Edgar Filing: Morningstar, Inc.

Three months ended March 31

($000)

Unrealized gains, net

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 MARCH 31, 2010

	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 o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of April 30, 2010, there were 49,152,105 shares of the Company’s common stock, no par value, outstanding.

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MORNINGSTAR, INC. AND SUBSIDIARIES

INDEX

PART 1	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements

	Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2010 and 2009

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009

	Unaudited Condensed Consolidated Statement of Equity and Comprehensive Income (Loss) for the three months ended March 31, 2010

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009

	Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosure about Market Risk

Item 4.	Controls and Procedures

PART 2	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

Item 6.	Exhibits

SIGNATURE

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PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

	Three months ended March 31
(in thousands except per share amounts)	2010			2009

Revenue	$	128,290		$	116,732

Operating expense (1):
Cost of goods sold	34,316			30,252
Development	10,889			9,300
Sales and marketing	22,561			17,536
General and administrative	20,643			17,153
Depreciation and amortization	8,939			7,866
Total operating expense	97,348			82,107

Operating income	30,942			34,625

Non-operating income (expense):
Interest income, net	587			978
Other expense, net	(766		)	(444		)
Non-operating income (expense), net	(179		)	534

Income before income taxes and equity in net income of unconsolidated entities	30,763			35,159

Income tax expense	10,995			10,668

Equity in net income of unconsolidated entities	389			382

Consolidated net income	20,157			24,873

Net loss attributable to the noncontrolling interest	31			89

Net income attributable to Morningstar, Inc.	$	20,188		$	24,962

Net income per share attributable to Morningstar, Inc.:
Basic	$	0.41		$	0.53
Diluted	$	0.40		$	0.51

Weighted average shares outstanding:
Basic	48,828			47,378
Diluted	50,332			49,167

	Three months ended March 31
	2010		2009
(1) Includes stock-based compensation expense of:
Cost of goods sold	$	715	$	549
Development	393		354
Sales and marketing	403		356
General and administrative	1,426		1,466
Total stock-based compensation expense	$	2,937	$	2,725

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(in thousands except share amounts)	March 31 2010			December 31 2009
Assets
Current assets:
Cash and cash equivalents	$	185,353		$	130,496
Investments	175,390			212,057
Accounts receivable, less allowance of $1,063 and $1,339, respectively	86,273			82,330
Deferred tax asset, net	1,081			1,109
Income tax receivable, net	4,638			5,541
Other	12,627			12,564
Total current assets	465,362			444,097
Property, equipment, and capitalized software, net	57,561			59,828
Investments in unconsolidated entities	24,474			24,079
Goodwill	245,952			249,992
Intangible assets, net	131,035			135,488
Other assets	6,018			6,099
Total assets	$	930,402		$	919,583

Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	30,666		$	29,901
Accrued compensation	26,042			48,902
Deferred revenue	136,842			127,114
Other	946			962
Total current liabilities	194,496			206,879
Accrued compensation	4,945			4,739
Deferred tax liability, net	3,077			4,678
Other long-term liabilities	25,801			26,413
Total liabilities	228,319			242,709

Equity:
Morningstar, Inc. shareholders’ equity:
Common stock, no par value, 200,000,000 shares authorized, of which 49,094,759 and 48,768,541 shares were outstanding as of March 31, 2010 and December 31, 2009, respectively	5			5
Treasury stock at cost, 217,871 shares as of March 31, 2010 and 222,653 as of December 31, 2009	(3,062		)	(3,130		)
Additional paid-in capital	441,463			432,052
Retained earnings	266,933			246,745
Accumulated other comprehensive income (loss):
Currency translation adjustment	(4,780		)	(337		)
Unrealized gain on available-for-sale securities	388			370
Total accumulated other comprehensive income (loss)	(4,392		)	33
Total Morningstar, Inc. shareholders’ equity	700,947			675,705
Noncontrolling interest	1,136			1,169
Total equity	702,083			676,874
Total liabilities and equity	$	930,402		$	919,583

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statement of Equity and Comprehensive Income (Loss)

For the Three Months Ended March 31, 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)		—		—			—		20,188		—			(31		)	20,157
Unrealized gain (loss) on available-for-sale investments, net of income tax of $28		—		—			—		—		18			—			18
Foreign currency translation adjustment, net		—		—			—		—		(4,443		)	(2		)	(4,445		)
Total comprehensive income (loss)		—		—			—		20,188		(4,425		)	(33		)	15,730
Issuance of common stock related to stock option exercises and vesting of restricted stock units, net	326,218	—		68			3,426		—		—			—			3,494
Stock-based compensation		—		—			2,937		—		—			—			2,937
Excess tax benefit derived from stock option exercises and vesting of restricted stock units		—		—			3,048		—		—			—			3,048
Balance as of March 31, 2010	49,094,759	$	5	$	(3,062	)	$	441,463	$	266,933	$	(4,392	)	$	1,136		$	702,083

