XNAS:MORN Morningstar Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2012
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 July 27, 2012, there were 48,394,821 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 six months ended June 30, 2012 and 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Equity for the six months ended June 30, 2012
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
 
 
Three months ended June 30
 
Six months ended June 30
(in thousands except per share amounts)
 
2012

 
2011

 
2012

 
2011

 
 
 
 
 
 
 
 
 
Revenue
 
$
165,968

 
$
161,011

 
$
326,727

 
$
312,778

 
 
 
 
 
 
 
 
 
Operating expense (1):
 
 
 
 
 
 
 
 
Cost of goods sold
 
49,452

 
45,186

 
99,768

 
85,855

Development
 
12,442

 
13,681

 
25,807

 
25,669

Sales and marketing
 
27,373

 
26,767

 
55,699

 
53,249

General and administrative
 
24,946

 
26,207

 
53,124

 
56,824

Depreciation and amortization
 
10,619

 
10,563

 
20,794

 
20,765

Total operating expense
 
124,832

 
122,404

 
255,192

 
242,362

 
 
 
 
 
 
 
 
 
Operating income
 
41,136

 
38,607

 
71,535

 
70,416

 
 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 

 
 

 
 
 
 
Interest income, net
 
1,260

 
(179
)
 
2,129

 
345

Other income (expense), net
 
(265
)
 
188

 
(475
)
 
438

Non-operating income, net
 
995

 
9

 
1,654

 
783

 
 
 
 
 
 
 
 
 
Income before income taxes and equity in net income of unconsolidated entities
 
42,131

 
38,616

 
73,189

 
71,199

 
 
 
 
 
 
 
 
 
Income tax expense
 
14,744

 
12,724

 
26,255

 
23,242

 
 
 
 
 
 
 
 
 
Equity in net income of unconsolidated entities
 
497

 
595

 
1,063

 
969

 
 
 
 
 
 
 
 
 
Consolidated net income
 
27,884

 
26,487

 
47,997

 
48,926

 
 
 
 
 
 
 
 
 
Net (income) loss attributable to the noncontrolling interest
 
4

 
(2
)
 
28

 
96

 
 
 
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
27,888

 
$
26,485

 
$
48,025

 
$
49,022

 
 
 
 
 
 
 
 
 
Net income per share attributable to Morningstar, Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.57

 
$
0.53

 
$
0.97

 
$
0.98

Diluted
 
$
0.56

 
$
0.52

 
$
0.95

 
$
0.96

 
 
 
 
 
 
 
 
 
Dividends per common share:
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.10

 
$
0.05

 
$
0.20

 
$
0.10

Dividends paid per common share
 
$
0.10

 
$
0.05

 
$
0.20

 
$
0.10

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
49,195

 
50,165

 
49,566

 
49,983

Diluted
 
49,856

 
51,142

 
50,296

 
51,041

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30
 
Six months ended June 30
 
 
2012

 
2011

 
2012

 
2011

(1) Includes stock-based compensation expense of:
 
 

 
 

 
 
 
 
Cost of goods sold
 
$
1,067

 
$
1,072

 
$
2,156

 
$
1,951

Development
 
465

 
572

 
964

 
1,043

Sales and marketing
 
461

 
481

 
940

 
903

General and administrative
 
1,741

 
1,718

 
3,540

 
3,595

Total stock-based compensation expense
 
$
3,734

 
$
3,843

 
$
7,600

 
$
7,492


 See notes to unaudited condensed consolidated financial statements.


3


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

 
 
Three months ended June 30
 
Six months ended June 30
(in thousands) 
 
2012

 
2011

 
2012

 
2011

 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
27,884

 
$
26,487

 
$
47,997

 
$
48,926

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(8,743
)
 
3,262

 
(1,778
)
 
12,564

Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
 
  Unrealized holding gains (losses) arising during period
 
(541
)
 
(39
)
 
368

 
399

  Reclassification of (gains) losses included in net income
 
(22
)
 
(211
)
 
33

 
(252
)
Other comprehensive income
 
(9,306
)
 
3,012

 
(1,377
)
 
12,711

 
 
 
 
 
 
 
 
 
Comprehensive income
 
18,578

 
29,499

 
46,620

 
61,637

Comprehensive (income) loss attributable to noncontrolling interest
 
(46
)
 
(13
)
 
61

 
99

Comprehensive income attributable to Morningstar, Inc.
 
