Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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|
|
|
FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2010
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|
OR
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|
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
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(I.R.S. Employer
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Incorporation or Organization)
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Identification Number)
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22 West Washington
Street
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Chicago, Illinois
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60602
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(Address of Principal Executive
Offices)
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(Zip Code)
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(312) 696-6000
(Registrants Telephone Number, Including Area Code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
x
No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
x
|
Accelerated
filer
o
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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)
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|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
As
of July 31, 2010, there were 49,560,398 shares of the Companys common
stock, no par value, outstanding.
Table of Contents
PART 1. FINANCIAL
INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
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Three months ended June 30
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Six months ended June 30
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(in thousands except per share amounts)
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2010
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2009
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2010
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2009
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|
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Revenue
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$
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136,091
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$
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119,533
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$
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264,381
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$
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236,265
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Operating expense (1):
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Cost of goods sold
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39,738
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30,694
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74,054
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60,946
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Development
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11,899
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9,438
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22,788
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18,738
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Sales and marketing
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24,435
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18,010
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46,996
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35,546
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General and administrative
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23,106
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19,853
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43,749
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37,006
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Depreciation and amortization
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9,246
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8,850
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18,185
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16,716
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Total operating expense
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108,424
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86,845
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205,772
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168,952
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Operating income
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27,667
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32,688
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58,609
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67,313
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Non-operating income (expense):
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|
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Interest income, net
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593
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764
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1,180
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1,742
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Other income (expense), net
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(572
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)
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1,208
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(1,338
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)
|
764
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Non-operating income (expense), net
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21
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1,972
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(158
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)
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2,506
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Income before income taxes and equity
in net income (loss) of unconsolidated entities
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27,688
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34,660
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58,451
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69,819
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Income tax expense
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10,225
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14,024
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21,220
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24,692
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Equity in net income (loss) of
unconsolidated entities
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454
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(21
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)
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843
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361
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Consolidated net income
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17,917
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20,615
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38,074
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45,488
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Net (income) loss attributable to
noncontrolling interests
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85
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(71
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)
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116
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18
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Net income attributable to
Morningstar, Inc.
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$
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18,002
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$
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20,544
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$
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38,190
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$
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45,506
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Net income per share attributable to
Morningstar, Inc.:
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Basic
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$
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0.37
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$
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0.43
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$
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0.78
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$
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0.95
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Diluted
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$
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0.36
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$
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0.41
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$
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0.76
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$
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0.92
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Weighted average shares outstanding:
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Basic
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49,234
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47,941
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49,032
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47,661
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Diluted
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50,533
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49,631
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|
50,426
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49,385
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Three months ended June 30
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Six months ended June 30
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2010
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2009
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2010
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2009
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(1) Includes stock-based
compensation expense of:
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Cost of goods sold
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$
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907
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$
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715
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$
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1,622
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$
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1,264
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Development
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449
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413
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|
842
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767
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Sales and marketing
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486
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|
422
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889
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778
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General and administrative
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1,813
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1,518
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3,239
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2,984
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|
Total stock-based compensation
expense
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$
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3,655
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$
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3,068
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$
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6,592
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$
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5,793
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|
See
notes to unaudited condensed consolidated financial statements.
3
Table of Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands except share amounts)
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June 30
2010
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December 31
2009
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Assets
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Current assets:
|
|
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Cash and cash equivalents
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$
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154,377
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$
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130,496
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Investments
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165,973
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212,057
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Accounts receivable, less allowance
of $766 and $1,339, respectively
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90,127
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82,330
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Deferred tax asset, net
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|
1,464
|
|
1,109
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|
Income tax receivable, net
|
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13,114
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|
5,541
|
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Other
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12,550
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12,564
|
|
Total current assets
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437,605
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444,097
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Property, equipment, and capitalized
software, net
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56,453
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59,828
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Investments in unconsolidated
entities
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24,099
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24,079
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Goodwill
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281,813
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249,992
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Intangible assets, net
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156,825
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135,488
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Other assets
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5,731
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|
6,099
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|
Total assets
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$
|
962,526
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$
|
919,583
|
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|
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|
|
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Liabilities
and equity
|
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Current liabilities:
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Accounts payable and accrued
liabilities
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$
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33,845
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$
|
29,901
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Accrued compensation
|
|
37,744
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|
48,902
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Deferred revenue
|
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140,802
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127,114
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Other
|
|
950
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|
962
|
|
Total current liabilities
|
|
213,341
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|
206,879
|
|
Accrued compensation
|
|
4,752
|
|
4,739
|
|
Deferred tax liability, net
|
|
3,418
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|
4,678
|
|
Other long-term liabilities
|
|
24,949
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|
26,413
|
|
Total liabilities
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246,460
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|
242,709
|
|
|
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Equity:
|
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|
|
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Morningstar, Inc. shareholders
equity:
|
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Common stock, no par value,
200,000,000 shares authorized, of which 49,558,248 and 48,768,541 shares were
outstanding as of June 30, 2010 and December 31, 2009, respectively
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|
5
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|
5
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|
Treasury stock at cost, 208,899 shares
as of June 30, 2010 and 222,653 as of December 31, 2009
|
|
(2,936
|
)
|
(3,130
|
)
|
Additional paid-in capital
|
|
446,305
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|
432,052
|
|
Retained earnings
|
|
284,935
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|
246,745
|
|
Accumulated other comprehensive
income (loss):
|
|
|
|
|
|
Currency translation adjustment
|
|
(12,992
|
)
|
(337
|
)
|
Unrealized gain (loss) on
available-for-sale securities
|
|
(217
|
)
|
370
|
|
Total accumulated other comprehensive
income (loss)
|
|
(13,209
|
)
|
33
|
|
Total Morningstar, Inc.
shareholders equity
|
|
715,100
|
|
675,705
|
|
Noncontrolling interest
|
|
966
|
|
1,169
|
|
Total equity
|
|
716,066
|
|
676,874
|
|
Total liabilities and equity
|
|
$
|
962,526
|
|
$
|
919,583
|
|
See
notes to unaudited condensed consolidated financial statements.
4
Table of
Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity and
Comprehensive Income (Loss)
For the Six Months Ended June 30, 2010
|
|
Morningstar, Inc.
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Additional
|
|
|
|
Comprehensive
|
|
Non
|
|
|
|
|
|
Shares
|
|
Par
|
|
Treasury
|
|
Paid-in
|
|
Retained
|
|
Income
|
|
Controlling
|
|
Total
|
|
(in thousands, except share amounts)
|
|
Outstanding
|
|
Value
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
(Loss)
|
|
Interests
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
48,768,541
|
|
$
|
5
|
|
$
|
(3,130
|
)
|
$
|
432,052
|
|
$
|
246,745
|
|
$
|
33
|
|
$
|
1,169
|
|
$
|
676,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
38,190
|
|
|
|
(116
|
)
|
38,074
|
|
Unrealized
loss on available-for-sale investments, net of income tax of $353
|
|
|
|
|
|
|
|
|
|
|
|
(588
|
)
|
|
|
(588
|
)
|
Foreign
currency translation adjustment, net
|
|
|
|
|
|
|
|
|
|
|
|
(12,654
|
)
|
(87
|
)
|
(12,741
|
)
|
Total
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
38,190
|
|
(13,242
|
)
|
(203
|
)
|
24,745
|
|
Issuance
of common stock related to stock option exercises and vesting of restricted
stock units, net
|
|
590,533
|
|
|
|
194
|
|
3,456
|
|
|
|
|
|
|
|
3,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation - restricted stock units
|
|
|
|
|
|
|
|
6,280
|
|
|
|
|
|
|
|
6,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation - restricted stock
|
|
199,174
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
312
|
|
Excess
tax benefit derived from stock option exercises and vesting of restricted
stock units
|
|
|
|
|
|
|
|
4,205
|
|
|
|
|
|
|
|
4,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
49,558,248
|
|
$
|
5
|
|
$
|
(2,936
|
)
|
$
|
446,305
|
|
$
|
284,935
|
|
$
|
(13,209
|
)
|
$
|
966
|
|
$
|
716,066
|
|
See
notes to unaudited condensed consolidated financial statements.
5
Table of
Contents
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
Six months ended June 30
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Consolidated net income
|
|
$
|
38,074
|
|
$
|
45,488
|
|
Adjustments to reconcile consolidated
net income to net cash flows from operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
18,185
|
|
16,716
|
|
Deferred income tax benefit
|
|
(1,012
|
)
|
(956
|
)
|
Stock-based compensation expense
|
|
6,592
|
|
5,793
|
|
Provision for bad debt
|
|
356
|
|
187
|
|
Equity in net income of
unconsolidated entities
|
|
(843
|
)
|
(361
|
)
|
Excess tax benefits from stock option
exercises and vesting of restricted stock units
|
|
(4,205
|
)
|
(4,544
|
)
|
Other, net
|
|
1,386
|
|
(752
|
)
|
Changes in operating assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
|
(6,615
|
)
|
9,312
|
|
Other assets
|
|
(511
|
)
|
341
|
|
Accounts payable and accrued
liabilities
|
|
2,859
|
|
(6,012
|
)
|
Accrued compensation
|
|
(11,154
|
)
|
(45,431
|
)
|
Income taxes payable
|
|
(4,255
|
)
|
10,396
|
|
Deferred revenue
|
|
7,177
|
|
806
|
|
Deferred rent
|
|
(80
|
)
|
(286
|
)
|
Other liabilities
|
|
(924
|
)
|
570
|
|
Cash provided by operating activities
|
|
45,030
|
|
31,267
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
Purchases of investments
|
|
(85,528
|
)
|
(50,273
|
)
|
Proceeds from maturities and sales of
investments
|
|
130,381
|
|
38,128
|
|
Capital expenditures
|
|
(3,839
|
)
|
(6,768
|
)
|
Acquisitions, net of cash acquired
|
|
(67,455
|
)
|
(18,571
|
)
|
Other, net
|
|
889
|
|
629
|
|
Cash used for investing activities
|
|
(25,552
|
)
|
(36,855
|
)
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
3,650
|
|
11,653
|
|
Excess tax benefits from stock option
exercises and vesting of restricted stock units
|
|
4,205
|
|
4,544
|
|
Other, net
|
|
205
|
|
(178
|
)
|
Cash provided by financing activities
|
|
8,060
|
|
16,019
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
(3,657
|
)
|
2,777
|
|
Net increase in cash and cash
equivalents
|
|
23,881
|
|
13,208
|
|
Cash and cash equivalentsbeginning
of period
|
|
130,496
|
|
173,891
|
|
Cash and cash equivalentsend of
period
|
|
$
|
154,377
|
|
$
|
187,099
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
26,396
|
|
$
|
14,152
|
|
Supplemental
information of non-cash investing and financing activities:
|
|
|
|
|
|
Unrealized loss on available-for-sale
investments
|
|
$
|
(941
|
)
|
$
|
(75
|
)
|
See
notes to unaudited condensed consolidated financial statements.
6
Table of Contents
MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation of Interim Financial
Information
The accompanying condensed consolidated financial statements
of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company)
have been prepared to conform to the rules and regulations of the
Securities and Exchange Commission (SEC). The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amount of assets, liabilities, revenue, and expenses. Actual
results could differ from those estimates. In the opinion of management, the
statements reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly our financial position, results of operations,
equity, and cash flows. These financial statements and notes should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2009, filed with the SEC on March 1, 2010.
The
acronyms that appear in the Notes to our Condensed Consolidated Financial
Statements refer to the following:
ASC:
Accounting Standards Codification
ASU:
Accounting Standards Update
EITF:
Emerging Issues Task Force
FASB:
Financial Accounting Standards Board
SEC: Securities and Exchange Commission
2. Summary of Significant Accounting Policies
We discuss our significant accounting policies in Note 2 of
our Consolidated Financial Statements included in our Annual Report on
Form 10-K for the year ended December 31, 2009, as filed with the SEC
on March 1, 2010. In addition, effective January 1, 2010, we adopted the
following financial accounting standards:
·
ASU No.
2009-16,
Transfers and Servicing (Topic 860) and 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 FASB ASU
No. 2009-16 consists of the removal of the concept of a Qualifying
Special-Purpose Entity (QSPE) from FASB ASC 860,
Transfers
and Services
. ASU No. 2009-17 addresses the effects of eliminating
the QSPE concept from ASC 860 and responds to concerns about the application of
certain key provisions of FASB ASC 810,
Consolidation
,
including concerns over the transparency of enterprises involvement with
Variable Interest Entities (VIEs). These accounting pronouncements did not
impact our Condensed Consolidated Financial Statements.
·
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. ASU 2010-06 also
clarifies 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. The additional disclosures required by ASU No. 2010-06
appear in Note 6, in the Notes to our Condensed Consolidated Financial
Statements.
7
Table of Contents
3. Acquisitions, Goodwill, and Other
Intangible Assets
2010 Acquisitions
In the first six months of 2010, we completed four
acquisitions, as follows:
Aegis Equities Research
In April 2010, we acquired Aegis Equities Research, a
leading provider of independent equity research in Sydney, Australia, for
$10,717,000 in cash, net of cash acquired. The following table summarizes our
preliminary allocation of the purchase price to the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition:
|
|
($000)
|
|
Cash and cash equivalents
|
|
$
|
51
|
|
Investments
|
|
55
|
|
Accounts receivable
|
|
229
|
|
Other non-current assets
|
|
62
|
|
Intangible assets
|
|
5,100
|
|
Goodwill
|
|
6,135
|
|
Deferred revenue
|
|
(617
|
)
|
Other current and non-current liabilities
|
|
(247
|
)
|
|
|
|
|
Total purchase price
|
|
$
|
10,768
|
|
The
preliminary allocation includes $5,100,000 of acquired intangible assets. These
assets primarily include customer-related assets and technology-based assets,
including software and databases. Goodwill of $6,135,000 represents the premium
we paid over the fair value of the net tangible and intangible assets acquired
with this acquisition. We paid this premium for a number of reasons, including
the strategic benefits of creating a larger analyst team that will enable us to
broaden and deepen our coverage of Australian listed companies, providing
Australian clients with more robust independent research, and giving us the
potential to expand our services in multiple delivery channels. We are in the process
of determining what portion of the value assigned to goodwill and intangible
assets, if any, is deductible for income tax purposes.
Old Broad Street Research Ltd
In April 2010, we acquired Old Broad Street Research Ltd.
(OBSR) for $16,651,000 in cash, net of cash acquired. OBSR is a premier
provider of fund research, ratings, and investment consulting services in the
United Kingdom, and offers an array of customized consulting services including
model portfolios, advice on fund construction, and corporate governance
services, that are used by many of the leading financial advisers and fund
platforms.
