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EX-32.1 - EXHIBIT 32.1 - Morningstar, Inc.morn_exhibitx321x093014.htm
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EX-31.1 - EXHIBIT 31.1 - Morningstar, Inc.morn_exhibitx311x093014.htm
EX-32.2 - EXHIBIT 32.2 - Morningstar, Inc.morn_exhibitx322x093014.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to
Commission File Number: 000-51280
 

MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter) 
Illinois
 
36-3297908
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification Number)
 
 
 
22 West Washington Street
 
 
Chicago, Illinois
 
60602
(Address of Principal Executive Offices)
 
(Zip Code)
  (312) 696-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x
Accelerated filer  o
Non-accelerated filer   o
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 24, 2014 there were 44,581,820 shares of the Company’s common stock, no par value, outstanding.
 



MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Equity for the nine months ended September 30, 2014
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements

3


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands except per share amounts)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Revenue
 
$
193,106

 
$
173,482

 
$
563,656

 
$
517,766

 
 
 
 
 
 
 
 
 
Operating expense (1):
 
 
 
 
 
 
 
 
Cost of revenue
 
80,142

 
72,422

 
237,243

 
198,499

Sales and marketing
 
26,761

 
22,774

 
83,138

 
78,789

General and administrative
 
26,384

 
22,416

 
82,926

 
77,863

Depreciation and amortization
 
14,558

 
11,257

 
40,336

 
33,858

Litigation settlement (2)
 

 

 
61,000

 

Total operating expense
 
147,845

 
128,869

 
504,643

 
389,009

 
 
 
 
 
 
 
 
 
Operating income
 
45,261

 
44,613

 
59,013

 
128,757

 
 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 

 
 

 
 
 
 
Interest income, net
 
515

 
630

 
1,734

 
2,035

Gain (loss) on sale of investments, reclassified from other comprehensive income
 
158

 
(42
)
 
505

 
1,106

Holding gain (loss) upon acquisition of additional ownership of equity and cost method investments
 

 
(78
)
 
5,168

 
3,635

Other income (expense), net
 
(971
)
 
261

 
(942
)
 
(1,949
)
Non-operating income (expense), net
 
(298
)
 
771

 
6,465

 
4,827

 
 
 
 
 
 
 
 
 
Income before income taxes and equity in net income of unconsolidated entities
 
44,963

 
45,384

 
65,478

 
133,584

 
 
 
 
 
 
 
 
 
Equity in net income of unconsolidated entities
 
337

 
315

 
1,433

 
1,172

 
 
 
 
 
 
 
 
 
Income tax expense
 
15,149

 
14,265

 
20,188

 
42,647

 
 
 
 
 
 
 
 
 
Consolidated net income
 
30,151

 
31,434

 
46,723

 
92,109

 
 
 
 
 
 
 
 
 
Net loss attributable to the noncontrolling interest
 
29

 
29

 
64

 
93

 
 
 
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
30,180

 
$
31,463

 
$
46,787

 
$
92,202

 
 
 
 
 
 
 
 
 
Net income per share attributable to Morningstar, Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.67

 
$
0.68

 
$
1.04

 
$
1.99

Diluted
 
$
0.67

 
$
0.68

 
$
1.04

 
$
1.98

 
 
 
 
 
 
 
 
 
Dividends per common share:
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.17

 
$

 
$
0.51

 
$
0.25

Dividends paid per common share
 
$
0.17

 
$
0.13

 
$
0.51

 
$
0.25

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
44,734

 
46,080

 
44,763

 
46,293

Diluted
 
44,889

 
46,519

 
44,990

 
46,635

 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
2014

 
2013

 
2014

 
2013

(1) Includes stock-based compensation expense of:
 
 

 
 

 
 
 
 
Cost of revenue
 
$
2,177

 
$
1,471

 
$
5,829

 
$
4,863

Sales and marketing
 
607

 
456

 
1,634

 
1,490

General and administrative
 
2,167

 
1,489

 
5,790

 
4,800

Total stock-based compensation expense
 
$
4,951

 
$
3,416

 
$
13,253

 
$
11,153


(2) See Note 12, Contingencies, for additional information.
 
See notes to unaudited condensed consolidated financial statements.


