLP, our independent registered public accounting
firm, has issued their report on the effectiveness of our internal control over
financial reporting, which is included in Part II, Item 8 of this Form 10-K
under the caption Financial Statements and Supplementary Data and
incorporated herein by reference.
(c) Changes in Internal Controls Over
Financial Reporting
There were no changes in our internal controls over
financial reporting during our fiscal quarter ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
There is no information that was required to be disclosed in
a report on Form 8-K during the fourth quarter of the year covered by this
Annual Report on Form 10-K that was not reported.
110
Part
III
Item 10. Directors, Executive
Officers, and Corporate Governance
The information contained under the headings Proposal 1
Election of Directors, Board of Directors and Corporate Governance
Independent Directors, Board of Directors and Corporate Governance Board
Committees and Charters, and Section 16(a) Beneficial Ownership
Reporting Compliance in the definitive proxy statement for our 2010 Annual Meeting
of Shareholders (the Proxy Statement) and the information contained under the
heading Executive Officers in Part I of this report is incorporated herein
by reference in response to this item.
We have adopted a code of ethics, which is posted in the Investor
Relations section on our website at
http://corporate.morningstar.com
.
We intend to include on our website any amendments to, or waivers from, a
provision of the code of ethics that apply to our principal executive officer,
principal financial officer, principal accounting officer, or controller that
relates to any element of the code of ethics definition contained in Item 406(b) of
SEC Regulation S-K. Shareholders may request a free copy of these
documents by sending an e-mail to investors@morningstar.com.
Item 11. Executive Compensation
The information contained under the headings Board of
Directors and Corporate Governance Directors Compensation, Compensation
Discussion and Analysis, Compensation Committee Report, Compensation Committee
Interlocks and Insider Participation, Executive Compensation, and Certain
Relationships and Related Party Transactions Deferred Compensation Agreement
with Don Phillips in the Proxy Statement is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the headings Security
Ownership of Certain Beneficial Owners and Management and Equity Compensation
Plan Information in the Proxy Statement is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and
Related Transactions, and Director Independence
The information contained under the headings Certain
Relationships and Related Party Transactions and Board of Directors and
Corporate Governance Independent Directors in the Proxy Statement is
incorporated herein by reference in response to this item.
Item 14. Principal Accountant Fees
and Services
The information contained under the headings Audit Committee
Report and Principal Accounting Firm Fees in the Proxy Statement is
incorporated herein by reference in response to this item.
111
Part IV
Item 15. Exhibits and Financial
Statement Schedules
(a)
1. Consolidated Financial Statements
The following documents are filed as part of this
Annual Report on Form 10-K under Item 8Financial Statements and
Supplementary Data:
Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm
|
|
Financial Statements:
|
Consolidated Statements of
IncomeYears ended December 31, 2009, 2008, and 2007
|
Consolidated Balance
SheetsDecember 31, 2009 and 2008
|
Consolidated Statements of Equity and Comprehensive
Income (Loss)Years ended December 31, 2009, 2008, and 2007
|
Consolidated Statements of Cash
FlowsYears ended December 31, 2009, 2008, and 2007
|
Notes to Consolidated Financial
Statements
|
2. Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The report of Ernst & Young LLP dated March 1,
2010 concerning the Financial Statement Schedule II, Morningstar, Inc.,
and subsidiaries Valuation and Qualifying Accounts, is included at the
beginning of Part II, Item 8 of this Annual Report on Form 10-K for
the year ended December 31, 2009.
The following financial statement schedule is filed as
part of this Annual Report on Form 10-K:
Schedule II: Valuation and Qualifying Accounts
All other schedules have been omitted as they are not
required, not applicable, or the required information is otherwise included.
Schedule II Morningstar, Inc. and
Subsidiaries Valuation and Qualifying Accounts
($000)
|
|
Balance at
Beginning
of Year
|
|
Charged
(Credited) to
Costs &
Expenses
|
|
Additions
(Deductions)
Including
Currency
Translation
|
|
Balance at
End of
Year
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
466
|
|
$
|
1,292
|
|
$
|
(419
|
)
|
$
|
1,339
|
|
2008
|
|
161
|
|
242
|
|
63
|
|
466
|
|
2007
|
|
225
|
|
(54
|
)
|
(10
|
)
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
3. Exhibits
Exhibit
|
|
Description
|
3.1
|
|
Amended and Restated Articles of Incorporation of
Morningstar are incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form S-1, as amended, Registration
No. 333-115209 (the Registration Statement).
|
3.2
|
|
By-laws of Morningstar, as in effect on July 28,
2006, are incorporated by reference to Exhibit 3.2 to our Current Report
on Form 8-K that we filed with the SEC on July 31, 2006.
|
4.1
|
|
Specimen Common Stock Certificate is incorporated by
reference to Exhibit 4.1 to the Registration Statement.
|
10.1*
|
|
Form of Indemnification Agreement is incorporated by
reference to Exhibit 10.1 to the Registration Statement.
|
10.2*
|
|
Morningstar Incentive Plan, as amended and restated
effective January 1, 2009, is incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K that we filed with
the SEC on May 20, 2009.
|
10.3*
|
|
Morningstar 1999 Incentive Stock Option Plan is
incorporated by reference to Exhibit 10.4 to the Registration Statement.