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. The purchase price allocation is preliminary pending
certain tax related matters, including the valuation of deferred tax assets and
liabilities at the date of acquisition.
|
|
($000)
|
|
Cash and cash equivalents
|
|
$
|
4,632
|
|
Accounts receivable and other current
assets
|
|
962
|
|
Other non-current assets
|
|
449
|
|
Intangible assets
|
|
8,473
|
|
Goodwill
|
|
9,337
|
|
Deferred revenue
|
|
(1,075
|
)
|
Accounts payable and accrued and
other current liabilities
|
|
(1,342
|
)
|
Other liabilities non-current
|
|
(153
|
)
|
Total purchase price
|
|
$
|
21,283
|
|
The
preliminary allocation includes $8,473,000 of acquired intangible assets. These
assets primarily include customer-related assets and technology-based assets,
including software and databases.
Goodwill
of $9,337,000 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 adding to our existing fund
research team in London, and continuing to build our thought leadership in
investment research. OBSR will also help us expand our investment consulting
presence in the United Kingdom, where we already provide asset allocation,
manager selection, and portfolio construction services to institutions and
intermediaries. The goodwill we recorded is not considered deductible for
income tax purposes.
8
Table of Contents
Realpoint, LLC
In May 2010, we acquired Realpoint, LLC (Realpoint) a
Nationally Recognized Statistical Ratings Organization (NRSRO) that specializes
in structured finance. Realpoint offers securities ratings, research,
surveillance services, and data to help institutional investors identify credit
risk in commercial mortgage-backed securities. Institutional investment firms
subscribe to Realpoints ratings and analytics, including money managers who
invest in commercial mortgage-backed securities.
In conjunction with this acquisition, we paid $38,385,000 in
cash, net of cash acquired, and issued 199,174 shares of restricted stock to
the selling employee-shareholders. As a result of the terms of the restricted
share agreements, in accordance with FASB ASC 805,
Business
Combinations
, we account for these grants as stock-based
compensation expense, and not as part of the acquisition consideration. See
Note 9 in the Notes to our Condensed Consolidated Financial Statements for
additional information concerning the accounting for this restricted stock.
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)
|
|
Cash and cash equivalents
|
|
$
|
5,393
|
|
Accounts receivable and other current
assets
|
|
2,647
|
|
Other non-current assets
|
|
319
|
|
Intangible assets
|
|
19,959
|
|
Goodwill
|
|
24,132
|
|
Deferred revenue
|
|
(7,316
|
)
|
Accounts payable and accrued and
other current liabilities
|
|
(1,356
|
)
|
Total purchase price
|
|
$
|
43,778
|
|
The
preliminary allocation includes $19,959,000 of acquired intangible assets.
These assets primarily include customer-related assets and technology-based
assets, including software and databases.
Goodwill
of $24,132,000 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 opportunity for Morningstar to enter into the
structured finance ratings and analysis business.
The
value assigned to goodwill, intangible assets, and restricted shares at the
date of grant are deductible for income tax purposes over a period of
approximately 15 years from the acquisition date.
Footnoted business of Financial Fineprint
Inc.
In February 2010, we acquired the Footnoted business of
Financial Fineprint Inc. (Footnoted), a blog for professional money managers,
analysts, and individual investors. Footnoted Pro, a service for institutional
investors, provides insight on actionable items and trends in SEC filings. The
acquisition includes the Footnoted.org website and the Footnoted Pro service.
Terms were not disclosed. The acquisition did not have a significant impact on
our Condensed Consolidated Financial Statements for the six months ended June
30, 2010.
9
Table of Contents
2009 Acquisitions
The table below summarizes the six acquisitions we completed
in 2009:
Acquisition
|
|
Description
|
|
Date Acquired
|
|
Purchase Price*
|
Global financial filings database
business of Global Reports LLC
|
|
A leading provider of online
financial and Corporate and Social Responsibility reports for publicly traded
companies around the world
|
|
April 20, 2009
|
|
Not separately Disclosed
|
Equity research and data business of
C.P.M.S. Computerized Portfolio Management Services Inc.
|
|
C.P.M.S. tracks fundamental equity
data for approximately 4,000 securities in the United States and Canada as
well as tracks and provides earnings estimates for Canadian stocks
|
|
May 1, 2009
|
|
$13.9 million
|
Andex Associates, Inc.
|
|
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
|
|
May 1, 2009
|
|
Not separately disclosed
|
Intech Pty Ltd
|
|
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
|
|
June 30, 2009
|
|
Not separately disclosed
|
Canadian Investment Awards and Gala
|
|
Canadas marquee investment awards
program, recognizing excellence in products and firms within the financial
services industry
|
|
December 17, 2009
|
|
Not separately disclosed
|
Logical Information Machines, Inc.
(LIM)
|
|
A leading provider of data and
analytics for the energy, financial, and agriculture sectors
|
|
December 31, 2009
|
|
$53.5 million
|
* Total purchase
price less cash acquired, subject to post-closing adjustments.
As
of June 30, 2010, we did not make any significant changes to the purchase price
allocations for the acquisitions that occurred in 2009. Certain of these
purchase price allocations, primarily the purchase price allocation related to
Logical Information Machines, Inc. are preliminary, pending resolution of
certain tax and other matters. Additional information concerning the six
acquisitions completed in 2009 can be found in the Notes to our Consolidated
Financial Statements included in our Annual Report on Form 10-K filed with the
SEC on March 1, 2010.
Pro Forma Information for 2010 and 2009 Acquisitions
The
following unaudited pro forma information presents a summary of our Condensed
Consolidated Statements of Income for the six months ended June 30, 2010 and
2009 as if we had completed the 2010 and 2009 acquisitions and had consolidated
Morningstar Korea, as of January 1 of each of these years. In calculating the
pro forma information below, we included an estimate of amortization expense
related to the intangible assets acquired.
|
|
Six months ended June 30
|
|
Unaudited Pro Forma Financial Information (in thousands
except per share amounts)
|
|
2010
|
|
2009
|
|
Revenue
|
|
$
|
271,736
|
|
$
|
262,848
|
|
Operating income
|
|
$
|
58,110
|
|
$
|
67,228
|
|
Net income attributable to Morningstar,
Inc.
|
|
$
|
37,840
|
|
$
|
45,435
|
|
|
|
|
|
|
|
Basic net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.77
|
|
$
|
0.95
|
|
Diluted net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.75
|
|
$
|
0.92
|
|
Goodwill
The following table shows the changes in our goodwill
balances from December 31, 2009 to June 30, 2010:
|
|
($000)
|
|
Balance as
of December 31, 2009
|
|
$
|
249,992
|
|
Acquisition
of Aegis
|
|
6,135
|
|
Acquisition
of OBSR
|
|
9,337
|
|
Acquisition
of Realpoint
|
|
24,132
|
|
Other,
primarily currency translation
|
|
(7,783
|
)
|
Balance as
of June 30, 2010
|
|
$
|
281,813
|
|
We did not record any impairment losses in the second
quarter or year-to-date periods ended June 30, 2010 and June 30, 2009,
respectively.
10
Table of
Contents
The following table summarizes our intangible assets:
|
|
As of June 30, 2010
|
|
As of December 31, 2009
|
|
($000)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Useful Life
(years)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Useful Life
(years)
|
|
Intellectual property
|
|
$
|
29,093
|
|
$
|
(13,502
|
)
|
$
|
15,591
|
|
10
|
|
$
|
28,472
|
|
$
|
(12,147
|
)
|
$
|
16,325
|
|
10
|
|
Customer-related assets
|
|
102,184
|
|
(32,535
|
)
|
69,649
|
|
11
|
|
87,635
|
|
(27,405
|
)
|
60,230
|
|
10
|
|
Supplier relationships
|
|
240
|
|
(66
|
)
|
174
|
|
20
|
|
240
|
|
(60
|
)
|
180
|
|
20
|
|
Technology-based assets
|
|
57,605
|
|
(20,092
|
)
|
37,513
|
|
9
|
|
49,276
|
|
(16,694
|
)
|
32,582
|
|
9
|
|
Non-competition agreement
|
|
848
|
|
(632
|
)
|
216
|
|
5
|
|
820
|
|
(547
|
)
|
273
|
|
5
|
|
Intangible assets related to
acquisitions with preliminary purchase price allocations
|
|
34,501
|
|
(819
|
)
|
33,682
|
|
10
|
|
26,129
|
|
(231
|
)
|
25,898
|
|
5
|
|
Total intangible assets
|
|
$
|
224,471
|
|
$
|
(67,646
|
)
|
$
|
156,825
|
|
10
|
|
$
|
192,572
|
|
$
|
(57,084
|
)
|
$
|
135,488
|
|
9
|
|
The
following table summarizes our amortization expense related to intangible
assets:
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Amortization expense
|
|
$
|
5,848
|
|
$
|
5,541
|
|
$
|
11,316
|
|
$
|
10,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
amortize intangible assets using the straight-line method over their expected
economic useful lives.
Based
on acquisitions completed through June 30, 2010, we expect intangible
amortization expense for 2010 and subsequent years as follows:
|
|
($000)
|
|
2010
|
|
$
|
23,071
|
|
2011
|
|
22,477
|
|
2012
|
|
21,257
|
|
2013
|
|
19,349
|
|
2014
|
|
18,438
|
|
2015
|
|
17,640
|
|
|
|
|
|
|
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.
11
Table of Contents
4. Income Per Share
The
numerator for both basic and diluted income per share is net income
attributable to Morningstar, Inc.
The
denominator for basic income per share is the weighted average number of common
shares outstanding during the period, exclusive of the restricted stock issued
in connection with the Realpoint acquisition. In accordance with FASB ASC 260,
Earnings Per Share
, outstanding common shares that are
contingently returnable until the shares are vested should be excluded from the
denominator in computing basic EPS even if they have been issued.
For
diluted income per share, we reflect the dilutive effect of outstanding
employee stock options, restricted stock units, and restricted stock issued in
connection with the Realpoint acquisition, in the denominator using the
treasury stock method.
The
following table shows how we reconcile our net income and the number of shares
used in computing basic and diluted income per share:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
(in thousands, except per share amounts)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
18,002
|
|
$
|
20,544
|
|
$
|
38,190
|
|
$
|
45,506
|
|
Weighted average common shares
outstanding
|
|
49,234
|
|
47,941
|
|
49,032
|
|
47,661
|
|
Basic net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.37
|
|
$
|
0.43
|
|
$
|
0.78
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
|
18,002
|
|
$
|
20,544
|
|
$
|
38,190
|
|
$
|
45,506
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
49,234
|
|
47,941
|
|
49,032
|
|
47,661
|
|
Net effect of dilutive stock options,
restricted stock units, and restricted stock
|
|
1,299
|
|
1,690
|
|
1,394
|
|
1,724
|
|
Weighted average common shares
outstanding for computing diluted income per share
|
|
50,533
|
|
49,631
|
|
50,426
|
|
49,385
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
attributable to Morningstar, Inc.
|
|
$
|
0.36
|
|
$
|
0.41
|
|
$
|
0.76
|
|
$
|
0.92
|
|
5. Segment and Geographical Area Information
Morningstar
has two operating segments:
·
Investment Information
.
The Investment Information
segment includes all of our data, software, and research products and services.
These products are typically sold through subscriptions or license agreements.
The
largest products in this segment based on revenue are 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:
Morningstar Office 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.
12
Table of Contents
·
Investment Management
.
The Investment Management
segment includes all of our asset management operations, which earn the
majority of their revenue from asset-based fees.
The
key products and services in this segment based on revenue are Investment
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, risk
levels, and investment strategies that financial advisors can use for their
clients taxable and tax-deferred accounts.
Our
segment accounting policies are the same as those described in Note 2 to our
Consolidated Financial Statements included in our Annual Report on
Form 10-K as of December 31, 2009, 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 350-20-50,
Intangibles - Goodwill - Disclosure.
13
Table of Contents
The following tables show selected
segment data for the three and six months ended June 30, 2010 and 2009:
|
|
Three months ended June 30, 2010
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
External
revenue
|
|
$
|
109,021
|
|
$
|
27,070
|
|
$
|
|
|
$
|
136,091
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
74,785
|
|
12,166
|
|
8,572
|
|
95,523
|
|
Stock-based
compensation expense
|
|
2,112
|
|
539
|
|
1,004
|
|
3,655
|
|
Depreciation
and amortization
|
|
1,582
|
|
44
|
|
7,620
|
|
9,246
|
|
Operating
income (loss)
|
|
$
|
30,542
|
|
$
|
14,321
|
|
$
|
(17,196
|
)
|
$
|
27,667
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,964
|
|
$
|
20
|
|
$
|
205
|
|
$
|
2,189
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
98,986
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
37,105
|
|
|
|
Three months ended June 30, 2009
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
External
revenue
|
|
$
|
97,739
|
|
$
|
21,794
|
|
$
|
|
|
$
|
119,533
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
57,770
|
|
8,126
|
|
9,031
|
|
74,927
|
|
Stock-based
compensation expense
|
|
1,526
|
|
517
|
|
1,025
|
|
3,068
|
|
Depreciation
and amortization
|
|
1,201
|
|
89
|
|
7,560
|
|
8,850
|
|
Operating
income (loss)
|
|
$
|
37,242
|
|
$
|
13,062
|
|
$
|
(17,616
|
)
|
$
|
32,688
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
1,713
|
|
$
|
148
|
|
$
|
317
|
|
$
|
2,178
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
89,286
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
30,247
|
|
|
|
Six months ended June 30, 2010
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
External
revenue
|
|
$
|
212,545
|
|
$
|
51,836
|
|
$
|
|
|
$
|
264,381
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
142,430
|
|
23,098
|
|
15,467
|
|
180,995
|
|
Stock-based
compensation expense
|
|
3,600
|
|
1,032
|
|
1,960
|
|
6,592
|
|
Depreciation
and amortization
|
|
3,227
|
|
92
|
|
14,866
|
|
18,185
|
|
Operating
income (loss)
|
|
$
|
63,288
|
|
$
|
27,614
|
|
$
|
(32,293
|
)
|
$
|
58,609
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
2,994
|
|
$
|
34
|
|
$
|
811
|
|
$
|
3,839
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
191,596
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
72,785
|
|
|
|
Six months ended June 30, 2009
|
|
($000)
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate Items
|
|
Total
|
|
External
revenue
|
|
$
|
193,979
|
|
$
|
42,286
|
|
$
|
|
|
$
|
236,265
|
|
Operating
expense, excluding stock-based compensation expense, depreciation, and
amortization
|
|
114,835
|
|
16,303
|
|
15,305
|
|
146,443
|
|
Stock-based
compensation expense
|
|
2,793
|
|
985
|
|
2,015
|
|
5,793
|
|
Depreciation
and amortization
|
|
2,272
|
|
109
|
|
14,335
|
|
16,716
|
|
Operating
income (loss)
|
|
$
|
74,079
|
|
$
|
24,889
|
|
$
|
(31,655
|
)
|
$
|
67,313
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
5,473
|
|
$
|
332
|
|
$
|
963
|
|
$
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
revenue
|
|
|
|
|
|
|
|
$
|
177,434
|
|
Non-U.S.
revenue
|
|
|
|
|
|
|
|
$
|
58,831
|
|
14
Table of Contents
|
|
As of
June 30, 2010
|
|
|
|
Investment
Information
|
|
Investment
Management
|
|
Corporate
Items
|
|
Total
|
|
Goodwill
|
|
$
|
244,818
|
|
$
|
36,995
|
|
$
|
|
|
$
|
281,813
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
long-lived assets
|
|
|
|
|
|
|
|
$
|
40,573
|
|
Non-U.S.
long-lived assets
|
|
|
|
|
|
|
|
$
|
15,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Investments
and Fair Value Measurements
We account for our investments in
accordance with FASB ASC 320,
InvestmentsDebt and
Equity Securities.