$
18,532

 
$
29,486

 
$
46,681

 
$
61,736


See notes to unaudited condensed consolidated financial statements.



4


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
 
 
As of June 30
 
As of December 31
(in thousands except share amounts)
 
2012

 
2011

Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
147,499

 
$
200,437

Investments
 
242,379

 
269,755

Accounts receivable, less allowance of $1,017 and $835, respectively
 
117,016

 
113,312

Deferred tax asset, net
 
4,898

 
5,104

Income tax receivable, net
 
7,911

 
7,445

Other
 
22,288

 
15,980

Total current assets
 
541,991

 
612,033

Property, equipment, and capitalized software, net
 
77,376

 
68,196

Investments in unconsolidated entities
 
34,271

 
27,642

Goodwill
 
316,963

 
318,492

Intangible assets, net
 
127,377

 
139,809

Other assets
 
7,801

 
5,912

Total assets
 
$
1,105,779

 
$
1,172,084

 
 
 
 
 
Liabilities and equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued liabilities
 
$
45,858

 
$
41,403

Accrued compensation
 
48,383

 
73,124

Deferred revenue
 
167,531

 
155,494

Other
 
367

 
612

Total current liabilities
 
262,139

 
270,633

Accrued compensation
 
6,483

 
5,724

Deferred tax liability, net
 
16,183

 
15,940

Deferred rent
 
15,199

 
14,604

Other long-term liabilities
 
8,550

 
8,167

Total liabilities
 
308,554

 
315,068

 
 
 
 
 
Equity:
 
 

 
 

Morningstar, Inc. shareholders’ equity:
 
 

 
 

Common stock, no par value, 200,000,000 shares authorized, of which 48,741,627 and 50,083,940 shares were outstanding as of June 30, 2012 and December 31, 2011, respectively
 
5

 
5

Treasury stock at cost, 2,857,205 shares as of June 30, 2012 and 980,177 shares as of December 31, 2011
 
(155,139
)
 
(46,701
)
Additional paid-in capital
 
503,480

 
491,432

Retained earnings
 
447,026

 
409,022

Accumulated other comprehensive income (loss):
 
 
 
 
    Currency translation adjustment
 
191

 
1,936

    Unrealized gain (loss) on available-for-sale investments
 
77

 
(324
)
Total accumulated other comprehensive income
 
268

 
1,612

Total Morningstar, Inc. shareholders’ equity
 
795,640

 
855,370

Noncontrolling interest
 
1,585

 
1,646

Total equity
 
797,225

 
857,016

Total liabilities and equity
 
$
1,105,779

 
$
1,172,084

 See notes to unaudited condensed consolidated financial statements.

5


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity
For the six months ended June 30, 2012
 
 
 
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, 2011
 
50,083,940

 
$
5

 
$
(46,701
)
 
$
491,432

 
$
409,022

 
$
1,612

 
$
1,646

 
$
857,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 

 

 

 
48,025

 

 
(28
)
 
47,997

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax of $189
 
 
 

 

 

 

 
368

 

 
368

Reclassification of adjustments for losses included in net income, net of income tax of $16
 
 
 

 

 

 

 
33

 

 
33

Foreign currency translation adjustment, net
 
 
 

 

 

 

 
(1,745
)
 
(33
)
 
(1,778
)
Other comprehensive income (loss), net
 
 
 

 

 

 

 
(1,344
)
 
(33
)
 
(1,377
)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
 
519,907

 

 
1,026

 
(245
)
 

 

 

 
781

Stock-based compensation — restricted stock units
 
 
 

 

 
6,548

 

 

 

 
6,548

Stock-based compensation — restricted stock
 
 
 

 

 
888

 

 

 

 
888

Stock-based compensation — stock-options
 
 
 

 

 
164

 

 

 

 
164

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

 

 
4,548

 

 

 

 
4,548

Common shares repurchased
 
(1,862,220
)
 

 
(109,464
)
 

 

 

 

 
(109,464
)
Dividends declared — common shares outstanding
 
 
 

 

 

 
(9,861
)
 

 

 
(9,861
)
Dividends declared — restricted stock units
 
 
 

 

 
145

 
(160
)
 

 

 
(15
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2012
 
48,741,627

 
$
5

 
$
(155,139
)
 
$
503,480

 
$
447,026

 
$
268

 
$
1,585

 
$
797,225

 
See notes to unaudited condensed consolidated financial statements.