4


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income

 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands) 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
30,151

 
$
31,434

 
$
46,723

 
$
92,109

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(18,809
)
 
11,247

 
(13,476
)
 
(4,952
)
Unrealized gains (losses) on securities, net of tax:
 
 
 
 
 
 
 
 
  Unrealized holding gains (losses) arising during period
 
(244
)
 
774

 
152

 
1,774

  Reclassification of (gains) losses included in net income
 
(100
)
 
28

 
(318
)
 
(706
)
Other comprehensive income (loss)
 
(19,153
)
 
12,049

 
(13,642
)
 
(3,884
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
10,998

 
43,483

 
33,081

 
88,225

Comprehensive loss attributable to noncontrolling interest
 
83

 
40

 
98

 
246

Comprehensive income attributable to Morningstar, Inc.
 
$
11,081

 
$
43,523

 
$
33,179

 
$
88,471


See notes to unaudited condensed consolidated financial statements.



5


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
 
 
As of September 30
 
As of December 31
(in thousands except share amounts)
 
2014

 
2013

Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
189,318

 
$
168,160

Investments
 
38,490

 
130,407

Accounts receivable, less allowance of $1,323 and $1,089, respectively
 
124,966

 
114,131

Deferred tax asset, net
 
7,524

 
3,892

Income tax receivable, net
 
4,427

 
3,942

Other current assets
 
23,619

 
26,361

Total current assets
 
388,344

 
446,893

Property, equipment, and capitalized software, less accumulated depreciation and amortization of $126,449 and $106,166, respectively
 
112,584

 
104,986

Investments in unconsolidated entities
 
30,428

 
38,714

Goodwill
 
378,969

 
326,450

Intangible assets, net
 
103,443

 
103,909

Other assets
 
6,407

 
9,716

Total assets
 
$
1,020,175

 
$
1,030,668

 
 
 
 
 
Liabilities and equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued liabilities
 
$
38,495

 
$
42,131

Accrued compensation
 
67,692

 
71,403

Deferred revenue
 
150,051

 
149,225

Short-term debt
 
30,017

 

Other current liabilities
 
4,632

 
6,786

Total current liabilities
 
290,887

 
269,545

Accrued compensation
 
6,905

 
8,193

Deferred tax liability, net
 
17,565

 
23,755

Deferred rent
 
23,460

 
23,938

Other long-term liabilities
 
10,839

 
13,947

Total liabilities
 
349,656

 
339,378

 
 
 
 
 
Equity:
 
 

 
 

Morningstar, Inc. shareholders’ equity:
 
 

 
 

Common stock, no par value, 200,000,000 shares authorized, of which 44,661,350 and 44,967,423 shares were outstanding as of September 30, 2014 and December 31, 2013, respectively
 
5

 
5

Treasury stock at cost, 7,809,277 shares as of September 30, 2014 and 7,202,896 shares as of December 31, 2013
 
(493,642
)
 
(449,054
)
Additional paid-in capital
 
553,172

 
539,507

Retained earnings
 
618,484

 
594,626

Accumulated other comprehensive income (loss):
 
 
 
 
    Currency translation adjustment
 
(8,833
)
 
4,609

    Unrealized gain on available-for-sale investments
 
398

 
564

Total accumulated other comprehensive income (loss)
 
(8,435
)
 
5,173

Total Morningstar, Inc. shareholders’ equity
 
669,584

 
690,257

Noncontrolling interests
 
935

 
1,033

Total equity
 
670,519

 
691,290

Total liabilities and equity
 
$
1,020,175

 
$
1,030,668

 See notes to unaudited condensed consolidated financial statements.