We classify our investments in three categories:
available-for-sale, held-to-maturity, and trading. We monitor the
concentration, diversification, maturity, and liquidity of our investment
portfolio, which is primarily invested in fixed-income securities, and classify
our investment portfolio as shown below:
($000)
|
|
As of June 30
2010
|
|
As of December 31
2009
|
|
Available-for-sale
|
|
$
|
153,963
|
|
$
|
197,306
|
|
Held-to-maturity
|
|
8,182
|
|
10,588
|
|
Trading
securities
|
|
3,828
|
|
4,163
|
|
Total
|
|
$
|
165,973
|
|
$
|
212,057
|
|
The following table shows the
cost, unrealized gains (losses), and fair values related to investments
classified as available-for-sale and held-to-maturity:
|
|
As of
June 30, 2010
|
|
As of
December 31, 2009
|
|
($000)
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
obligations
|
|
$
|
118,235
|
|
$
|
150
|
|
$
|
(28
|
)
|
$
|
118,357
|
|
$
|
174,433
|
|
$
|
439
|
|
$
|
(50
|
)
|
$
|
174,822
|
|
Corporate
bonds
|
|
24,879
|
|
27
|
|
(69
|
)
|
24,837
|
|
12,268
|
|
44
|
|
(1
|
)
|
12,311
|
|
Equity
securities
|
|
3,343
|
|
186
|
|
(430
|
)
|
3,099
|
|
2,013
|
|
188
|
|
(28
|
)
|
2,173
|
|
Mutual
funds
|
|
8,000
|
|
|
|
(330
|
)
|
7,670
|
|
8,000
|
|
|
|
|
|
8,000
|
|
Total
|
|
$
|
154,457
|
|
$
|
363
|
|
$
|
(857
|
)
|
$
|
153,963
|
|
$
|
196,714
|
|
$
|
671
|
|
$
|
(79
|
)
|
$
|
197,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
8,182
|
|
$
|
|
|
$
|
|
|
$
|
8,182
|
|
$
|
10,588
|
|
$
|
|
|
$
|
|
|
$
|
10,588
|
|
As of June 30, 2010 and December 31,
2009, investments with unrealized losses for greater than a 12-month period
were not material to the Condensed Consolidated Balance Sheets and were not
deemed to have other than temporary declines in value.
15
Table of Contents
The table below shows the cost and
fair value of investments classified as available-for-sale and held-to-maturity
based on their contractual maturities as of June 30, 2010 and December 31,
2009. The expected maturities of certain fixed-income securities
may differ from their contractual maturities because some of these
holdings have call features that allow the issuers the right to prepay
obligations without penalties.
|
|
As of
June 30, 2010
|
|
As of
December 31, 2009
|
|
($000)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Due in
one year or less
|
|
$
|
122,134
|
|
$
|
122,209
|
|
$
|
161,453
|
|
$
|
161,817
|
|
Due in
one to three years
|
|
20,980
|
|
20,985
|
|
25,248
|
|
25,316
|
|
Equity
securities and mutual funds
|
|
11,343
|
|
10,769
|
|
10,013
|
|
10,173
|
|
Total
|
|
$
|
154,457
|
|
$
|
153,963
|
|
$
|
196,714
|
|
$
|
197,306
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Due in
one year or less
|
|
$
|
8,181
|
|
$
|
8,181
|
|
$
|
10,587
|
|
$
|
10,587
|
|
Due in
one to three years
|
|
1
|
|
1
|
|
1
|
|
1
|
|
Total
|
|
$
|
8,182
|
|
$
|
8,182
|
|
$
|
10,588
|
|
$
|
10,588
|
|
Held-to-maturity investments
include a $1,600,000 certificate of deposit held as collateral against two bank
guarantees for our office lease in Australia.
The following table shows the
realized gains and losses arising from sales of our investments classified as
available-for-sale recorded in our Condensed Consolidated Statements of Income:
|
|
Six months
ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Realized
gains
|
|
$
|
17
|
|
$
|
9
|
|
Realized
losses
|
|
(8
|
)
|
(531
|
)
|
Realized
gains (loss), net
|
|
$
|
9
|
|
$
|
(522
|
)
|
The following table shows the net
unrealized gains on trading securities as recorded in our Condensed
Consolidated Statements of Income:
|
|
Six months
ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Unrealized
gains (loss), net
|
|
$
|
(398
|
)
|
$
|
604
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
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
|
|
June 30, 2010 Using Fair Value Hierarchy
|
|
($000)
|
|
June 30, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
Government
obligations
|
|
$
|
118,357
|
|
$
|
118,357
|
|
$
|
|
|
$
|
|
|
Corporate
bonds
|
|
24,837
|
|
24,837
|
|
|
|
|
|
Equity
securities
|
|
3,099
|
|
3,099
|
|
|
|
|
|
Mutual
funds
|
|
7,670
|
|
7,670
|
|
|
|
|
|
Trading
securities
|
|
3,828
|
|
3,828
|
|
|
|
|
|
Total
|
|
$
|
157,791
|
|
$
|
157,791
|
|
$
|
|
|
$
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Government
obligations
|
|
$
|
174,822
|
|
$
|
174,822
|
|
$
|
|
|
$
|
|
|
Corporate
bonds
|
|
12,311
|
|
12,311
|
|
|
|
|
|
Equity
securities
|
|
2,173
|
|
2,173
|
|
|
|
|
|
Mutual
funds
|
|
8,000
|
|
8,000
|
|
|
|
|
|
Trading
securities
|
|
4,163
|
|
4,163
|
|
|
|
|
|
Total
|
|
$
|
201,469
|
|
$
|
201,469
|
|
$
|
|
|
$
|
|
|
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.
We did not transfer any
investments between levels of the fair value hierarchy in the first six months
of 2010 or 2009. Based on our analysis of the nature and risks of our
investments in equity securities and mutual funds, we have determined that
presenting these investment categories each in the aggregate is appropriate.
17
Table of Contents
7. Investments in
Unconsolidated Entities
Our investments in unconsolidated
entities consist primarily of the following:
($000)
|
|
As of June 30
2010
|
|
As of December 31
2009
|
|
Investment
in MJKK
|
|
$
|
18,504
|
|
$
|
18,413
|
|
Other
equity method investments
|
|
491
|
|
577
|
|
Investments
accounted for using the cost method
|
|
5,104
|
|
5,089
|
|
Total
investments in unconsolidated entities
|
|
$
|
24,099
|
|
$
|
24,079
|
|
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 MJKK
and the market value of this investment based on MJKKs publicly quoted share
price:
|
|
As of June 30
2010
|
|
As of December 31
2009
|
|
Morningstars
approximate ownership of MJKK
|
|
34
|
%
|
34
|
%
|
|
|
|
|
|
|
Approximate
market value of Morningstars ownership in MJKK:
|
|
|
|
|
|
Japanese
yen (¥000)
|
|
¥
|
3,311,000
|
|
¥
|
2,600,000
|
|
Equivalent
U.S. dollars ($000)
|
|
$
|
37,352
|
|
$
|
28,507
|
|
Other
Equity Method Investments
. As
of June 30, 2010 and December 31, 2009, 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 June 30, 2010 and December 31,
2009.
Cost
Method Investments.
As of June 30,
2010 and 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 did
not record any impairment losses on our cost method investments in the first
six months of 2010 and 2009, respectively.
8. Liability for Vacant
Office Space
The following table shows the
change in our liability for vacant office space from December 31, 2009 to June 30,
2010:
Liability for vacant
office space
|
|
($000)
|
|
Balance
as of December 31, 2009
|
|
$
|
3,815
|
|
Increase
liability for vacant office space
|
|
1,262
|
|
Reduction
of liability for lease payments
|
|
(1,294
|
)
|
Other,
net
|
|
(959
|
)
|
Balance
as of June 30, 2010
|
|
$
|
2,824
|
|
In the first six months of 2010,
we increased our liability for vacant office space for the former Ibbotson
headquarters because we finalized sub-lease arrangements for a portion of this
space. In addition, we increased our liability for vacant office space related
to the equity research and data business acquired from C.P.M.S. These increases
in the liability for vacant office space were recorded as an operating expense
in the first six months of 2010.
9. 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.
18
Table of Contents
Since the adoption of the 2004
Stock Incentive Plan, we have granted stock options and, beginning in 2006,
restricted stock units.
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.
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.
The following table summarizes the
number of shares available for future grants under our 2004 Stock Incentive
Plan:
(000)
|
|
As of June 30
2010
|
|
As of December 31
2009
|
|
Shares
available for future grants
|
|
1,818
|
|
2,143
|
|
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). 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.
All options granted under the 2004
Stock Incentive Plan and the Prior Plans were vested as of January 1,
2010; however, because the options under these plans expire 10 years after the
date of grant, some options granted under these plans remain outstanding as of June 30,
2010.
Restricted Stock
In conjunction with the Realpoint
acquisition in May 2010, we issued 199,174 shares of restricted stock to
the selling employee-shareholders. The restricted stock vests ratably over a
five-year period from the acquisition date and may be subject to forfeiture if
the holder terminates his or her employment during the vesting period. Because
of the terms of the restricted share agreements, in accordance with ASC 805,
Business Combinations
, we account for these grants as
stock-based compensation expense, and not as part of the acquisition
consideration. See Note 3, in the Notes to our Condensed Consolidated Financial
Statements, for additional information concerning the Realpoint acquisition.
Accounting for
Stock-Based Compensation Awards
The following table summarizes our
stock-based compensation expense and the related income tax benefit we recorded
in the three and six months ended June 30, 2010 and 2009:
|
|
Three months ended June 30
|
|
Six months ended
June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Restricted
stock units
|
|
$
|
3,343
|
|
$
|
2,735
|
|
$
|
6,280
|
|
$
|
4,905
|
|
Restricted
stock
|
|
312
|
|
|
|
312
|
|
|
|
Stock
options
|
|
|
|
333
|
|
|
|
888
|
|
Total
stock-based compensation expense
|
|
$
|
3,655
|
|
$
|
3,068
|
|
$
|
6,592
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit related to the stock-based compensation expense
|
|
$
|
1,008
|
|
$
|
967
|
|
$
|
1,901
|
|
$
|
1,834
|
|
In accordance with FASB ASC 718,
CompensationStock Compensation
, we estimate forfeitures of
employee stock-based awards and recognize compensation cost only for those
awards expected to vest. Because our largest annual equity grants typically
have vesting dates in the second quarter, we adjust the stock-based
compensation expense at that time to reflect those awards that ultimately
vested and update our estimate of the forfeiture rate that will be applied to
awards not yet vested. In the second quarter of 2010 and 2009, we recorded
approximately $228,000 and $299,000, respectively, of additional stock-based
compensation expense as a result of these adjustments.
19
Table of Contents
Restricted Stock
Units
We measure the fair value of our
restricted stock units on the date of grant based on the closing market price
of the underlying common stock on the day prior to grant. We amortize that
value to stock-based compensation expense, net of estimated forfeitures,
ratably over the vesting period. The following table summarizes restricted
stock unit activity during the first six months of 2010:
Restricted Stock Units (RSUs)
|
|
Unvested
|
|
Vested but
Deferred
|
|
Total
|
|
Weighted
Average
Grant Date Value
per RSU
|
|
RSUs
outstandingDecember 31, 2009
|
|
681,425
|
|
39,594
|
|
721,019
|
|
$
|
46.99
|
|
Granted
|
|
346,474
|
|
|
|
346,474
|
|
47.85
|
|
Vested
|
|
(200,462
|
)
|
|
|
(200,462
|
)
|
47.80
|
|
Vested
but deferred
|
|
(15,996
|
)
|
15,996
|
|
|
|
|
|
Issued
|
|
|
|
(11,153
|
)
|
(11,153
|
)
|
49.29
|
|
Forfeited
|
|
(21,022
|
)
|
|
|
(21,022
|
)
|
47.13
|
|
RSUs
outstandingJune 30, 2010
|
|
790,419
|
|
44,437
|
|
834,856
|
|
47.12
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, the
total amount of unrecognized stock-based compensation expense related to
restricted stock units was approximately $32,184,000. We expect to recognize
this expense over an average period of approximately 36 months.
Restricted Stock
We measure the fair value of the
restricted stock on the date of grant based on the closing market price of our
common stock on the day prior to the grant. We amortize this value to
stock-based compensation expense ratably over the vesting period. We have
assumed that all of the restricted stock will ultimately vest, and therefore we
have not incorporated a forfeiture rate for purposes of determining the
stock-based compensation expense.
As of June 30, 2010, the
total amount of unrecognized stock-based compensation expense related to
restricted stock was approximately $9,051,000. We expect to recognize this
expense over 58 months, from July 2010 through April 2015.
Stock Option
Activity
The following tables summarize
stock option activity in the first six months of 2010 for our various stock
option grants. The first table includes activity for options granted at an
exercise price below the fair value per share of our common stock on the grant
date; the second table includes activity for all other option grants.
Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstandingDecember 31, 2009
|
|
809,169
|
|
$
|
17.75
|
|
Cancelled
|
|
(600
|
)
|
13.68
|
|
Exercised
|
|
(59,526
|
)
|
13.08
|
|
Options
outstandingJune 30, 2010
|
|
749,043
|
|
18.50
|
|
|
|
|
|
|
|
Options
exercisableJune 30, 2010
|
|
749,043
|
|
$
|
18.50
|
|
All Other Option Grants, Excluding Activity Shown Above
|
|
Underlying
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstandingDecember 31, 2009
|
|
1,868,408
|
|
$
|
16.02
|
|
Canceled
|
|
(8,592
|
)
|
14.38
|
|
Exercised
|
|
(376,279
|
)
|
14.82
|
|
Options
outstandingJune 30, 2010
|
|
1,483,537
|
|
16.69
|
|
|
|
|
|
|
|
Options
exercisableJune 30, 2010
|
|
1,483,537
|
|
$
|
16.69
|
|
20
Table of Contents
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:
|
|
Six months ended
June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Intrinsic
value of options exercised
|
|
$
|
14,502
|
|
$
|
25,041
|
|
|
|
|
|
|
|
|
|
All outstanding options were
vested and exercisable as of January 1, 2010. The table below shows
additional information for options outstanding and exercisable as of
June 30, 2010:
|
|
Options Outstanding and Exercisable
|
|
Range of Exercise Prices
|
|
Number of Options
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($000)
|
|
$8.57 -
$14.70
|
|
926,942
|
|
1.8
|
|
$
|
11.44
|
|
$
|
28,810
|
|
$18.55 -
$42.03
|
|
1,305,638
|
|
4.7
|
|
21.47
|
|
27,487
|
|
$8.57 -
$42.03
|
|
2,232,580
|
|
3.5
|
|
17.30
|
|
$
|
56,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in
the table above represents the total pretax intrinsic value all option holders
would have received if they had exercised all outstanding options on June 30,
2010. The intrinsic value is based on our closing stock price of $42.52 on that
date.