|
10.4*
|
|
Morningstar 2004 Stock Incentive Plan, as amended and
restated effective as of July 24, 2009, is incorporated by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009.
|
10.5*
|
|
Form of Morningstar 2004 Stock Incentive Plan Stock
Option Agreement is incorporated by reference to Exhibit 10.5 to our
Annual Report on Form 10-K for the year ended December 31, 2005.
|
10.6*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Restricted Stock Unit Award Agreement for awards made prior to
November 15, 2007 is incorporated by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2006 (the March 2006 10-Q).
|
10.7*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Director Restricted Stock Unit Award Agreement for awards made prior to
November 15, 2007 is incorporated by reference to Exhibit 10.2 to
the March 2006 10-Q.
|
10.8*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Restricted Stock Unit Award Agreement for awards made on and after November 15,
2007 and prior to January 1, 2009 is incorporated by reference to
Exhibit 10.8 to our Annual Report Form 10-K for the year ended
December 31, 2007 (the 2007 10-K).
|
10.9*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Director Restricted Stock Unit Award Agreement for awards made on and after
November 15, 2007 and prior to January 1, 2009 is incorporated by
reference to Exhibit 10.9 to the 2007 10-K.
|
10.10*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Restricted Stock Unit Award Agreement for awards made on and after
January 1, 2009 is incorporated by reference to Exhibit 10.10 to
our Annual Report on Form 10-K for the year ended December 31, 2008
(the 2008 10-K).
|
10.11*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Director Restricted Stock Unit Award Agreement for awards made on and after
January 1, 2009 is incorporated by reference to Exhibit 10.11 to
the 2008 10-K.
|
10.12*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Deferral Election Form is incorporated by reference to Exhibit 10.3
to the March 2006 10-Q.
|
10.13*
|
|
Form of Morningstar 2004 Stock Incentive Plan
Director Deferral Election Form is incorporated by reference to
Exhibit 10.4 to the March 2006 10-Q.
|
10.14*
|
|
Deferred Compensation Agreement dated February 15,
1999 between Morningstar and Don Phillips is incorporated by reference to
Exhibit 10.6 to the Registration Statement.
|
10.15*
|
|
Purchase Agreement dated April 30, 2003 between
Morningstar and Patrick Reinkemeyer is incorporated by reference to
Exhibit 10.8 to the Registration Statement.
|
10.16*
|
|
First Amendment to Purchase Agreement dated as of
February 1, 2006 between Morningstar and Patrick Reinkemeyer is
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K that we filed with the SEC on February 3, 2006 (the
February 2006 8-K).
|
113
10.17*
|
|
Purchase Agreement dated April 30, 2003 between
Morningstar and David Williams is incorporated by reference to
Exhibit 10.9 to the Registration Statement.
|
10.18*
|
|
First Amendment to Purchase Agreement dated as of
February 1, 2006 between Morningstar and David Williams is incorporated
by reference to Exhibit 10.2 to the February 2006 8-K.
|
10.19*
|
|
Agreement dated as of February 18, 2010 between Tao
Huang and Morningstar is incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K that we filed with the SEC on
February 18, 2010.
|
21.1
|
|
Subsidiaries of Morningstar.
|
23.1
|
|
Consent of Ernst & Young LLP.
|
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
|
* Management contract with a
director or executive officer or a compensatory plan or arrangement in which
directors or executive officers are eligible to participate.
Filed herewith.
114
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 on March 1,
2010.
|
MORNINGSTAR, INC.
|
|
By: /s/ Joe Mansueto
|
|
Name: Joe Mansueto
|
|
Title: Chairman of the Board and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Joe Mansueto
|
|
Chairman of the Board and Chief
Executive
|
|
March 1, 2010
|
Joe Mansueto
|
|
Officer (principal executive
officer)
|
|
|
|
|
|
|
|
/s/ Scott Cooley
|
|
Chief Financial Officer (principal
|
|
March 1, 2010
|
Scott Cooley
|
|
accounting and financial officer)
|
|
|
|
|
|
|
|
/s/ Donald J. Phillips II
|
|
Director
|
|
March 1, 2010
|
Donald J. Phillips II
|
|
|
|
|
|
|
|
|
|
/s/ Cheryl Francis
|
|
Director
|
|
March 1, 2010
|
Cheryl Francis
|
|
|
|
|
|
|
|
|
|
/s/ Steven Kaplan
|
|
Director
|
|
March 1, 2010
|
Steven Kaplan
|
|
|
|
|
|
|
|
|
|
/s/ Bill Lyons
|
|
Director
|
|
March 1, 2010
|
Bill Lyons
|
|
|
|
|
|
|
|
|
|
/s/ Jack Noonan
|
|
Director
|
|
March 1, 2010
|
Jack Noonan
|
|
|
|
|
|
|
|
|
|
/s/ Frank Ptak
|
|
Director
|
|
March 1, 2010
|
Frank Ptak
|
|
|
|
|
|
|
|
|
|
/s/ Paul Sturm
|
|
Director
|
|
March 1, 2010
|
Paul Sturm
|
|
|
|
|
|
|
|
|
|
/s/ Hugh Zentmyer
|
|
Director
|
|
March 1, 2010
|
Hugh Zentmyer
|
|
|
|
|
115
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