6


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity
For the nine months ended September 30, 2014
 
 
 
Morningstar, Inc. Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
(Loss)

 
 
 
 
 
 
Common Stock
 
 

 
Additional
Paid-in
Capital

 
 
 
 
Non-
Controlling
Interests

 
 
(in thousands, except share amounts)
 
Shares
Outstanding

 
Par
Value

 
Treasury
Stock

 
 
Retained
Earnings

 
 
 
Total
Equity

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
 
44,967,423

 
$
5

 
$
(449,054
)
 
$
539,507

 
$
594,626

 
$
5,173

 
$
1,033

 
$
691,290

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 

 

 

 
46,787

 


 
(64
)
 
46,723

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax of $82
 
 
 

 

 

 

 
152

 

 
152

Reclassification of adjustments for gains included in net income, net of income tax of $187
 
 
 

 

 

 

 
(318
)
 

 
(318
)
Foreign currency translation adjustment, net
 
 
 

 

 

 

 
(13,442
)
 
(34
)
 
(13,476
)
Other comprehensive loss, net
 
 
 

 

 

 

 
(13,608
)
 
(34
)
 
(13,642
)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
 
317,579

 

 
1,261

 
(2,617
)
 

 

 

 
(1,356
)
Stock-based compensation
 
 
 

 

 
13,253

 

 

 

 
13,253

Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
 
 
 

 

 
2,945

 

 

 

 
2,945

Common shares repurchased
 
(623,652
)
 

 
(45,849
)
 

 

 

 

 
(45,849
)
Dividends declared — common shares outstanding
 
 
 

 

 

 
(22,779
)
 

 

 
(22,779
)
Dividends declared — restricted stock units
 
 
 

 

 
84

 
(150
)
 

 

 
(66
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2014
 
44,661,350

 
$
5

 
$
(493,642
)
 
$
553,172

 
$
618,484

 
$
(8,435
)
 
$
935

 
$
670,519

 
See notes to unaudited condensed consolidated financial statements.


7


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine months ended September 30
(in thousands)
 
2014

 
2013

 
 
 
 
 
Operating activities
 
 

 
 

Consolidated net income
 
$
46,723

 
$
92,109

Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
40,336

 
33,858

Deferred income taxes
 
(5,367
)
 
(2,315
)
Stock-based compensation expense
 
13,253

 
11,153

Provision for bad debts
 
308

 
730

Equity in net income of unconsolidated entities
 
(1,433
)
 
(1,172
)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
 
(2,945
)
 
(4,093
)
Holding gain upon acquisition of additional ownership of equity method investments
 
(5,168
)
 
(3,635
)
Other, net
 
200

 
12

Changes in operating assets and liabilities, net of effects of acquisitions:
 


 


Accounts receivable
 
(12,588
)
 
(1,249
)
Other assets
 
(3,333
)
 
(2,887
)
Accounts payable and accrued liabilities
 
(1,224
)
 
(3,151
)
Accrued compensation
 
3,376

 
(8,404
)
Income taxes—current
 
3,542

 
17,205

Deferred revenue
 
548

 
6,004

Deferred rent
 
33

 
(1,273
)
Other liabilities
 
(973
)
 
(679
)
Cash provided by operating activities
 
75,288

 
132,213

 
 
 
 
 
Investing activities
 
 

 
 

Purchases of investments
 
(10,612
)
 
(113,824
)
Proceeds from maturities and sales of investments
 
103,120

 
108,599

Capital expenditures
 
(42,756
)
 
(27,950
)
Acquisitions, net of cash acquired
 
(64,447
)
 
(11,079
)
Proceeds from sale of a business
 

 
957

Purchases of equity- and cost-method investments
 

 
(2,751
)
Other, net
 
229

 
432

Cash used for investing activities
 
(14,466
)
 
(45,616
)
 
 
 
 
 
Financing activities
 
 

 
 

Proceeds from stock-option exercises
 
3,766

 
3,172

Employee taxes withheld for restricted stock units
 
(5,122
)
 
(5,276
)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
 
2,945

 
4,093

Common shares repurchased
 
(42,100
)
 
(62,794
)
Dividends paid
 
(22,912
)
 
(11,657
)
Proceeds from short-term debt
 
30,000

 

Other, net
 
(9
)
 
(54
)
Cash used for financing activities
 
(33,432
)
 
(72,516
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(6,232
)
 
(1,011
)
Net increase in cash and cash equivalents
 
21,158

 
13,070

Cash and cash equivalents—beginning of period
 
168,160

 
163,889

Cash and cash equivalents—end of period
 
$
189,318

 
$
176,959

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid for income taxes
 
$
22,044

 
$
27,700

Supplemental information of non-cash investing and financing activities:
 
 
 
 
Unrealized gain (loss) on available-for-sale investments
 
$
(270
)
 
$
1,675

Equipment obtained under long-term financing arrangement
 
$

 
$
4,860

 
See notes to unaudited condensed consolidated financial statements.