As of June 30, 2010, there
was no unrecognized stock-based compensation expense related to stock options.
Excess Tax Benefits Related
to Stock-Based Compensation
FASB ASC 718,
CompensationStock
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 that 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 three and six months ended June 30, 2010 and 2009:
|
|
Three months ended June 30
|
|
Six months ended
June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Excess
tax benefits related to stock-based compensation
|
|
$
|
1,157
|
|
$
|
4,194
|
|
$
|
4,205
|
|
$
|
4,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Related Party
Transactions
In 2009, we determined that
certain incentive stock options (ISOs) granted to one former and two current
executives, including Tao Huang, our chief operating officer, should have been
treated as non-qualified stock options (NQSOs) for the executives and our
income tax purposes. In the fourth quarter of 2009, we recorded an operating
expense of $4,887,000 related to adjusting the tax treatment of these stock
options that were originally considered ISOs. In the first quarter of 2010, we
paid these individuals $4,887,000 to compensate for the difference in tax
treatment.
11. Income Taxes
The following table shows our
effective income tax rate for the three months ended June 30, 2010 and
2009:
|
|
Three months ended June 30
|
|
Six months ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Income
before income taxes and equity in net income (loss) of unconsolidated
entities
|
|
$
|
27,688
|
|
$
|
34,660
|
|
$
|
58,451
|
|
$
|
69,819
|
|
Equity
in net income (loss) of unconsolidated entities
|
|
454
|
|
(21
|
)
|
843
|
|
361
|
|
Net
(income) loss attributable to noncontrolling interests
|
|
85
|
|
(71
|
)
|
116
|
|
18
|
|
Total
|
|
$
|
28,227
|
|
$
|
34,568
|
|
$
|
59,410
|
|
$
|
70,198
|
|
Income
tax expense
|
|
$
|
10,225
|
|
$
|
14,024
|
|
$
|
21,220
|
|
$
|
24,692
|
|
Effective
tax rate
|
|
36.2
|
%
|
40.6
|
%
|
35.7
|
%
|
35.2
|
%
|
21
Table of Contents
Our effective tax rate declined
4.4 percentage points in the second quarter of 2010. The deposit penalty of
$3,500,000, which decreased pre-tax income in the second quarter of 2009, and
which is not deductible for tax purposes, accounted for 3.7 percentage points
of the effective tax rate in the second quarter of 2009, and did not recur in
2010.
For the first six months of 2010,
our effective tax rate was slightly higher compared with the same period in
2009. The 2009 year-to-date effective tax rate included a net benefit which did
not recur in 2010. The effective tax rate in the first half of 2009 reflects
the impact from the first quarter of 2009 of reversing a $1,420,000 reserve for
uncertain tax positions as a result of a lapse in the statute of limitations
and the reversal in the second quarter of 2009 of $635,000 of reserves due to
settlements and other audit activity. These non-cash benefits had a favorable
impact of approximately 3 percentage points in the prior year period. This
benefit was partially offset by the impact of the non-deductible deposit
penalty expense, which increased our effective tax rate by approximately 2
percentage points in the first six months of 2009.
We conduct business globally and
as a result, we file income tax returns in U.S. Federal, state, local, and
foreign jurisdictions. In the normal course of business we are subject to
examination by tax authorities throughout the world. The open tax years for our
U.S. Federal tax return include the years 2006 to the present. Most of our
state tax returns have open tax years from 2006 to the present. In non-U.S.
jurisdictions, the statute of limitations generally extends to years prior to
2003.
There were
no significant changes to uncertain tax positions in the second quarter of 2010
as a result of other lapses of statutes of limitation or audit activity. As of December 31,
2009, our Condensed 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.
We are
currently under audit by various state and local tax authorities in the United
States. We are also under audit by the tax authorities in certain non-U.S.
jurisdictions. It is likely that the examination phase of some of these 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.
Our effective tax rate reflects
the fact that we are not recording an income tax benefit related to losses
recorded by certain of our non-U.S. operations. The net operating losses (NOLs)
may become deductible in certain non-U.S. tax jurisdictions to the extent
these non-U.S. operations become profitable. In the year certain non-U.S.
entities record a loss, we do not record a corresponding tax benefit, thus
increasing our effective tax rate. For each of our operations, we evaluate
whether it is more likely than not that the tax benefits related to NOLs will
be realized. As part of this evaluation, we consider evidence such as tax
planning strategies, historical operating results, forecasted taxable income,
and recent financial performance. Upon determining that it is more likely
than not that the NOLs will be realized, we reduce the tax valuation allowances
related to these NOLs, which results in a reduction to our income tax expense
and our effective tax rate in the period.
12. Contingencies
Egan-Jones Rating Co.
In June 2010, Egan-Jones Rating Co. filed a complaint in the Court
of Common Pleas of Montgomery County, Pennsylvania against Realpoint LLC and
Morningstar, Inc. in connection with a December 2007 agreement
between Egan-Jones and Realpoint for certain data sharing and other services.
In addition to damages, Egan-Jones seeks injunctive relief against Morningstar
to temporarily prevent us from offering corporate credit ratings. While
Realpoint and Morningstar are vigorously contesting the claims, we cannot
predict the outcome of the proceeding.
Aloft
Media, LLC
In June 2010,
Aloft Media, LLC filed a complaint in the United States District Court for the
Eastern District of Texas against Morningstar, Inc. and several other
companies alleging that each defendant infringes U.S. Patent No. 7,593,910
and 7,596,538 which purports to relate to a computer-based platform that
supports a decision making process. Aloft Media seeks, among other things,
unspecified damages and costs incurred by Aloft Media because of defendants
alleged infringing activities. Morningstar is evaluating the lawsuit but cannot
predict the outcome of the proceeding.
22
Table of Contents
Business Logic Holding Corporation
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. In July 2010, Morningstar and Online News Link entered
into a license agreement covering patents relating to, among other things, the
delivery of news content via electronic mail with links to additional content.
The license agreement resolves the litigation. All other settlement terms are
confidential.
Morningstar Associates, LLC Subpoena from the New York Attorney Generals
Office
In
December 2004, Morningstar Associates, LLC, a wholly owned subsidiary of
Morningstar, Inc., 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 subpoena asks for documents
relating to the investment consulting services the company offers to retirement
plan providers, including fund lineup recommendations for retirement plan
sponsors. Morningstar Associates has provided the requested information and
documents.
In 2005,
Morningstar Associates received subpoenas seeking information and documents
related to investigations being conducted by the SEC and United States
Department of Labor. The subpoenas were similar in scope to the New York
Attorney General subpoena. In January 2007 and September 2009,
respectively, the SEC and Department of Labor each notified Morningstar
Associates that it had ended its investigation, with no enforcement action,
fines, or penalties.
In
January 2007, Morningstar Associates received a Notice of Proposed
Litigation from the New York Attorney Generals office. The Notice centers 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. 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.
13.
Subsequent Events
We
completed the following acquisitions subsequent to June 30, 2010. We used
approximately $22,500,000 of our cash and investments for these acquisitions.
Increased
Ownership Interest in Morningstar Denmark
In July 2010, we acquired an
additional 75% interest in Morningstar Denmark, increasing our ownership to
100% from 25%. Morningstar Denmarks main offering is the investment
information website for individual investors, Morningstar.dk, which provides
fund and ETF data, portfolio tools, and market analysis.
Seeds
Group
In July 2010,
we acquired Seeds Group, a leading provider of investment consulting services
and fund research in France. Through its subsidiary Seeds Finance, the company
provides investment consulting services to pension funds, insurance companies,
asset managers, banks, and brokerage firms and specializes in asset liability
management, manager selection, plan construction, risk, and portfolio
management in alternative investments and active strategies. In addition to
investment consulting, Seeds Group also operates Multiratings.com, a fund
research and investment education website for advisor groups and institutions.
With both basic and premium subscription levels, the site offers editorial and
video commentary, fund and industry analysis, and research tools.
23
Table of Contents
14. Recently
Issued Accounting Pronouncements
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 and also does 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 entities to disclose information in the Level 3
rollforward about purchases, sales, issuances, and settlements on a gross
basis. For Morningstar, 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, this accounting pronouncement will have on our
Consolidated Financial Statements.
24
Table of Contents
Item 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The discussion
included in this section, as well as other sections of this Quarterly Report on
Form 10-Q, contains forward-looking statements as that term is used in the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations about future events or future financial performance.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain, and often contain words such as may, could, expect,
intend, plan, seek, anticipate, believe, estimate, predict, potential,
or continue. These statements involve known and unknown risks and
uncertainties that may cause the events we discuss not to occur or to differ
significantly from what we expect. For us, these risks and uncertainties
include, among others:
·
general industry conditions and
competition, including 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 our other filings
with the Securities and Exchange Commission (SEC), including our Annual Report
on Form 10-K for the year ended December 31, 2009. If any of these
risks and uncertainties materialize, our actual future results may vary
significantly from what we expect. We do not undertake to update our
forward-looking statements as a result of new information or future events.
All dollar and
percentage comparisons, which are often accompanied by words such as increase,
decrease, grew, declined, was up, was down, was flat, or was
similar refer to a comparison with the same period in the prior year unless
otherwise stated.
Understanding our
Company
Our Business
Our
mission is to create great products that help investors reach their financial
goals. We offer an extensive line of Internet, software, and print-based
products for individual investors, financial advisors, and institutional
clients. We also offer asset management services for advisors, institutions,
and retirement plan participants. Many of our products are sold through
subscriptions or license agreements. As a result, we typically generate
recurring revenue.
We
emphasize a decentralized approach to running our business to create a culture
of responsibility and accountability. Our company has two operating segments:
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 all of our asset management operations, which are registered
investment advisors and earn more than half of their revenue from asset-based
fees.
Historically,
we have focused primarily on organic growth by introducing new products and
services and expanding our existing products. However, we have made and
expect to continue to make selective acquisitions that support our five key
growth strategies, which are:
·
Enhance our position in each of our key market segments by
focusing on our three major Internet-based platforms;
·
Become a global leader in fund-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.
25
Table of
Contents
Industry Overview
We monitor
developments in the economic and financial information industry on an ongoing
basis and use these insights to help inform our company strategy, product
development plans, and marketing initiatives.
After
generally strong performance earlier in the year, the U.S. equity market
slipped into negative territory in the second quarter of 2010. Morningstars
U.S. Market Index, a broad market benchmark, was down 11.3% during the quarter,
but increased approximately 15% since June 2009. Total U.S. mutual fund assets
increased to $10.5 trillion as of June 30, 2010, based on data from the
Investment Company Institute (ICI), up from $10.0 trillion as of June 30, 2009.
Despite the
more positive market environment, alternative asset classes, such as hedge
funds, continued to show mixed results. In aggregate, hedge funds included in
Morningstars database, excluding funds of hedge funds, experienced small net
outflows for the year-to-date period through May 31, 2010.
Assets in
exchange-traded funds (ETFs) increased to $772 billion as of June 30, 2010,
compared with $590 billion as of June 30, 2009, based on data from the ICI.
Based on
data from Nielsen/Net Ratings, aggregate page views, unique users, and
time spent per visit for financial and investment sites all decreased compared
with the second quarter of 2009. Overall, page views to finance and
investment sites were down about 10% based on Nielsens data. We attribute this
trend to individual investors lower level of engagement with investing-related
topics following the financial crisis in 2008. Although our investment website,
Morningstar.com, continued to perform well versus competing sites based on time
spent per visit, some metrics such as unique visitors and pages viewed per
visit declined according to Nielsens data.
Following
the downturn in global advertising sales in 2009, we began seeing stronger
growth in online advertising spending in early 2010. During the second quarter
of 2010, industry publication eMarketer increased its forecast for U.S. online
advertising spending, which is based on data from the Interactive Advertising
Bureau and PricewaterhouseCoopers. The revised forecast projects an increase of
11% to $25.1 billion in 2010, following a 4.6% decline in 2009.
Overall,
we believe that business conditions in the financial services sector have
continued improving in recent months, although some areas, such as consumer
discretionary spending, remain under pressure.
Three and Six
Months Ended June 30, 2010 vs. Three and Six Months Ended June 30,
2009
Consolidated
Results
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics ($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Revenue
|
|
$
|
136,091
|
|
$
|
119,533
|
|
13.9
|
%
|
$
|
264,381
|
|
$
|
236,265
|
|
11.9
|
%
|
Operating
income
|
|
27,667
|
|
32,688
|
|
(15.4
|
)%
|
58,609
|
|
67,313
|
|
(12.9
|
)%
|
Operating
margin
|
|
20.3
|
%
|
27.3
|
%
|
(7.0
|
)pp
|
22.2
|
%
|
28.5
|
%
|
(6.3
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used for investing activities
|
|
(60,134
|
)
|
(26,652
|
)
|
125.6
|
%
|
(25,552
|
)
|
(36,855
|
)
|
30.7
|
%
|
Cash
provided by financing activities
|
|
1,203
|
|
12,913
|
|
(90.7
|
)%
|
8,060
|
|
16,019
|
|
(49.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
30,580
|
|
$
|
39,589
|
|
(22.8
|
)%
|
$
|
45,030
|
|
$
|
31,267
|
|
44.0
|
%
|
Capital
expenditures
|
|
(2,189
|
)
|
(2,178
|
)
|
0.5
|
%
|
(3,839
|
)
|
(6,768
|
)
|
(43.3
|
)%
|
Free
cash flow
|
|
$
|
28,391
|
|
$
|
37,411
|
|
(24.1
|
)%
|
$
|
41,191
|
|
$
|
24,499
|
|
68.1
|
%
|
pp percentage
points
We define free cash flow as cash
provided by or used for operating activities less capital expenditures. We
present free cash flow solely as supplemental disclosure to help you better
understand how much cash is available after we spend money to operate our
business. Our management team uses free cash flow to evaluate our business.
Free cash flow is not
26
Table of Contents
equivalent to any measure required
to be reported under U.S. generally accepted accounting principles (GAAP).
Also, the free cash flow definition we use may not be comparable to similarly
titled measures used by other companies.