6


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Six months ended June 30
(in thousands)
 
2012

 
2011

 
 
 
 
 
Operating activities
 
 

 
 

Consolidated net income
 
$
47,997

 
$
48,926

Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
20,794

 
20,765

Deferred income taxes
 
299

 
454

Stock-based compensation expense
 
7,600

 
7,492

Provision for bad debt
 
717

 
530

Equity in net income of unconsolidated entities
 
(1,063
)
 
(969
)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
 
(4,548
)
 
(6,171
)
Other, net
 
745

 
(547
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable
 
(4,394
)
 
617

Other assets
 
(3,640
)
 
608

Accounts payable and accrued liabilities
 
652

 
(5,260
)
Accrued compensation
 
(26,920
)
 
(14,528
)
Income taxes—current
 
4,525

 
2,742

Deferred revenue
 
12,333

 
8,197

Deferred rent
 
468

 
(657
)
Other liabilities
 
(776
)
 
(1,043
)
Cash provided by operating activities
 
54,789

 
61,156

 
 
 
 
 
Investing activities
 
 

 
 

Purchases of investments
 
(133,888
)
 
(198,647
)
Proceeds from maturities and sales of investments
 
161,523

 
150,360

Capital expenditures
 
(17,922
)
 
(8,418
)
Acquisitions, net of cash acquired
 

 
569

Purchases of cost method investments
 
(6,750
)
 

Other, net
 

 
785

Cash provided by (used for) investing activities
 
2,963

 
(55,351
)
 
 
 
 
 
Financing activities
 
 

 
 

Proceeds from stock-option exercises, net
 
781

 
4,652

Excess tax benefits from stock-option exercises and vesting of restricted stock units
 
4,548

 
6,171

Common shares repurchased
 
(105,439
)
 
(109
)
Dividends paid
 
(10,004
)
 
(5,011
)
Other, net
 
(20
)
 
(214
)
Cash provided by (used for) financing activities
 
(110,134
)
 
5,489

 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(556
)
 
3,553

Net increase (decrease) in cash and cash equivalents
 
(52,938
)
 
14,847

Cash and cash equivalents—beginning of period
 
200,437

 
180,176

Cash and cash equivalents—end of period
 
$
147,499

 
$
195,023

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid for income taxes
 
$
21,405

 
$
21,104

Supplemental information of non-cash investing and financing activities:
 
 
 
 
Unrealized gain on available-for-sale investments
 
$
606

 
$
220

 
See notes to unaudited condensed consolidated financial statements.

7


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, 2011, filed with the SEC on February 24, 2012.
 
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
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, 2011, filed with the SEC on February 24, 2012.

In addition, effective January 1, 2012, we adopted FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of ASU No. 2011-04 did not have a material impact on our Consolidated Financial Statements.
3.
Goodwill and Other Intangible Assets
 
Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2011 to June 30, 2012:
 
 
($000)

Balance as of December 31, 2011
$
318,492

Net change, primarily currency translation
(1,529
)
Balance as of June 30, 2012
$
316,963


We did not record any significant impairment losses in the first half of 2012 or 2011. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of June 30, 2012
 
As of December 31, 2011
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

Intellectual property
 
$
32,073

 
$
(21,671
)
 
$
10,402

 
9

 
$
32,293

 
$
(20,455
)
 
$
11,838

 
9

Customer-related assets
 
134,059

 
(58,926
)
 
75,133

 
12

 
134,396

 
(52,611
)
 
81,785

 
12

Supplier relationships
 
240

 
(90
)
 
150

 
20

 
240

 
(84
)
 
156

 
20

Technology-based assets
 
80,723

 
(39,345
)
 
41,378

 
9

 
80,694

 
(35,130
)
 
45,564

 
9

Non-competition agreement
 
1,750

 
(1,436
)
 
314

 
4

 
1,751

 
(1,285
)
 
466

 
4

Total intangible assets
 
$
248,845

 
$
(121,468
)
 
$
127,377

 
10

 
$
249,374

 
$
(109,565
)
 
$
139,809

 
10

 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended June 30
 
Six months ended June 30
($000)
 