8


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 (U.S. GAAP) 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 are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

Certain prior-period amounts have been reclassified to conform to the current period's presentation. We now include development expense, which was previously reported as a separate operating expense category, in the cost of revenue category. We have reclassified development expense to include it in cost of revenue for all periods presented.

Separately, as a result of our move to a more centralized structure in the third quarter of 2013 (including new positions created, changes in focus for some existing roles, and the refinement of employee cost categorizations as we moved to a more centralized structure), approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. For the first nine months of 2014 as compared with the same period in 2013, changes related to our more centralized organizational structure added $14 million of compensation expense to cost of revenue, and reduced the compensation expense in our sales and marketing and general and administrative expense categories by $8 million and $6 million, respectively. These changes did not affect our total operating expense or operating income for any of the periods presented.

The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:
 
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board
 
2. Correction

In 2014, we identified and corrected an immaterial classification error related to the current and long-term balance for deferred rent included on our Consolidated Balance Sheets as of December 31, 2013. The correcting entries had the effect of decreasing accounts payable and accrued liabilities by $10.7 million and increasing deferred rent (long-term) by the same amount. The financial statements have been corrected to reduce the current balance and increase the long-term balance as shown in the table below:
 
 
As of December 31, 2013
($000)
 
Previously Reported

 
Correction

 
As Corrected

Accounts payable and accrued liabilities
 
$
52,877

 
$
(10,746
)
 
$
42,131

Deferred rent
 
$
13,192

 
$
10,746

 
$
23,938



9


3. Summary of Significant Accounting Policies

We discuss our significant accounting policies in Note 2 of our Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

In addition, effective January 1, 2014, we adopted FASB ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). ASU No. 2013-05 specifies that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Additionally, the amendments in this update clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that results in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes referred to as a step acquisition). The currency translation adjustment should be released into net income upon the occurrence of those events. The adoption of ASU No. 2013-05 did not have a material effect on our consolidated financial statements.

We also adopted FASB ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), effective January 1, 2014. This update requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The update does not require new recurring disclosures. The adoption of ASU No. 2013-11 did not have a material effect on our consolidated financial statements.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.


10


4. Credit Arrangements

In July 2014, the company entered into a one year, $75.0 million, single-bank revolving credit facility. The company drew on the credit facility during the third quarter and had an outstanding principal balance of $30.0 million at an interest rate of LIBOR plus 100 basis points as of September 30, 2014, leaving borrowing availability of $45.0 million.

5. Acquisitions, Goodwill and Other Intangible Assets

Acquisitions

Increased Ownership Interest in HelloWallet Holdings, Inc.

In June 2014, we acquired an additional 81.3% interest in HelloWallet Holdings, Inc. (HelloWallet), increasing our ownership to 100% from 18.7%. HelloWallet combines behavioral economics and the psychology of decision-making with sophisticated technology to provide personalized, unbiased financial guidance to U.S. workers and their families through their employer benefit plans. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on June 3, 2014.

HelloWallet's total preliminary estimated fair value of $54,006,000 includes $40,525,000 in cash paid to acquire the remaining 81.3% interest in HelloWallet and pay off HelloWallet's indebtedness as well as $13,481,000 related to the 18.7% of HelloWallet we previously held. We recorded a preliminary non-cash holding gain of $5,168,000 for the difference between the fair value and the book value of our previously held investment. The gain is included in non-operating income in our Unaudited Condensed Consolidated Statements of Income.

The purchase price valuation will be finalized upon the completion of the fair value analysis of the acquired assets and liabilities, including the preliminary intangible assets. We have not yet obtained all of the information related to the fair value of the acquired assets and liabilities to finalize the purchase price allocation. The primary areas that are not yet finalized relate to the valuation of the identifiable intangible assets and income taxes.