Because weve made several
acquisitions in recent years, comparing our financial results from year to year
is complex. To make it easier for investors to compare our results in different
periods, we provide information on both organic revenue, which reflects our
underlying business excluding acquisitions, and revenue from acquisitions. We
include an acquired operation as part of our revenue from acquisitions for 12
months after we complete the acquisition. After that, we include it as part of
our organic revenue.
Consolidated organic revenue
(revenue excluding acquisitions and the impact of foreign currency translations)
is considered a non-GAAP financial measure. The definition of organic revenue
we use may not be the same as similarly titled measures used by other
companies. Organic revenue should not be considered an alternative to any
measure of performance as promulgated under GAAP.
The table below shows the period
in which we included each acquired operation in revenue from acquisitions.
Acquisition
|
|
Date of Acquisition
|
|
Six months ended June
30, 2010
|
Global
financial filings database business of Global Reports LLC
|
|
April 20, 2009
|
|
January 1 through April 19, 2010
|
Equity
research and data business of C.P.M.S. Computerized Portfolio Management
Services Inc.
|
|
May 1, 2009
|
|
January 1 through April 30, 2010
|
Andex Associates, Inc.
|
|
May 1, 2009
|
|
January 1 through April 30, 2010
|
Intech Pty Ltd
|
|
June 30, 2009
|
|
Entire period
|
Canadian Investment Awards and
Gala
|
|
December 17, 2009
|
|
Entire period
|
Logical Information Machines,
Inc.
|
|
December 31, 2009
|
|
Entire period
|
Footnoted business of Financial
Fineprint Inc.
|
|
February 1, 2010
|
|
February 1 through June 30, 2010
|
Aegis Equities Research
|
|
April 1, 2010
|
|
April 1 through June 30, 2010
|
Old Broad Street Research Ltd.
|
|
April 12, 2010
|
|
April 12 through June 30, 2010
|
Realpoint, LLC
|
|
May 3, 2010
|
|
May 3 through June 30, 2010
|
Consolidated
Revenue
In the second quarter of 2010, our
consolidated revenue increased 13.9% to $136.1 million. Revenue for the first
half of the year increased 11.9% to $264.4 million. We had $12.7 million in
incremental revenue from acquisitions during the second quarter, which
contributed about 11 percentage points to our consolidated revenue growth.
Currency movements had a slight positive effect in the second quarter, but a
larger impact in the year-to-date period.
Excluding acquisitions and the impact
of foreign currency translations, consolidated revenue increased by about $3.2
million, or 2.7%, in the second quarter of 2010. Higher revenue from Internet
advertising, Morningstar Direct, and Retirement Advice were the main drivers
behind the revenue increase. These positive factorsas well as smaller
contributions from advisor software, Licensed Data, and Morningstar Managed
Portfolioshelped offset the loss of revenue associated with the Global Analyst
Research Settlement (GARS), which ended in July 2009. We had equity research
revenue of $5.4 million related to GARS in the second quarter of 2009 and $10.9
million in the first half of 2009 that did not recur in 2010.
The table below reconciles
consolidated revenue with organic revenue (revenue excluding acquisitions and
the impact of foreign currency translations):
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Consolidated
revenue
|
|
$
|
136,091
|
|
$
|
119,533
|
|
13.9
|
%
|
$
|
264,381
|
|
$
|
236,265
|
|
11.9
|
%
|
Less:
acquisitions
|
|
(12,718
|
)
|
|
|
NMF
|
|
(22,422
|
)
|
|
|
NMF
|
|
Favorable impact
of foreign currency translations
|
|
(671
|
)
|
|
|
NMF
|
|
(4,402
|
)
|
|
|
NMF
|
|
Organic
revenue
|
|
$
|
122,702
|
|
$
|
119,533
|
|
2.7
|
%
|
$
|
237,557
|
|
$
|
236,265
|
|
0.5
|
%
|
NMF - Not meaningful
International revenue continues to
increase as a percentage of our consolidated revenue and made up about 27.3% of
our consolidated revenue in the second quarter of 2010. Revenue from
international operations rose $6.9 million, or 22.7%, to
27
Table of Contents
$37.1 million for the second
quarter. Acquisitions contributed $5.1 million of additional revenue outside
the United States, and foreign currency translations also had a slightly
positive effect. Excluding acquisitions and the effect of foreign currency
translations, non-U.S. revenue rose 3.5%, reflecting stronger product sales in
Europe, Australia, and Canada.
Revenue from international operations
rose $14.0 million, or 23.7%, to $72.8 million in the first half of 2010.
Acquisitions contributed $9.2 million of additional revenue outside the United
States, and foreign currency translations also had a positive effect of $4.4
million. Excluding acquisitions and the impact of foreign currency
translations, non-U.S. revenue rose 0.6%.
International
organic revenue (international revenue excluding acquisitions and the impact of
foreign currency translations) is considered a non-GAAP financial measure. The
definition of international organic revenue we use may not be the same as
similarly titled measures used by other companies. International organic
revenue should not be considered an alternative to any measure of performance
as promulgated under GAAP. The tables below present a reconciliation from
international revenue to international organic revenue (international revenue
excluding acquisitions and the impact of foreign currency translations):
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
International
revenue
|
|
$
|
37,105
|
|
$
|
30,247
|
|
22.7
|
%
|
$
|
72,785
|
|
$
|
58,831
|
|
23.7
|
%
|
Less:
acquisitions
|
|
(5,120
|
)
|
|
|
NMF
|
|
(9,221
|
)
|
|
|
NMF
|
|
Favorable
impact of foreign currency translations
|
|
(671
|
)
|
|
|
NMF
|
|
(4,402
|
)
|
|
|
NMF
|
|
International
organic revenue
|
|
$
|
31,314
|
|
$
|
30,247
|
|
3.5
|
%
|
$
|
59,162
|
|
$
|
58,831
|
|
0.6
|
%
|
Consolidated
Operating Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Operating
expense
|
|
$
|
108,424
|
|
$
|
86,845
|
|
24.8
|
%
|
$
|
205,772
|
|
$
|
168,952
|
|
21.8
|
%
|
% of
revenue
|
|
79.7
|
%
|
72.7
|
%
|
7.0
|
pp
|
77.8
|
%
|
71.5
|
%
|
6.3
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2010, our
consolidated operating expense increased $21.6 million, or 24.8%. For the first
six months of 2010, operating expense increased $36.8 million, or 21.8%. We
completed six acquisitions in the last nine months of 2009 and four in the
first half of 2010. Because of the timing of these acquisitions, our
second-quarter and year-to-date results include operating expense that did not
exist in the same periods last year. Incremental operating expense from
businesses acquired since the first quarter of 2009 represented approximately
half of the increase in the quarter and year-to-date periods.
Higher incentive compensation and
employee benefit costs represented approximately half of the overall operating
expense increase in the quarter. In early 2010, we began phasing in some of the
benefits and other compensation-related expense we reduced in 2009. As a
result, bonus expense increased $5.4 million in the second quarter and $8.0
million in the first half of 2010. Matching contributions to our 401(k) plan in
the United States increased $0.8 million in the second quarter and $1.8 million
for the year-to-date period because we partially reinstated this employee
benefit in 2010. Sales commissions increased $2.5 million in the quarter and
$4.7 million in the first six months of 2010, reflecting improved sales
activity compared with the first half of 2009 as well as a change to one of our
commission plans. In addition, healthcare benefit costs were up $1.4 million in
the second quarter of 2010 and $1.6 million in the first half of 2010, mainly
because of some unusually high medical claims.
In the second quarter of 2009, we
recorded a $3.5 million operating expense for estimated penalties related to
the timing of deposits for taxes withheld on stock option exercises from 2006
through 2009. The expense affected each of our operating expense categories,
with approximately half recorded as general and administrative expense. This
expense did not recur in 2010.
Headcount and salary-related
expense increased year over year, partly because of acquisitions. We had
approximately 2,965 employees worldwide as of June 30, 2010, up 13.8% from
December 31, 2009, and an 18.1% increase from the same period a year ago. We
added about 250 employees through acquisitions over the 12 months ending June
30, 2010. The remainder of the increase in headcount mainly reflects continued
hiring for our development centers in China and India.
28
Table of Contents
Cost of Goods
Sold
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Cost of
goods sold
|
|
$
|
39,738
|
|
$
|
30,694
|
|
29.5
|
%
|
$
|
74,054
|
|
$
|
60,946
|
|
21.5
|
%
|
% of
revenue
|
|
29.2
|
%
|
25.7
|
%
|
3.5
|
pp
|
28.0
|
%
|
25.8
|
%
|
2.2
|
pp
|
Gross
profit
|
|
$
|
96,353
|
|
$
|
88,839
|
|
8.5
|
%
|
$
|
190,327
|
|
$
|
175,319
|
|
8.6
|
%
|
Gross
margin
|
|
70.8
|
%
|
74.3
|
%
|
(3.5
|
)pp
|
72.0
|
%
|
74.2
|
%
|
(2.2
|
)pp
|
Cost of goods sold is our largest
category of operating expense, accounting for more than one-third of our total
operating expense. 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 rose $9.0
million in the second quarter and $13.1 million in the first half of 2010.
Approximately half of the increase was related to recent acquisitions. Higher
bonus expense and other compensation-related expense also contributed to the
increase, but to a lesser extent.
Our gross margin in the second
quarter of 2010 was down 3.5 percentage points to 70.8%, compared with 74.3% in
the second quarter of 2009. The year-to-date gross margin also declined, but by
a smaller amount.
Development
Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Development
expense
|
|
$
|
11,899
|
|
$
|
9,438
|
|
26.1
|
%
|
$
|
22,788
|
|
$
|
18,738
|
|
21.6
|
%
|
% of
revenue
|
|
8.7
|
%
|
7.9
|
%
|
0.8
|
pp
|
8.6
|
%
|
7.9
|
%
|
0.7
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense increased $2.5
million in the second quarter of 2010 and $4.1 million in the first six months
of 2010, mainly because of higher bonus and compensation-related expense for
our development teams. Development expense from recent acquisitions also
contributed to the increase, but to a lesser extent. As a percentage of
revenue, development was in line with typical levels from previous years,
though up slightly from the same periods in 2009.
Sales and
Marketing Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Sales
and marketing expense
|
|
$
|
24,435
|
|
$
|
18,010
|
|
35.7
|
%
|
$
|
46,996
|
|
$
|
35,546
|
|
32.2
|
%
|
% of
revenue
|
|
18.0
|
%
|
15.1
|
%
|
2.9
|
pp
|
17.8
|
%
|
15.0
|
%
|
2.8
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expense increased
$6.4 million in the second quarter of 2010 and $11.5 million in the first six
months of 2010, including higher sales commission expense which increased $2.5
million in the quarter and $4.7 million in the first half of 2010. The increase
in sales commission expense partly reflects improved sales activity. In
addition, we recognized more expense in the quarter because of a change in our
U.S. sales commission structure. Under this new commission plan, we record the
entire commission expense in the quarter. Under the previous commission
structure, we recognized the commission expense over the term of the customer
contract. Other costs in this category, including bonus expense and
travel-related expenses, also increased.
As a percentage of revenue, sales
and marketing expense increased 2.9 percentage points in the second quarter and
2.8 percentage points in the first six months of 2010.
29
Table of Contents
General and
Administrative Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
General
and administrative expense
|
|
$
|
23,106
|
|
$
|
19,853
|
|
16.4
|
%
|
$
|
43,749
|
|
$
|
37,006
|
|
18.2
|
%
|
% of
revenue
|
|
17.0
|
%
|
16.6
|
%
|
0.4
|
pp
|
16.5
|
%
|
15.7
|
%
|
0.8
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
rose $3.2 million in the second quarter of 2010 and $6.7 million in the first
six months of 2010, mainly reflecting higher bonus expense. This expense
category also includes $0.5 million in the second quarter and $1.3 million in
the first half of 2010 to increase liabilities for vacant office space. In the
second quarter of 2010, we increased our liability for vacant office space
related to the acquisition of the equity research and data business from
C.P.M.S. in Canada. In the first quarter of 2010, we increased our liability
for vacant office space for the former Ibbotson headquarters because we
finalized sub-lease arrangements for a portion of the space. Higher travel,
professional, and legal fees, partly related to acquisitions, also contributed
to the operating expense increase.
General and administrative expense
in the second quarter and first half of 2009 included $1.8 million for the
estimated tax deposit penalty discussed in more detail on page 28. This
expense did not recur in 2010.
As a percentage of revenue,
general and administrative expense increased 0.4 percentage points in the
second quarter of 2010 and 0.8 percentage points in the first six months of
2010.
Depreciation and
Amortization Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Depreciation
expense
|
|
$
|
3,398
|
|
$
|
3,309
|
|
2.7
|
%
|
$
|
6,869
|
|
$
|
6,053
|
|
13.5
|
%
|
Amortization
expense
|
|
5,848
|
|
5,541
|
|
5.5
|
%
|
11,316
|
|
10,663
|
|
6.1
|
%
|
Total depreciation and amortization expense
|
|
$
|
9,246
|
|
$
|
8,850
|
|
4.5
|
%
|
$
|
18,185
|
|
$
|
16,716
|
|
8.8
|
%
|
% of
revenue
|
|
6.8
|
%
|
7.4
|
%
|
(0.6
|
)pp
|
6.9
|
%
|
7.1
|
%
|
(0.2
|
)pp
|
Depreciation expense was
essentially flat in the second quarter and rose $0.8 million in the first six
months of 2010. Amortization expense increased $0.3 million in the second
quarter and $0.7 million in the first six months of 2010, primarily because of
acquisitions that have occurred since the first quarter of 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 June 30, 2010, we estimate that
aggregate amortization expense for intangible assets will be $23.1 million in
2010 and $22.5 million in 2011. Our estimates of future amortization expense
for intangible assets may be affected by changes to the preliminary purchase
price allocations associated with the acquisitions we made in 2009 and 2010,
additional acquisitions, and currency translations.
As a percentage of revenue,
depreciation and amortization was down slightly in both the second quarter and
first half of 2010.
Stock-Based
Compensation Expense
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Restricted stock units
|
|
$
|
3,343
|
|
$
|
2,735
|
|
22.2
|
%
|
$
|
6,280
|
|
$
|
4,905
|
|
28.0
|
%
|
Restricted stock
|
|
312
|
|
|
|
NMF
|
|
312
|
|
|
|
NMF
|
|
Stock options
|
|
|
|
333
|
|
(100
|
)%
|
|
|
888
|
|
(100
|
)%
|
Total
stock-based compensation expense
|
|
$
|
3,655
|
|
$
|
3,068
|
|
19.1
|
%
|
$
|
6,592
|
|
$
|
5,793
|
|
13.8
|
%
|
% of
revenue
|
|
2.7
|
%
|
2.6
|
%
|
0.1
|
pp
|
2.5
|
%
|
2.5
|
%
|
|
pp
|
Stock-based compensation expense,
which we include in each of our operating expense categories, increased $0.6
million in the second quarter of 2010 and $0.8 million in the first half of
2010 and remained relatively flat as a percentage of revenue compared with the
same periods in 2009.