2012

 
2011

 
2012

 
2011

Amortization expense
 
$
5,976

 
$
6,632

 
$
12,031

 
$
13,145

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

We expect intangible amortization expense for 2012 and subsequent years as follows:
 
 
($000)

2012
 
$
23,766

2013
 
21,086

2014
 
19,859

2015
 
18,998

2016
 
14,393

2017
 
9,839

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

4.
Income Per Share 

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

 
 
Three months ended June 30
 
Six months ended June 30
(in thousands, except per share amounts)
 
2012

 
2011

 
2012

 
2011

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

 
 

 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
27,888

 
$
26,485

 
$
48,025

 
$
49,022

Less: Distributed earnings available to participating securities
 
(12
)
 
(8
)
 
(27
)
 
(17
)
Less: Undistributed earnings available to participating securities
 
(53
)
 
(72
)
 
(88
)
 
(131
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,405

 
$
47,910

 
$
48,874

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
49,195

 
50,165

 
49,566

 
49,983

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.57

 
$
0.53

 
$
0.97

 
$
0.98

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,405

 
$
47,910

 
$
48,874

Add: Undistributed earnings allocated to participating securities
 
53

 
72

 
88

 
131

Less: Undistributed earnings reallocated to participating securities
 
(53
)
 
(70
)
 
(87
)
 
(129
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,407

 
$
47,911

 
$
48,876

 
 


 


 


 


Weighted average common shares outstanding
 
49,195

 
50,165

 
49,566

 
49,983

Net effect of dilutive stock options and restricted stock units
 
661

 
977

 
730

 
1,058

Weighted average common shares outstanding for computing diluted income per share
 
49,856

 
51,142

 
50,296

 
51,041

 
 


 


 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.56

 
$
0.52

 
$
0.95

 
$
0.96


8



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 Morningstar Data (formerly Licensed Data), Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, and Morningstar Principia. Morningstar Data is a set of investment data spanning all of our investment databases, including real-time pricing and commodity data, and is 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 Direct is a web-based institutional research platform. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Integrated Web Tools is a set of services that helps institutional clients build customized websites or enhance their existing sites with Morningstar’s online tools and components. 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. We sell Morningstar Equity Research to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.

The Investment Information segment also includes Morningstar Credit Research and Morningstar Structured Credit Ratings. Morningstar Structured Credit Ratings is provided by Morningstar Credit Ratings, LLC, a Nationally Recognized Statistical Rating Organization specializing in structured finance. It offers securities ratings, research, surveillance services, and data to help institutional investors identify risk in commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS).

We also offer a variety of financial communications and newsletters, other institutional and advisor software, and investment indexes.

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 Advisory Services (formerly Investment Consulting), which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Solutions, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund, exchange-traded fund, and stock portfolios tailored to meet a range of investment time horizons and risk levels that financial advisors can use for their clients' taxable and tax-deferred accounts. In addition, we offer Managed Portfolios through our subsidiary Ibbotson Australia which provides asset management services primarily to institutional clients and individual investors.
 
Our segment accounting policies are the same as those described in Note 2, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s 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. 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 don’t 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.
 

9


The following tables present information about our operating segments and by geographical area:
 
 
 
Three months ended June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
134,749

 
$
31,219

 
$

 
$
165,968

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
86,915

 
17,179

 
6,385

 
110,479

Stock-based compensation expense
 
2,531

 
529

 
674

 
3,734

Depreciation and amortization
 
2,300

 
38

 
8,281

 
10,619

Operating income (loss)
 
$
43,003

 
$
13,473

 
$
(15,340
)
 
$
41,136

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
6,818

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
2,110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
128,116

 
$
32,895

 
$

 
$
161,011

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
86,484

 
13,833

 
7,681

 
107,998

Stock-based compensation expense
 
2,488

 
531

 
824

 
3,843

Depreciation and amortization
 
2,047

 
40

 
8,476

 
10,563

Operating income (loss)
 
$
37,097

 
$
18,491

 
$
(16,981
)
 
$
38,607

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
1,593

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
261,674

 
$
65,053

 
$

 
$
326,727

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
180,353

 
33,132

 
13,313

 
226,798

Stock-based compensation expense
 
5,090

 
1,080

 
1,430

 
7,600

Depreciation and amortization
 
4,544

 
77

 
16,173

 
20,794

Operating income (loss)
 