The following table summarizes our preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, all of which are preliminary pending completion of the final valuation:
 
 
($000)

Cash and cash equivalents
 
$
3,739

Accounts receivable and other current assets
 
150

Other current and non-current assets
 
318

Deferred tax asset
 
7,340

Intangible assets
 
9,460

Goodwill
 
40,472

Deferred revenue
 
(2,897
)
Deferred tax liability
 
(3,595
)
Other current and non-current liabilities
 
(981
)
Total fair value of HelloWallet
 
$
54,006


The preliminary allocation includes $9,460,000 of acquired intangible assets, as follows:
 
 
($000)

 
Weighted Average Useful Life (years)
Technology based assets
 
6,670

 
5
Intellectual property (trademarks and trade names)
 
169

 
3
Non-competition agreement
 
2,621

 
5
Total intangible assets
 
$
9,460

 
5


11


We recognized a preliminary deferred tax liability of $3,595,000 mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes. The fair value of the acquired intangible assets and the deferred tax liability are preliminary pending receipt of the final valuation for these assets.

We recognized a preliminary deferred tax asset of $7,340,000 mainly because of net operating losses of HelloWallet which will become available to Morningstar.

Preliminary goodwill of $40,472,000 represents the premium over the fair value of the net tangible and intangible assets acquired. We paid this premium for a number of reasons, including the opportunity to bring together HelloWallet's comprehensive financial wellness expertise with Morningstar's independent, research-based retirement advice to create a holistic retirement savings and advice offering.

ByAllAccounts, Inc.

In April 2014, we acquired ByAllAccounts, Inc. (ByAllAccounts), a provider of innovative data aggregation technology for financial applications for $27,949,000 in cash. ByAllAccounts uses a knowledge-based process, including patented artificial intelligence technology, to collect, consolidate, and enrich financial account data and deliver it to virtually any platform. We began including the financial results of this acquisition in our Consolidated Financial Statements on April 1, 2014.

The purchase price valuation will be finalized upon the completion of the fair value analysis of the acquired assets and liabilities, including the preliminary intangible assets. We have not yet obtained all of the information related to the fair value of the acquired assets and liabilities to finalize the purchase price allocation. The primary areas that are not yet finalized relate to the valuation of the identifiable intangible assets and income taxes.

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 the acquisition, all of which are preliminary pending completion of the final valuation:
 
 
($000)

Cash and cash equivalents
 
$
287

Accounts receivable and other current assets
 
152

Deferred tax asset
 
3,685

Other current and non-current assets
 
257

Intangible assets
 
8,681

Goodwill
 
18,778

Deferred revenue
 
(79
)
Deferred tax liability
 
(3,299
)
Other current and non-current liabilities
 
(513
)
Total purchase price
 
$
27,949


The preliminary allocation includes $8,681,000 of acquired intangible assets, as follows:

 
 
($000)

 
Weighted Average Useful Life (years)
Customer-related assets
 
$
5,506

 
24
Technology-based assets
 
3,020

 
4.5
Intellectual property (trademarks and trade names)
 
47

 
1
Non-competition agreement
 
108

 
3
Total intangible assets
 
$
8,681

 
19


12


We recognized a preliminary deferred tax liability of $3,299,000 mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes. The fair value of the acquired intangible assets and the deferred tax liability are preliminary pending receipt of the final valuation for these intangible assets.

We recognized a preliminary deferred tax asset of $3,685,000 mainly because of net operating losses of ByAllAccounts which will become available to Morningstar.

Preliminary goodwill value of $18,778,000 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 to integrate the service into our offerings as well as expand and develop ByAllAccounts' third-party distribution relationships.

Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2013 to September 30, 2014:
 
 
 
($000)

Balance as of December 31, 2013
 
$
326,450

Acquisitions of HelloWallet and ByAllAccounts
 
59,250

Foreign currency translation
 
(6,731
)
Balance as of September 30, 2014
 
$
378,969


We did not record any impairment losses in the first nine months of 2014 or 2013. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of September 30, 2014
 
As of December 31, 2013
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
29,539

 
$
(24,844
)
 
$
4,695

 
9
 
$
29,477

 
$
(23,128
)
 
$
6,349

 
9
Customer-related assets
 
144,359

 
(82,076
)
 
62,283

 
12
 
141,833

 
(74,311
)
 
67,522

 
12
Supplier relationships
 
240

 
(117
)
 
123

 
20
 
240

 
(108
)
 
132

 
20
Technology-based assets
 
89,789

 
(56,050
)
 
33,739

 
8
 
80,489

 
(50,673
)
 
29,816

 
9
Non-competition agreement
 
4,379

 
(1,776
)
 
2,603

 
5
 
1,661

 
(1,571
)
 
90

 
4
Total intangible assets
 
$
268,306

 
$
(164,863
)
 
$
103,443

 
11
 
$
253,700

 
$
(149,791
)
 
$
103,909

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2014

 
2013

 
2014

 
2013

Amortization expense
 
$
5,912

 
$
5,287

 
$
16,555

 
$
16,249

 
We amortize intangible assets using the straight-line method over their expected economic useful lives.