30
Table of Contents
Our stock-based compensation
expense mainly relates to grants of restricted stock units (RSUs), and, in the
first six months of 2009, to stock option grants made in previous years. We
began granting RSUs in May 2006 and made additional grants each year,
primarily in the second quarter. We recognize the expense related to RSUs over
the vesting period, which is generally four years.
Beginning in the second quarter of
2010, we began recording expense related to restricted stock issued in
conjunction with the acquisition of Realpoint, LLC. In May 2010, we issued
199,174 shares which will vest over five years from the date of grant. This
grant resulted in an expense of $0.3 million in the second quarter and first
half of 2010.
All outstanding stock options were
vested as of January 1, 2010. As a result, we did not record any
additional stock-based compensation expense in the first half of 2010 for stock
options granted in previous years.
We estimate forfeitures of these
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 quarter of 2010 and 2009, we recorded
approximately $0.2 million and $0.3 million, respectively, of additional
stock-based compensation expense as a result of these adjustments.
Based on grants of RSUs and
restricted stock made through June 30, 2010, we anticipate that stock-based
compensation expense will be $14 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
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Bonus
expense
|
|
$
|
8,993
|
|
$
|
3,548
|
|
153.5
|
%
|
$
|
16,701
|
|
$
|
8,738
|
|
91.1
|
%
|
% of
revenue
|
|
6.6
|
%
|
3.0
|
%
|
3.6
|
pp
|
6.3
|
%
|
3.7
|
%
|
2.6
|
pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus
expense, which we include in each of our operating expense categories,
increased $5.4 million in the second quarter of 2010 and $8.0 in the first half
of 2010. We reduced our bonus expense in 2009 as part of our efforts to better
align our cost structure with revenue in the challenging business environment.
In 2010, we reinstated a portion of the bonus expense that was previously
reduced. Bonus expense for newly acquired operations also contributed to the
increase, but to a lesser extent.
The size of our bonus pool varies
each year based on a number of items, including changes in full-year operating
income relative to the previous year and other factors. We review and update
our estimates and the bonus pool size quarterly. We record bonus expense
throughout the year and pay annual bonuses to employees in the first quarter of
the following year.
As a percentage of revenue, bonus
expense increased by 3.6 percentage points in the second quarter and 2.6
percentage points in the first six months of 2010.
Consolidated
Operating Income
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Operating
income
|
|
$
|
27,667
|
|
$
|
32,688
|
|
(15.4
|
)%
|
$
|
58,609
|
|
$
|
67,313
|
|
(12.9
|
)%
|
% of
revenue
|
|
20.3
|
%
|
27.3
|
%
|
(7.0
|
)pp
|
22.2
|
%
|
28.5
|
%
|
(6.3
|
)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income fell
$5.0 million in the second quarter and $8.7 million in the first six months of
2010. Although revenue increased in both periods, our cost base increased more,
resulting in the decline in operating income in both periods. This was driven
by incremental costs from acquisitions as well as reinstating some of the
employee benefits and other expenses we reduced in 2009. Higher bonus expense
across all expense categories also contributed to the decline in operating
income. Costs rose across all of our operating expense categories, with the
largest percent increase in sales and marketing, primarily because of an
increase in sales commission expense.
We made significant cost
reductions early in 2009 in anticipation of a tough economic environment. Those
cost reductions improved our margin in the second quarter of 2009. In 2010, we
began phasing in some of the benefits we suspended in
31
Table of Contents
2009, such as a partial
reinstatement of matching contributions to our 401(k) plan in the United
States, which represented approximately $0.8 million of expense in the second
quarter and $1.8 million in the first half of 2010.
We kept salary levels flat for
nearly all employees in 2009, but made some moderate compensation increases in July 2010.
Also in July 2010, we hired about 45 employees in the United States as
part of the Morningstar Development Program, a two-year rotational training
program for entry-level college graduates.
With operating expense increasing
more than revenue, our operating margin was 7.0 percentage points lower in the
second quarter of 2010 and 6.3 percentage points lower in the first half of
2010. The margin decline mainly reflects higher bonus, sales commissions, and
employee benefits as a percentage of revenue. The loss of revenue from GARS
also had a negative effect on margins. The deposit penalty of $3.5 million
reduced last years operating margin by approximately 3 percentage points in
the second quarter and 1.5 percentage points in the first half of 2009.
Consolidated Free
Cash Flow
As described in more detail above,
we define free cash flow as cash provided by or used for operating activities
less capital expenditures.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Cash provided by operating activities
|
|
$
|
30,580
|
|
$
|
39,589
|
|
(22.8
|
)%
|
$
|
45,030
|
|
$
|
31,267
|
|
44.0
|
%
|
Capital expenditures
|
|
(2,189
|
)
|
(2,178
|
)
|
0.5
|
%
|
(3,839
|
)
|
(6,768
|
)
|
(43.3
|
)%
|
Free
cash flow
|
|
$
|
28,391
|
|
$
|
37,411
|
|
(24.1
|
)%
|
$
|
41,191
|
|
$
|
24,499
|
|
68.1
|
%
|
We generated positive free cash
flow in both the second quarter and year-to-date periods of 2010 and 2009. Our
cash flow from operations is typically stronger in the second quarter compared
with the first quarter because we pay annual bonuses early in the year.
Free cash flow declined $9.0
million in the second quarter, but increased $16.7 million in the first six
months of 2010. The decline in free cash flow in the quarter primarily reflects
a reduction in cash provided by operating activities. The year-to-date increase
primarily reflects lower bonus payments made in the first quarter of 2010
compared with the prior-year period.
Cash provided by
operating activities:
Cash
provided by operating activities decreased $9.0 million in the second quarter
of 2010 reflecting a $4.3 million increase in cash paid for income taxes, and a
reduction in cash flow generated from accounts receivable and other operating
assets and liabilities. These items which reduced cash flow from operations
were partially offset by an increase in net income adjusted for non-cash items.
Cash provided by operating
activities increased $13.7 million in the first half of the year. Bonuses paid
in the first quarter of 2010 were $37.5 million less than the amount paid in
the previous year. We made bonus payments of $21.4 million in the first quarter
of 2010, compared with $58.9 million in the first quarter of 2009, including
$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 the bonus. The cash flow impact of
a lower bonus payment was partially offset by an increase of $12.2 million in
cash paid for income taxes in the first half of the year as well as a payment
of $4.9 million we made to one former and two current executives related to
adjusting the tax treatment of certain stock options originally considered
incentive stock options (ISOs). We recorded the operating expense related to
this matter in the fourth quarter of 2009. We expect that the payment will be
partially offset by a cash tax benefit in the future. Lower net income
(adjusted for non-cash items) also offset the cash flow benefit from the lower
bonus payment.
32
Table of Contents
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 operating cash flow:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Consolidated
net income
|
|
$
|
17,917
|
|
$
|
20,615
|
|
$
|
(2,698
|
)
|
$
|
38,074
|
|
$
|
45,488
|
|
$
|
(7,414
|
)
|
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
|
|
(1,157
|
)
|
(4,194
|
)
|
3,037
|
|
(4,205
|
)
|
(4,544
|
)
|
339
|
|
Depreciation
and amortization expense
|
|
9,246
|
|
8,850
|
|
396
|
|
18,185
|
|
16,716
|
|
1,469
|
|
Stock-based
compensation expense
|
|
3,655
|
|
3,068
|
|
587
|
|
6,592
|
|
5,793
|
|
799
|
|
All
other non-cash items included in net income
|
|
609
|
|
(821
|
)
|
1,430
|
|
(113
|
)
|
(1,882
|
)
|
1,769
|
|
Changes in
operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for bonuses
|
|
|
|
|
|
|
|
(21,360
|
)
|
(58,867
|
)
|
37,507
|
|
Cash
paid for income taxes
|
|
(17,831
|
)
|
(13,487
|
)
|
(4,344
|
)
|
(26,396
|
)
|
(14,152
|
)
|
(12,244
|
)
|
Cash
paid related to adjusting the tax treatment of certain stock options
originally considered incentive stock options
|
|
|
|
|
|
|
|
(4,887
|
)
|
|
|
(4,887
|
)
|
Accounts
receivable
|
|
(1,748
|
)
|
9,143
|
|
(10,891
|
)
|
(6,615
|
)
|
9,312
|
|
(15,927
|
)
|
Deferred
revenue
|
|
(3,253
|
)
|
(3,254
|
)
|
1
|
|
7,177
|
|
806
|
|
6,371
|
|
Income
taxes current
|
|
9,895
|
|
12,501
|
|
(2,606
|
)
|
22,141
|
|
24,548
|
|
(2,407
|
)
|
Accrued
compensation
|
|
11,362
|
|
9,608
|
|
1,754
|
|
15,093
|
|
13,436
|
|
1,657
|
|
Deferred
rent
|
|
312
|
|
(130
|
)
|
442
|
|
(80
|
)
|
(286
|
)
|
206
|
|
Other
assets
|
|
(31
|
)
|
(10
|
)
|
(21
|
)
|
(511
|
)
|
341
|
|
(852
|
)
|
Accounts
payable and accrued liabilities
|
|
1,685
|
|
(1,901
|
)
|
3,586
|
|
2,859
|
|
(6,012
|
)
|
8871
|
|
All
other
|
|
(81
|
)
|
(399
|
)
|
318
|
|
(924
|
)
|
570
|
|
(1,494
|
)
|
Cash
provided by operating activities
|
|
$
|
30,580
|
|
$
|
39,589
|
|
$
|
(9,009
|
)
|
$
|
45,030
|
|
$
|
31,267
|
|
$
|
13,763
|
|
In the second quarter of 2010, the
decline in cash provided by operations was greater than the decline in net
income, primarily because of the timing of cash paid for income taxes and a
reduction in the cash flow benefit from operating assets and liabilities,
compared with the prior-year period. For the year-to-date period, while
consolidated net income declined, cash flow from operations increased compared
with the first half of 2009. The $37.5 million decrease in bonuses paid in the
first quarter of 2010 was the primary contributor to the difference between the
changes in net income and cash provided by operations.
FASB ASC 718,
CompensationStock
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 the first half of 2010 and 2009, we classified $4.2
million and $4.5 million of excess tax benefits, respectively, as financing
activities. We describe these excess tax benefits in the Liquidity and Capital
Resources section.
Capital
expenditures:
We spent $2.2 million for capital expenditures in the second
quarter of 2010 and $3.8 million in the first half of 2010, primarily for
computer hardware and software and, to a lesser extent, for leasehold
improvements. Year to date, capital expenditures decreased $3.0 million
primarily as a result of lower spending in the first quarter of 2010 compared
with the same period in 2009. Capital expenditures of $6.8 million in the first
half of 2009 included spending for our new corporate headquarters in Chicago.
Segment Results
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics ($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$
|
109,021
|
|
$
|
97,739
|
|
11.5
|
%
|
$
|
212,545
|
|
$
|
193,979
|
|
9.6
|
%
|
Investment
Management
|
|
27,070
|
|
21,794
|
|
24.2
|
%
|
51,836
|
|
42,286
|
|
22.6
|
%
|
Consolidated
revenue
|
|
$
|
136,091
|
|
$
|
119,533
|
|
13.9
|
%
|
$
|
264,381
|
|
$
|
236,265
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$
|
30,542
|
|
$
|
37,242
|
|
(18.0
|
)%
|
$
|
63,288
|
|
$
|
74,079
|
|
(14.6
|
)%
|
Investment
Management
|
|
14,321
|
|
13,062
|
|
9.6
|
%
|
27,614
|
|
24,889
|
|
10.9
|
%
|
Intangible
amortization and corporate depreciation expense
|
|
(7,620
|
)
|
(7,560
|
)
|
0.8
|
%
|
(14,866
|
)
|
(14,335
|
)
|
3.7
|
%
|
Corporate
unallocated
|
|
(9,576
|
)
|
(10,056
|
)
|
(4.8
|
)%
|
(17,427
|
)
|
(17,320
|
)
|
0.6
|
%
|
Consolidated
operating income
|
|
$
|
27,667
|
|
$
|
32,688
|
|
(15.4
|
)%
|
$
|
58,609
|
|
$
|
67,313
|
|
(12.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
28.0
|
%
|
38.1
|
%
|
(10.1
|
)pp
|
29.8
|
%
|
38.2
|
%
|
(8.4
|
)pp
|
Investment
Management
|
|
52.9
|
%
|
59.9
|
%
|
(7.0
|
)pp
|
53.3
|
%
|
58.9
|
%
|
(5.6
|
)pp
|
Consolidated
operating margin
|
|
20.3
|
%
|
27.3
|
%
|
(7.0
|
)pp
|
22.2
|
%
|
28.5
|
%
|
(6.3
|
)pp
|
33
Table of
Contents
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 and available through electronic data feeds. Advisor Workstation is a
web-based investment planning system for advisors. Advisor Workstation is
available in two editions: Morningstar Office for independent financial
advisors and an enterprise edition for financial advisors affiliated with
larger firms. Morningstar.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 ended in July 2009. The banks covered by it are no
longer required to provide independent research to their clients. For further
discussion about this issue, see Item 1ARisk Factors, included in our Annual
Report on
Form 10-K filed with the SEC on March 1, 2010. 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, real-time data, and investment
indexes.
In the first six months of 2010
and 2009, this segment represented 80.4% and 82.1%, respectively, of our
consolidated revenue.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Revenue
|
|
$
|
109,021
|
|
$
|
97,739
|
|
11.5
|
%
|
$
|
212,545
|
|
$
|
193,979
|
|
9.6
|
%
|
Operating
income
|
|
$
|
30,542
|
|
$
|
37,242
|
|
(18.0
|
)%
|
$
|
63,288
|
|
$
|
74,079
|
|
(14.6
|
)%
|
Operating
margin (%)
|
|
28.0
|
%
|
38.1
|
%
|
(10.1
|
)pp
|
29.8
|
%
|
38.2
|
%
|
(8.4
|
)pp
|
Revenue
In the second quarter of 2010, Investment
Information segment revenue increased $11.3 million, or 11.5%, to $109.0
million. Acquisitions contributed $9.9 million of revenue in the quarter.
Excluding acquisitions, higher revenue in our software, research and data
products and services more than offset the loss of $5.4 million of revenue from
GARS, which expired at the end of July 2009. In the first half of 2010,
revenue increased $18.6 million, or 9.6%, to $212.5 million, with acquisitions
contributing $17.5 million. GARS revenue was $10.9 million in the first half of
2009.
As disclosed in the third quarter
of 2009, 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 in our Annual Report on Form 10-K for
the year ended December 31, 2009.