$
71,687

 
$
30,764

 
$
(30,916
)
 
$
71,535

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
14,215

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
3,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10


 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
248,515

 
$
64,263

 
$

 
$
312,778

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
170,247

 
27,671

 
16,187

 
214,105

Stock-based compensation expense
 
4,958

 
973

 
1,561

 
7,492

Depreciation and amortization
 
3,906

 
82

 
16,777

 
20,765

Operating income (loss)
 
$
69,404

 
$
35,537

 
$
(34,525
)
 
$
70,416

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
3,523

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
4,895

 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
275,568

 
$
41,395

 
$

 
$
316,963

 
 
 
As of December 31, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
277,059

 
$
41,433

 
$

 
$
318,492

 
External revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended June 30
 
Six months ended June 30
($000)
 
2012

 
2011

 
2012

 
2011

United States
 
$
117,952

 
$
113,424

 
$
232,421

 
$
221,605

United Kingdom
 
14,714

 
13,947

 
28,450

 
26,794

Europe, excluding the United Kingdom
 
12,281

 
12,561

 
24,336

 
24,141

Australia
 
9,791

 
10,693

 
19,139

 
19,986

Canada
 
7,397

 
6,784

 
14,747

 
13,401

Asia, excluding Japan
 
2,366

 
2,338

 
4,735

 
4,402

Japan
 
986

 
959

 
1,965

 
1,890

Other
 
481

 
305

 
934

 
559

Total Non-U.S.
 
48,016

 
47,587

 
94,306

 
91,173

 
 
 
 
 
 
 
 
 
Total
 
$
165,968

 
$
161,011

 
$
326,727

 
$
312,778




11


Long-lived assets by geographical area
 
 
 
 
 
 
As of June 30
 
As of December 31
($000)
 
2012

 
2011

United States
 
$
53,941

 
$
44,572

United Kingdom
 
7,422

 
7,512

Europe, excluding the United Kingdom
 
2,543

 
2,629

Australia
 
1,550

 
1,415

Canada
 
1,914

 
2,076

Asia, excluding Japan
 
9,757

 
9,656

Japan
 
216

 
282

Other
 
33

 
54

Total Non-U.S.
 
23,435

 
23,624

 
 
 
 
 
Total
 
$
77,376

 
$
68,196


6.
Investments and Fair Value Measurements
 
We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments 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:
 
 
 
As of June 30
 
As of December 31
($000)
 
2012

 
2011

Available-for-sale
 
$
217,478

 
$
247,917

Held-to-maturity
 
19,717

 
16,347

Trading securities
 
5,184

 
5,491

Total
 
$
242,379

 
$
269,755



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, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
82,317

 
$
53

 
$
(571
)
 
$
81,799

 
$
139,099

 
$
72

 
$
(402
)
 
$
138,769

Corporate bonds
 
78,476

 
38

 
(351
)
 
78,163

 
61,589

 
14

 
(280
)
 
61,323

Commercial paper
 
17,138

 
1

 
(3
)
 
17,136

 
29,964

 
2

 
(7
)
 
29,959

Equity securities and exchange-traded funds
 
29,080

 
827

 
(421
)
 
29,486

 
8,461

 
368

 
(558
)
 
8,271

Mutual funds
 
10,355

 
623

 
(84
)
 
10,894

 
9,298

 
363

 
(66
)
 
9,595

Total
 
$
217,366

 
$
1,542

 
$
(1,430
)
 
$
217,478

 
$
248,411

 
$
819

 
$
(1,313
)
 
$
247,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
19,717

 
$

 
$

 
$
19,717

 
$
16,347

 
$

 
$

 
$
16,347

 
As of June 30, 2012 and December 31, 2011, 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.

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, 2012 and December 31, 2011. 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, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
141,562

 
$
140,928

 
$
155,651

 
$
155,247

Due in one to two years
 
36,369

 
36,170

 
75,001

 
74,804

Equity securities, exchange-traded funds, and mutual funds
 
39,435

 
40,380

 
17,759

 
17,866

Total
 
$
217,366

 
$
217,478

 
$
248,411

 
$
247,917

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
19,712

 
$
19,712

 
$
16,342

 
$
16,342

Due in one to three years
 
5

 
5

 
5

 
5

Total