13


We expect intangible amortization expense for 2014 and subsequent years as follows:
 
 
($000)

2014
 
$
22,059

2015
 
22,251

2016
 
17,693

2017
 
13,145

2018
 
10,965

Thereafter
 
33,885

 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful life, and currency translations.


14


6. Income Per Share 

The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands, except per share amounts)
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 

 
 

 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
30,180

 
$
31,463

 
$
46,787

 
$
92,202

Less: Distributed earnings available to participating securities
 
(1
)
 

 
(6
)
 
(5
)
Less: Undistributed earnings available to participating securities
 
(4
)
 
(11
)
 
(4
)
 
(29
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
30,175

 
$
31,452

 
$
46,777

 
$
92,168

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
44,734

 
46,080

 
44,763

 
46,293

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.67

 
$
0.68

 
$
1.04

 
$
1.99

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
30,175

 
$
31,452

 
$
46,777

 
$
92,168

Add: Undistributed earnings allocated to participating securities
 
4

 
11

 
4

 
29

Less: Undistributed earnings reallocated to participating securities
 
(4
)
 
(11
)
 
(4
)
 
(29
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
30,175

 
$
31,452

 
$
46,777

 
$
92,168

 
 


 


 


 


Weighted average common shares outstanding
 
44,734

 
46,080
 
44,763

 
46,293
Net effect of dilutive stock options and restricted stock units
 
155

 
439

 
227

 
342
Weighted average common shares outstanding for computing diluted income per share
 
44,889

 
46,519

 
44,990

 
46,635

 
 


 
 
 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.67

 
$
0.68

 
$
1.04

 
$
1.98



15


The following table shows the number of restricted stock units and performance share awards excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2014

 
2013

 
2014

 
2013

Weighted average restricted stock units
 
83

 
1

 
34

 
19

Weighted average performance share awards
 
9

 

 
7

 

Total
 
92

 
1

 
41

 
19


Stock options and restricted stock could be included in the calculation in the future.

7. Segment, Enterprise-Wide, and Geographical Area Information
 
Segment Information

Beginning with the third quarter of 2013, we revised our segment structure to reflect our shift to a more centralized organizational structure. We now report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and evaluates our financial results.

Because we have one reportable segment, all required financial segment information can be found directly in the Unaudited Condensed Consolidated Financial Statements.

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2013. We evaluate the performance of our reporting segment based on revenue and operating income.

Products and Services Information

We derive revenue from two product groups. The investment information product group includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements. The investment management product group includes all of our asset management operations, which earn the majority of their revenue from asset-based fees. The table below summarizes our revenue by product group:

External revenue by product group
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2014

 
2013

 
2014

 
2013

Investment information
 
$
152,252

 
$
137,216

 
$
443,049

 
$
412,332

Investment management
 
40,854

 
36,266

 
120,607

 
105,434

Consolidated revenue
 
$
193,106

 
$
173,482

 
$
563,656

 
$
517,766



16


Geographical Area Information

The tables below summarize our revenue and long-lived assets by geographical area:

External revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2014

 
2013

 
2014

 
2013

United States
 
$
141,276

 
$
124,998

 
$
407,681

 
$
372,746

 
 
 
 
 
 
 
 
 
United Kingdom
 
15,190

 
14,148

 
46,071

 
41,316

Continental Europe
 
15,562

 
14,666

 
47,109

 
41,826

Australia
 
8,866

 
8,041

 
26,267

 
26,569

Canada
 
7,391

 
7,603

 
22,599

 
23,151

Asia
 
3,950

 
3,363

 
11,547

 
10,236

Other
 
871

 
663

 
2,382

 
1,922

Total International
 
51,830

 
48,484

 
155,975

 
145,020

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
193,106

 
$
173,482

 
$
563,656

 
$
517,766


Long-lived assets by geographical area
 
 
 