Revenue for Morningstar.com, which
includes Internet advertising sales and Premium Membership subscriptions,
increased in both the second quarter and year-to-date periods. Positive trends
in Internet advertising sales were offset by
34
Table of Contents
a decline in Premium Membership
revenue in the United States. Subscriptions for the U.S. version of
Morningstar.com Premium service declined to 143,392 as of June 30, 2010
compared with 150,473 as of December 31, 2009 and 160,936 as of June 30,
2009. Subscriptions fell partly because of lower consumer discretionary
spending. However, consistent with the trend over the past few years, we
moderately increased subscription prices for U.S. Premium Membership in both January 2010
and 2009, which partly offset the revenue decline associated with the decline
in subscriptions.
Advisor software revenue also
increased in the second quarter and first half of 2010, as higher revenue from
Advisor Workstation, SiteBuilder, and Profiles and Guides more than offset
lower Principia revenue. The number of U.S. licenses for Morningstar Advisor
Workstation increased slightly to 154,226 as of June 30, 2010 compared
with 148,392 as of December 31, 2009, and 152,971 as of June 30,
2009. Principia subscriptions totaled 34,715 as of June 30, 2010, down
from 35,844 as of December 31, 2009 and 38,378 as of June 30, 2009.
Higher
revenue from Morningstar Direct also contributed to the revenue increase in the
quarter and year-to-date periods. The number of licenses for Morningstar Direct
increased to 4,109 worldwide, compared with 3,171 as of June 30, 2009,
with particularly strong growth from outside the United States. The second
quarter marked the best quarter so far for net new licenses for Morningstar
Direct both in the United States and globally. The growth in licenses reflects
additional licenses for both new and existing clients. Weve also been able to
displace competitiors with Morningstar Direct.
Operating
Income
In the second quarter of 2010,
operating income for the Investment Information segment decreased $6.7 million,
or 18.0%, and decreased $10.8 million, or 14.6%, in the first half of 2010,
because the increase in operating expense exceeded the increase in revenue.
Operating
expense increased $18.0 million in the second quarter of 2010 and $29.4 million
in the first half of 2010. Additional costs from acquisitions contributed
approximately 40% of the increase. Higher incentive compensation, including
bonus and sales commission expense, was the second-largest contributor to the
increase in the segments operating expense. Increased salaries, reflecting
higher headcount, and an increase in employee benefits expense, including employee
health benefits and the partial reinstatement of matching contributions to our
401(k) plan in the United States, also contributed to the increase, but to
a lesser extent.
Our Investment Information segment operating margin declined
10.1 percentage points in the second quarter and 8.4 percentages points in the
first half of 2010. Higher incentive compensation, as well as a higher
compensation and benefits expense, as a percentage of revenue, drove the
decline in the margin in both the quarter and year-to-date periods.
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, exchange-traded fund, and stock portfolios tailored to meet a
range of investment time horizons, risk levels, and investment strategies that
financial advisors can use for their clients taxable and tax-deferred
accounts.
In the first six months of 2010
and 2009, this segment represented 19.6% and 17.9%, respectively, of our
consolidated revenue.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics
($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Revenue
|
|
$
|
27,070
|
|
$
|
21,794
|
|
24.2
|
%
|
$
|
51,836
|
|
$
|
42,286
|
|
22.6
|
%
|
Operating
income
|
|
$
|
14,321
|
|
$
|
13,062
|
|
9.6
|
%
|
$
|
27,614
|
|
$
|
24,889
|
|
10.9
|
%
|
Operating
margin (%)
|
|
52.9
|
%
|
59.9
|
%
|
(7.0
|
)pp
|
53.3
|
%
|
58.9
|
%
|
(5.6
|
)pp
|
35
Table of Contents
Revenue
Investment
Management segment revenue increased $5.3 million in the second quarter and
$9.6 million year to date. Acquisitions contributed $2.8 million of revenue in
the second quarter and $4.9 million in the first half of 2010, primarily from
the acquisition of Intech in Australia on June 30, 2009. Excluding
acquisitions, Retirement Advice and Morningstar Managed Portfolios were the
primary drivers of the segment revenue increase. Investment Consulting also
contributed to the revenue increase, but to a lesser extent. Investment
Consulting revenue in the second quarter of 2009 included revenue from a
contract that was not renewed in May 2009.
Within the Investment Management
segment, revenue from asset-based fees made up approximately 60% of segment
revenue in the first half of 2010 and 2009. For the majority of our contracts
that include variable asset-based fees, we bill clients quarterly in arrears
based on average assets for the quarter. The method of calculation varies by
client; some contracts include provisions for calculating average assets based
on daily data, while others use weekly or monthly data. Other contracts may include provisions for
monthly billing or billing based on assets as of the last day of the billing
period rather than on average assets.
Our Investment Consulting business
has multiple fee structures, which vary by client. In general, we seek to
receive asset-based fees for any work we perform that involves investment
management or acting as a subadvisor to investment portfolios. For any
individual contract, we may receive flat fees, variable asset-based fees, or a
combination of the two. Some of our contracts include minimum fee levels that
provide us with a flat payment up to a specified asset level, above which we
also receive variable asset-based fees.
In our Retirement Advice business,
our contracts may include fixed fees for advice and guidance, one-time setup
fees, technology licensing fees, asset-based fees for managed retirement
accounts, or a combination of these fee structures.
Assets under Advisement for
Investment Consulting
|
|
As of June 30
|
|
Assets under advisement for Investment Consulting ($ billions)
|
|
2010
|
|
2009
|
|
Ibbotson
Associates
|
|
$
|
41.0
|
|
$
|
38.6
|
|
Morningstar
Associates
|
|
50.2
|
|
17.5
|
|
Total
|
|
$
|
91.2
|
|
$
|
56.1
|
|
We provided Investment Consulting
advisory services on approximately $91.2 billion in assets as of June 30,
2010 compared with approximately $61.4 billion as of December 31, 2009 and
approximately $56.1 billion as of June 30, 2009. The asset totals include
relationships for which we receive basis-point fees, including consulting
arrangements and other 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; we do not include these assets in the total reported above. Excluding
changes related to new contracts and 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.
Total assets under advisement for
Investment Consulting rose to $91.2 billion, an increase of approximately 63% compared
with June 30, 2009. About one-third of the assets reflects a new
fund-of-funds program that began in May 2010 for an existing Morningstar
Associates client. Previously, we created model portfolios for the same client,
so the increase in assets represents incremental growth in an existing revenue
stream. Excluding assets from the new fund-of-funds program, assets under
advisement from Morningstar Associates and Ibbotson Associates increased
approximately 7%, mainly reflecting positive market performance over the past
12 months.
We cannot separately quantify cash
inflows and outflows for these portfolios because we do not have custody of the
assets in the majority of our investment management business. The information
we receive from our clients does not separately identify the impact of cash
inflows and outflows on asset balances for each period. We also cannot
precisely quantify the impact of market appreciation or depreciation because
the majority of our clients have discretionary authority to implement their own
portfolio allocations.
36
Table of
Contents
Assets under Management for Managed
Retirement Accounts
|
|
As of June 30
|
|
|
|
Assets under management in managed retirement accounts ($ billions)
|
|
2010
|
|
2009
|
|
Advice by Ibbotson
|
|
$
|
14.4
|
|
$
|
11.3
|
|
Morningstar Retirement Manager
|
|
1.7
|
|
1.2
|
|
Total
|
|
$
|
16.1
|
|
$
|
12.5
|
|
Assets under management for Retirement Advice increased to
$16.1 billion as of June 30, 2010 compared with $15.7 billion as of December 31,
2009 and $12.5 billion as of June 30, 2009.
There
are several factors that affect assets under management for our managed
retirement accounts. These factors include employer and employee contributions,
plan administrative fees, market movements, and participant loans and hardship
withdrawals. We cannot quantify the effect of these other factors because the
information we receive from the plan providers does not separately identify
these transactions or the changes in balances caused by market movement.
Morningstar Managed Portfolios
Morningstar
Managed Portfolios also contributed to the segments revenue increase in the
second quarter and first half of 2010. The higher revenue mainly reflects
higher average asset levels during the first half of 2010 compared with the same
period in 2009. Assets under management for Morningstar Managed Portfolios rose
to $2.2 billion as of June 30, 2010, from $1.7 billion as of June 30,
2009, reflecting positive equity market returns and net inflows.
Operating Income
Operating
income for the Investment Management segment rose $1.3 million, or 9.6%, in the
second quarter and $2.7 million, or 10.9%, in the first half of 2010, as higher
revenue exceeded the increase in operating expense.
Operating
expense in the segment rose $4.0 million, or 46%, in the second quarter of 2010
and $6.8 million, or 39.2%, in the first six months of the year. Incremental
operating expense from businesses acquired since the second quarter of 2009
contributed approximately half of the increase. Higher incentive compensation,
including bonuses and sales commissions also contributed to the change. Bonus
expense rose $1.0 million in the second quarter and $1.9 million in the first
half of 2010. Sales commissions increased $0.4 million in the second quarter
and $0.7 million in the first half of 2010. Employee benefits, including
employee healthcare benefits and matching contributions to our 401(k) plan
in the United States, also increased, but to a lesser extent.
Operating
margin declined 7.0 percentage points in the second quarter of 2010 and 5.6
percentage points in the first half of 2010. Acquisitions were the primary
contributor to the lower margin, representing approximately half of the margin
decline in both periods. Higher incentive compensation and employee benefits
expense as a percentage of revenue also contributed to the margin decline in
both periods.
Corporate Items
We
do not allocate corporate costs to our business segments. The corporate items
category also includes amortization expense related to intangible assets
recorded when we allocate the purchase price of acquisitions. The table below
shows the components of corporate items that impacted our consolidated
operating income:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
Key Metrics ($000)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Amortization expense
|
|
$
|
5,848
|
|
$
|
5,541
|
|
5.5
|
%
|
$
|
11,316
|
|
$
|
10,663
|
|
6.1
|
%
|
Depreciation expense
|
|
1,772
|
|
2,019
|
|
(12.2
|
)%
|
3,550
|
|
3,672
|
|
(3.3
|
)%
|
Corporate unallocated
|
|
9,576
|
|
10,056
|
|
(4.8
|
)%
|
17,427
|
|
17,320
|
|
0.6
|
%
|
Corporate items
|
|
$
|
17,196
|
|
$
|
17,616
|
|
(2.4
|
)%
|
$
|
32,293
|
|
$
|
31,655
|
|
2.0
|
%
|
37
Table of
Contents
Amortization
of intangible assets increased $0.3 million in the second quarter of 2010 and
$0.7 million in the first half of 2010, mainly reflecting incremental
amortization expense related to acquisitions completed in 2009 and 2010. As of June 30,
2010, we recorded $156.8 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 June 30, 2010, we
estimate that aggregate amortization expense for intangible assets will be $23.1
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 did not change significantly in the quarter
or year-to-date periods.
Corporate
unallocated expense decreased $0.5 million in the second quarter of 2010 but
increased $0.1 million in the first half of 2010. In the second quarter of 2009
we recorded a $3.5 million operating expense for estimated penalties related to
the timing of deposits for taxes withheld on stock-option exercises from 2006
through 2009. This expense did not recur in 2010. This expense decline was
partially offset by higher bonus and other compensation-related expense and
professional and legal fees in the second quarter of 2010. In this second
quarter of 2010, we also recorded an expense of $0.5 million to increase our
liability for vacant office space for the equity research and data business
acquired from C.P.M.S. in Canada.
The
slight increase in corporate unallocated expense in the first half of this year
reflects higher professional and legal fees, and expense related to vacant
office space, primarily related to acquisitions. In the first half of 2010, we
recorded expense of $1.3 million to increase our liability for vacant office
space for the former Ibbotson headquarters and for vacant office space related
to the C.P.M.S. acquisition. Higher bonus and compensation-related expense also
contributed to the expense increase, but to a lesser extent. These expense
increases were almost entirely offset by the decrease of $3.5 million related
to the deposit penalty expense recorded in the first half of 2009.
Equity in Net Income (Loss) of Unconsolidated Entities,
Non-Operating Income (Expense), and Income Tax Expense
Equity in Net Income (Loss) of Unconsolidated Entities
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
$
|
454
|
|
$
|
(21
|
)
|
$
|
843
|
|
$
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net income (loss) of unconsolidated entities includes our portion of the net
income (loss) of Morningstar Japan K.K. (MJKK), Morningstar Danmark A/S, and
Morningstar Sweden AB. In the first half of 2009, this category also included
our portion of the net income (loss) of Morningstar Korea. In the second half
of 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 consolidated the assets,
liabilities, and results of operations of Morningstar Korea in our Consolidated
Financial Statements.
We
describe our investments in unconsolidated entities in more detail in Note 7 of
the Notes to our Unaudited Condensed Consolidated Financial Statements.
Non-Operating Income (Expense)
The
following table presents the components of net non-operating income (expense):
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest income, net
|
|
$
|
593
|
|
$
|
764
|
|
$
|
1,180
|
|
$
|
1,742
|
|
Other income (expense), net
|
|
(572
|
)
|
1,208
|
|
(1,338
|
)
|
764
|
|
Non-operating income (expense), net
|
|
$
|
21
|
|
$
|
1,972
|
|
$
|
(158
|
)
|
$
|
2,506
|
|
Interest
income, net mainly reflects interest from our investment portfolio. Net
interest income decreased $0.2 million in the second quarter of 2010 and $0.6
million in the first half of 2010 because we had lower returns on our
investment balances.
Other
income (expense) primarily represents foreign currency exchange gains and
losses arising from the ordinary course of business related to our U.S. and
non-U.S. operations. It also includes royalty income from MJKK and realized
gains and losses from our investment portfolio.
38
Table of Contents
Income Tax Expense
The
following table summarizes the components of our effective tax rate:
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
($000)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Income before income taxes and equity
in net income (loss) of unconsolidated entities
|
|
$
|
27,688
|
|
$
|
34,660
|
|
$
|
58,451
|
|
$
|
69,819
|
|
Equity in net income (loss) of
unconsolidated entities
|
|
454
|
|
(21
|
)
|
843
|
|
361
|
|
Net (income) loss attributable to the
noncontrolling interest
|
|
85
|
|
(71
|
)
|
116
|
|
18
|
|
Total
|
|
$
|
28,227
|
|
$
|
34,568
|
|
$
|
59,410
|
|
$
|
70,198
|
|
Income tax expense
|
|
$
|
10,225
|
|
$
|
14,024
|
|
$
|
21,220
|
|
$
|
24,692
|
|
Effective tax rate
|
|
36.2
|
%
|
40.6
|
%
|
35.7
|
%
|
35.2
|
%
|
Our
effective tax rate declined 4.4 percentage points in the second quarter of
2010. The deposit penalty of $3.5 million, which decreased pre-tax income in
the second quarter of 2009, and which is not deductible for tax purposes,
accounted for 3.7 percentage points of the effective tax rate and did not recur
in 2010.