 
 
 
As of September 30
 
As of December 31
($000)
 
2014

 
2013

United States
 
$
94,103

 
$
84,321

 
 
 
 
 
United Kingdom
 
6,994

 
6,873

Continental Europe
 
1,410

 
1,873

Australia
 
926

 
1,051

Canada
 
926

 
1,275

Asia
 
8,138

 
9,479

Other
 
87

 
114

Total International
 
18,481

 
20,665

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
112,584

 
$
104,986


17



8. Investments and Fair Value Measurements
 
We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments into three categories: available-for-sale, held-to-maturity, and trading. Our investment portfolio is primarily invested in proprietary Morningstar portfolios, exchange-traded funds that seek to track the performance of certain Morningstar proprietary indexes, and various mutual funds. We classify our investment portfolio as shown below:
 
 
 
As of September 30
 
As of December 31
($000)
 
2014

 
2013

Available-for-sale
 
$
12,226

 
$
91,461

Held-to-maturity
 
18,059

 
31,214

Trading securities
 
8,205

 
7,732

Total
 
$
38,490

 
$
130,407


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 September 30, 2014
 
As of December 31, 2013
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$

 
$

 
$

 
$

 
$
19,693

 
$
8

 
$
(3
)
 
$
19,698

Corporate bonds
 

 

 

 

 
49,913

 
22

 
(124
)
 
49,811

Foreign obligations
 

 

 

 

 
505

 

 
(2
)
 
503

Commercial paper
 

 

 

 

 
9,482

 
7

 

 
9,489

Equity securities and exchange-traded funds
 
6,499

 
477

 
(81
)
 
6,895

 
8,872

 
1,011

 
(141
)
 
9,742

Mutual funds
 
5,097

 
372

 
(138
)
 
5,331

 
2,095

 
221

 
(98
)
 
2,218

Total
 
$
11,596

 
$
849

 
$
(219
)
 
$
12,226

 
$
90,560

 
$
1,269

 
$
(368
)
 
$
91,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
18,059

 
$

 
$

 
$
18,059

 
$
31,214

 
$

 
$

 
$
31,214

 
As of September 30, 2014 and December 31, 2013, 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.


18


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 September 30, 2014 and December 31, 2013. 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 September 30, 2014
 
As of December 31, 2013
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$

 
$

 
$
45,486

 
$
45,402

Due in one to two years
 

 

 
34,107

 
34,099

Equity securities, exchange-traded funds, and mutual funds
 
11,596

 
12,226

 
10,967

 
11,960

    Total
 
$
11,596

 
$
12,226

 
$
90,560

 
$
91,461

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
18,054

 
$
18,054

 
$
31,210

 
$
31,210

Due in one to three years
 
5

 
5

 
4

 
4

Total
 
$
18,059

 
$
18,059

 
$
31,214

 
$
31,214

 
As of September 30, 2014 and December 31, 2013, held-to-maturity investments included a $1.5 million certificate of deposit held primarily as collateral against bank guarantees for our office leases, primarily in Australia.

The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Condensed Consolidated Statements of Income: 
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2014

 
2013

 
2014

 
2013

Realized gains
 
$
158

 
$
94

 
$
731

 
$
2,320

Realized losses
 

 
(136
)
 
(226
)
 
(1,214
)
Realized gains (losses), net
 
$
158

 
$
(42
)
 
$
505

 
$
1,106

 
We determine realized gains and losses using the specific identification method.

The following table shows the net unrealized gains (losses) on trading securities as recorded in our Condensed Consolidated Statements of Income:
 
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2014

 
2013

 
2014

 
2013

Unrealized gains (losses), net
 
$
272

 
$
(741
)
 
$
117

 
$
(468
)


19


The table below shows the fair value of our assets subject to fair value measurements that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement:
 
 
 
Fair Value
 
Fair Value Measurements as of September 30, 2014
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
September 30, 2014
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$

 
$

 
$

 
$

Corporate bonds
 

 

 

 

Foreign obligations
 

 

 

 

Commercial paper