In
the first half of 2010, our effective tax rate was slightly higher compared
with the prior-year period. The 2009 year-to-date effective tax rate reflects
two positive factors that did not recur in 2010. In the first quarter of 2009,
we reversed a $1.4 million reserve for uncertain tax positions as a result of a
lapse in the statute of limitations. In the second quarter of 2009, we reversed
$0.6 million because of settlements and other audit activity. These non-cash
benefits had a favorable impact of approximately 3 percentage points in the
prior-year period. These benefits were partially offset by the impact of the
non-deductible deposit penalty expense, which increased our effective tax rate
by approximately 2 percentage points in the year-to-date period of 2009.
There
were no significant changes to uncertain tax positions in the first half of
2010 as a result of other lapses of statutes of limitation or audit activity.
As of December 31, 2009, our Consolidated Balance Sheet included a current
liability of $1.0 million and a non-current liability of $5.4 million for
unrecognized tax benefits. These amounts include interest and penalties, less
any associated tax benefits.
We
are currently under audit by 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 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.
Liquidity and Capital Resources
We
believe our available cash balances and investments, along with cash generated
from operations, will be sufficient to meet our operating and cash needs for
the foreseeable future. We invest our cash reserves in cash equivalents and
investments, consisting primarily of fixed-income securities. We maintain a
conservative investment policy for our investments and invest a portion of
these assets in municipal securities with high-quality stand-alone credit
ratings. 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.
39
Table of Contents
Cash and Cash Equivalents
As
of June 30, 2010, we had cash, cash equivalents, and investments of $320.4
million, a decrease of $22.2 million compared with December 31, 2009. The
decrease since December 31, 2009 reflects cash used for acquisitions and
capital expenditures of $71.3 million, partially offset by cash provided by
operating activities.
We
used approximately $22.5 million of our cash and investments on hand as of June 30,
2010 to complete two acquisitions in July 2010.
Cash Provided by Operating Activities
Our
main source of capital is cash generated from operating activities. We
typically pay bonuses in the first quarter of the year. As a result, cash flow
from operations in the first quarter tends to be lower compared with subsequent
quarters.
In
the first six months of 2010, cash provided by operating activities was $45.0
million, an increase of $13.7 million compared with cash provided for operating
activities of $31.3 million in the first six months of 2009. The increase
primarily reflects the lower bonus payments in 2010 (reflecting the difficult
operating environment experienced in 2009).
We
paid $21.4 million in annual bonus payments in the first quarter of 2010,
compared with bonus payments of $58.9 million in the prior-year period. The
bonuses paid in 2009 included approximately $48.9 million of bonus expense
recorded in 2008 and approximately $10.0 million of bonus payments deferred
from 2007. In accordance with bonus program revisions adopted in January 2009,
we no longer defer payment of a portion of the bonus from prior years.
In
addition, in the first six months of 2010, we paid $4.9 million to one former
and two current executives to adjust the tax treatment of certain stock options
originally considered incentive stock options. We expect this payment to be
partially offset by a cash tax benefit in the future.
Cash Used for Investing Activities
Cash
used for investing activities consists primarily of cash used for acquisitions,
purchases of investments less proceeds from the maturity or sale of
investments, and cash used for capital expenditures. The level of investing
activities can vary from period to period depending on the level of activity in
these three categories. In the first half of 2010, cash used for investing
activities was $25.6 million, compared with cash used for investing activities
of $36.9 million in the same period of 2009.
Cash
used for acquisitions, net of cash acquired, was $67.5 million in the first
half of 2010. We completed four acquisitions in the first half of 2010. In
comparison, cash used for acquisitions, net of acquired cash, was $18.6 million
in the first half of 2009. We also completed four acquisitions in the first
half of 2009.
In
the first half of 2010, proceeds from the maturity or sale of investments
exceeded the purchases of investments by $44.9 million. We transferred funds
from our investment portfolio to cash and cash equivalents to pay for four
acquisitions in the first half of 2010. In contrast, in the first half of 2009,
purchases of investments, net of proceeds from the maturity or sale of
investments, were $12.2 million. As of June 30, 2010 and December 31,
2009, we had investments, consisting primarily of fixed-income securities, of
$166.0 million and $212.1 million, respectively. As of June 30, 2010, our
investments represented approximately 52% of our total cash, cash equivalents,
and investments, a decrease of approximately 10 percentage points compared with
December 31, 2009.
Capital
expenditures were $3.8 million in the first half of 2010, a decrease of $3.0
million compared with $6.8 million in the first half of 2009. We expect to make
capital expenditures of approximately $18 to $20 million in 2010 compared with
the $12.4 million in 2009. The 2010 capital expenditures include spending for a
new office space in Shenzhen, China.
Cash Provided by Financing Activities
Cash provided by financing activities consists primarily of
proceeds from stock-option exercises and excess tax benefits related to
stock-option exercises and vesting of restricted stock units. Excess tax benefits
occur at the time a stock option is exercised when the intrinsic value of the
option (the difference between the fair value of our stock on the date of
exercise and the exercise price of the option) is greater than the fair value
of the option at the time of grant. Similarly, excess tax benefits are
generated upon vesting of restricted stock units when the market value of our
common stock on the vesting date exceeds the grant price of the restricted
stock units. These excess tax benefits reduce the cash we pay for income taxes
in the year they are recognized. It is not possible to predict the timing of
stock-option exercises or the intrinsic value that will be achieved at the time
options are exercised or upon vesting of restricted stock units.
40
Table of Contents
As
a result, we expect cash flow from financing activities to vary over time. Note
9 in the Notes to our Unaudited Condensed Consolidated Financial Statements
includes additional information concerning stock options and restricted stock
units outstanding as of June 30, 2010.
Cash
provided by financing activities was $8.0 million in the first half of 2010.
Proceeds from stock-option exercises totaled $3.7 million, while excess tax
benefits related to stock-option exercises and vesting of restricted stock
units totaled $4.2 million. In the first six months of 2010, cash provided by
financing activities decreased by $8.0 million compared with the first half of
2009, driven mostly by a decrease in proceeds from stock-option exercises.
Employees
exercised approximately 0.4 million and 1.4 million stock options in the first
six months of 2010 and 2009, respectively. The total intrinsic value (the
difference between the market value of our stock on the date of exercise and
the exercise price of the option) of options exercised during the first six
months of 2010 and 2009 was $14.5 million and $25.0 million, respectively.
Acquisitions
In
2010, we announced the following acquisitions:
Acquisition
|
|
Description
|
|
Date of Acquisition
|
|
Purchase Price*
|
Footnoted business of Financial
Fineprint Inc.
|
|
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for professional money managers, analysts, and sophisticated individual
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|
|
February 1, 2010
|
|
Not separately disclosed
|
Aegis Equities Research
|
|
A leading provider of independent equity
research in Sydney, Australia.
|
|
April 1, 2010
|
|
$10.7 million
|
Old Broad Street Research Ltd.
|
|
A premier provider of fund research,
ratings, and investment consulting services in the United Kingdom.
|
|
April 12, 2010
|
|
$16.7 million
|
Realpoint, LLC
|
|
A Nationally Recognized Statistical
Ratings Organization (NRSRO) that specializes in structured finance.
|
|
May 3, 2010
|
|
$38.4 million in cash and 199,174
shares of restricted stock (valued at approximately $10 million as of the
date the acquisition was announced in March 2010)
|
Morningstar Danmark A/S
|
|
Acquisition of the 75% ownership
interest not previously owned by Morningstar, bringing our ownership to 100%.
|
|
July 1, 2010
|
|
$14.7 million
|
Seeds Group
|
|
A leading provider of investment
consulting services and fund research in France.
|
|
July 1, 2010
|
|
Not separately disclosed
|
* Total purchase
price, less cash acquired, subject to post closing adjustments.
Subsequent Events
See
Note 13 in the Notes to our Unaudited Condensed Consolidated Financial
Statements for events subsequent to June 30, 2010.
41
Table of Contents
Reclassifications
Beginning
in 2010, we include revenue from Ibbotsons plan sponsor advice service as
Retirement Advice revenue. Previously, we included this revenue in Investment
Consulting. We have reclassified the prior-year information for consistency
with the current-year presentation. This reclassification did not have any
effect on the order of our top five products in 2009 or 2008, as presented in
the two tables below.
Top Five Products 2009
|
|
Reclassified for
Consistency with
2010 Product
Revenue
($000)
|
|
As Reported
Revenue ($000)
|
|
Licensed Data
|
|
$
|
91,524
|
|
$
|
91,524
|
|
Advisor Workstation
|
|
65,673
|
|
65,673
|
|
Investment Consulting
|
|
62,531
|
|
63,748
|
|
Morningstar.com
|
|
39,454
|
|
39,454
|
|
Morningstar Direct
|
|
29,968
|
|
29,968
|
|
|
|
|
|
|
|
|
|
Top Five Products 2008
|
|
Reclassified for
Consistency with
2010 Product
Revenue
($000)
|
|
As Reported
Revenue ($000)
|
|
Licensed Data
|
|
$
|
78,329
|
|
$
|
78,329
|
|
Investment Consulting
|
|
76,150
|
|
77,757
|
|
Advisor Workstation
|
|
64,222
|
|
64,222
|
|
Morningstar.com
|
|
45,684
|
|
45,684
|
|
Principia
|
|
27,791
|
|
27,791
|
|
|
|
|
|
|
|
|
|
Application of Critical Accounting Policies and Estimates
We
discuss our critical accounting policies and estimates in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations,
included in our Annual Report on Form 10-K filed with the SEC for the year
ended December 31, 2009. In addition, effective January 1, 2010, we
adopted the following financial accounting standards:
·
Accounting Standards Update (ASU)
No. 2009-16,
Transfers and Servicing (Topic 860) and
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, 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). These accounting pronouncements did not impact our Unaudited Condensed
Consolidated Financial Statements.
·
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. ASU 2010-06 also clarifies 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. The additional disclosures required by ASU No. 2010-06
appear in Note 6, in the Notes to our Unaudited Condensed Consolidated
Financial Statements.
42
Table of Contents
Recently Issued
Accounting Pronouncements
In October 2009, the
Financial Accounting Standards Board (FASB) issued ASU No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements.
ASU 2009-13 supersedes Emerging Issues Task
Force (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 and also does 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 entities to disclose
information in the Level 3 rollforward about purchases, sales, issuances, and
settlements on a gross basis. For Morningstar, 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, this accounting
pronouncement will have on our Consolidated Financial Statements.
43
Table of Contents
Rule 10b5-1 Sales Plans
Our
directors and executive officers may exercise stock options or purchase or
sell shares of our common stock in the market from time to time. We encourage
them to make these transactions through plans that comply with Exchange Act
Rule 10b5-1(c). Morningstar will not receive any proceeds, other than
proceeds from the exercise of stock options, related to these transactions. The
following table, which we are providing on a voluntary basis, shows the
Rule 10b5-1 sales plans entered into by our directors and executive
officers that were in effect as of August 1, 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
August 1,
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
|
|
724,477
|
|
24,665,100
|
|
Peng
Chen President, Ibbotson Associates
|
|
06/01/10
|
|
06/30/11
|
|
5,746
|
|
Shares
to be sold under the plan if the stock reaches specified prices
|
|
|
|
3,152
|
|
Cheryl
Francis Director
|
|
08/11/09
|
|
12/17/10
|
|
12,000
|
|
Shares
to be sold under the plan if the stock reaches specified prices
|
|
6,002
|
|
31,047
|
|
Steve
Kaplan Director
|
|
05/5/10
|
|
12/31/10
|
|
8,001
|
|
Shares
to be sold under the plan on specified dates
|
|
|
|
61,226
|
|
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
|
|
|
|
111,167
|
|
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
|
|
|
|
77,635
|
|
Patrick
Reinkemeyer President, Morningstar Associates
|
|
05/13/10
|
|
03/05/11
|
|
50,000
|
|
Shares
to be sold under the plan if the stock reaches specified prices
|
|
|
|
272,945
|
|
Richard
Robbins General Counsel and Corporate Secretary
|
|
11/11/09
|
|
12/31/10
|
|
5,000
|
|
Biweekly
increments of up to 500 shares
|
|
|
|
27,784
|
|
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
|
|
|
|
88,141
|
|
(1)
This column reflects an estimate of the number of shares each identified
director and executive officer will beneficially own following the sale of all
shares under the Rule 10b5-1 sales plans identified above. This
information reflects the beneficial ownership of our common stock on
June 30, 2010, and includes shares of our common stock subject to options
that were then exercisable or that will have become exercisable by August 29,
2010 and restricted stock units that will vest by August 29,
2010. The estimates do not reflect any changes to beneficial ownership
that may have occurred since June 30, 2010. 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.
44
Table of Contents
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Our
investment portfolio is actively managed and may suffer losses from fluctuating
interest rates, market prices, or adverse security selection. Our investment
portfolio is mainly invested in high-quality fixed-income securities. We do not
have any direct exposure to sub-prime mortgages. As of June 30, 2010, our
cash, cash equivalents, and investments balance was $320.4 million. Based on
our estimates, a 100 basis-point change in interest rates would impact the fair
value of our investment portfolio by approximately $0.7 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.
Item 4.
Controls and Procedures
(a) Evaluation
and Disclosure Controls and Procedures
Disclosure controls and procedures
are designed to reasonably assure that information required to be disclosed in
the reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SECs
rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to reasonably assure that
information required to be disclosed in the reports filed under the Exchange
Act is accumulated and communicated to management, including the chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
We carried
out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 12a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as of June 30, 2010. Based on that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized, and reported
as and when required and is accumulated and communicated to management,
including the chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
(b) Changes
in Internal Controls Over Financial Reporting
There were no changes in our
internal controls over financial reporting during the quarter ended June 30,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART 2 OTHER
INFORMATION
Item
1. Legal Proceedings
We incorporate by reference the
information regarding legal proceedings set forth in Note 12 Contingencies of
the Notes to our Unaudited Condensed Consolidated Financial Statements
contained in Part 1, Item 1 of this Quarterly Report on
Form 10-Q.
Item
1A. Risk Factors
There have been no material
changes to the risk factors disclosed in Item 1ARisk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009.
45
Table of Contents
Item 6.
Exhibits
(a) Exhibits
Exhibit No
|
|
Description of Exhibit
|
|
|
|
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
|
|
|
|
101*
|
|
The following financial
information from Morningstar Inc.s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010, filed with the SEC on August 5, 2010, formatted
in XBRL: (i) Condensed Consolidated Statements of Income, (ii) Condensed
Consolidated Balance Sheets, (iii) Condensed Consolidated Statement of Equity
and Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of
Cash Flows and (v) the Notes to Unaudited Condensed Consolidated Financial
Statements, tagged as blocks of text
|
* Users of this data are
advised pursuant to Rule 406T of Regulation S-T that this interactive data file
is deemed not filed or part of a registration statement or prospectus for
purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections
46
Table of Contents
SIGNATURE
Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
MORNINGSTAR, INC.
|
|
|
|
|
|
Date:
August 5, 2010
|
|
By:
|
/s/
|
Scott Cooley
|
|
|
|
|
Scott Cooley
|
|
|
|
|
Chief Financial Officer
|
47
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