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

	Three months ended March 31
(in thousands)	2010			2009

Operating activities
Consolidated net income	$	20,157		$	24,873
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization	8,939			7,866
Deferred income tax benefit	(1,287		)	(1,311		)
Stock-based compensation expense	2,937			2,725
Provision for bad debt	162			223
Equity in net income of unconsolidated entities	(389		)	(382		)
Excess tax benefits from stock option exercises and vesting of restricted stock units	(3,048		)	(350		)
Other, net	792			409
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(4,867		)	169
Other assets	(480		)	351
Accounts payable and accrued liabilities	1,174			(4,111		)
Accrued compensation	(22,516		)	(55,039		)
Income taxes payable	3,681			11,382
Deferred revenue	10,430			4,060
Deferred rent	(392		)	(156		)
Other liabilities	(843		)	969
Cash provided by (used for) operating activities	14,450			(8,322		)

Investing activities
Purchases of investments	(50,964		)	(22,403		)
Proceeds from maturities and sales of investments	87,934			16,752
Capital expenditures	(1,650		)	(4,590		)
Acquisitions, net of cash acquired	(738		)	(60		)
Other, net	—			98
Cash provided by (used for) investing activities	34,582			(10,203		)

Financing activities
Proceeds from stock option exercises	3,494			2,932
Excess tax benefits from stock option exercises and vesting of restricted stock units	3,048			350
Other, net	315			(176		)
Cash provided by financing activities	6,857			3,106

Effect of exchange rate changes on cash and cash equivalents	(1,032		)	(1,760		)
Net increase (decrease) in cash and cash equivalents	54,857			(17,179		)
Cash and cash equivalents–beginning of period	130,496			173,891
Cash and cash equivalents–end of period	$	185,353		$	156,712

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	8,565		$	665
Supplemental information of non-cash investing and financing activities:
Unrealized gain on available-for-sale investments	$	46		$	248

See notes to unaudited condensed consolidated financial statements.

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MORNINGSTAR, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation of Interim Financial Information

The accompanying unaudited condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) 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 as of December 31, 2009 included in our Annual Report on Form 10-K 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 filed with the SEC for the year ended December 31, 2009. 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 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 FASB 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.

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3. Acquisitions, Goodwill, and Other Intangible Assets

2010 Acquisitions

In February 2010, we acquired the Footnoted business of Financial Fineprint Inc., a privately held firm based in Peekskill, N.Y. The acquisition includes the Footnoted.org website and the Footnoted Pro service. Terms were not disclosed. The acquisition did not have a significant impact on our Condensed Consolidated Financial Statements for the three months ended March 31, 2010.

2009 Acquisitions

The table below summarizes the acquisitions completed during 2009. We did not make any significant changes to the purchase price allocations compared with the preliminary estimates existing at December 31, 2009. Additional information concerning these acquisitions can be found in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 1, 2010.

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	Canada’s 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

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 three months ended March 31, 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.


	Three months ended March 31
Unaudited Pro Forma Financial Information (in thousands except per share amounts)	2010		2009
Revenue	$	128,290	$	125,569
Operating income	$	30,936	$	34,865
Net income attributable to Morningstar, Inc.	$	20,184	$	25,135

Basic net income per share attributable to Morningstar, Inc.	$	0.41	$	0.53
Diluted net income per share attributable to Morningstar, Inc.	$	0.40	$	0.51

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Goodwill

The following table shows the changes in our goodwill balances from December 31, 2009 to March 31, 2010:

	($000)
Balance as of December 31, 2009	$	249,992
Acquisition of the Footnoted business	402
Other, primarily currency translation	(4,442		)
Balance as of March 31, 2010	$	245,952

We did not record any impairment losses in the first quarter of 2010 or 2009, respectively.

The following table summarizes our intangible assets:

	As of March 31, 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	$	29,249	$	(13,005	)	$	16,244	10	$	28,472	$	(12,147	)	$	16,325	10
Customer-related assets	102,129		(29,988		)	72,141		11	87,635		(27,405		)	60,230		10
Supplier relationships	240		(63		)	177		20	240		(60		)	180		20
Technology-based assets	59,349		(18,501		)	40,848		9	49,276		(16,694		)	32,582		9
Non-competition agreement	849		(592		)	257		5	820		(547		)	273		5
Intangible assets related to acquisitions with preliminary purchase price allocations	1,480		(112		)	1,368		5	26,129		(231		)	25,898		5
Total intangible assets	$	193,296	$	(62,261	)	$	131,035	10	$	192,572	$	(57,084	)	$	135,488	9

The following table summarizes our amortization expense related to intangible assets:

	Three months ended March 31
($000)	2010		2009
Amortization expense	$	5,468	$	5,121

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

Based on acquisitions completed through March 31, 2010, we expect intangible amortization expense for 2010 and subsequent years as follows:

	($000)
2010	$	20,641
2011	19,130
2012	17,904
2013	15,994
2014	15,082
2015	14,211

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.

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4. Income Per Share

The numerator for both basic and diluted income per share is net income attributable to Morningstar, Inc. The denominator for basic income per share is the weighted average number of common shares outstanding during the period. For diluted income per share, the dilutive effect of outstanding employee stock options and restricted stock units is reflected 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 March 31
(in thousands, except per share amounts)	2010		2009

Basic net income per share attributable to Morningstar, Inc.:
Net income attributable to Morningstar, Inc.:	$	20,188	$	24,962
Weighted average common shares outstanding	48,828		47,378
Basic net income per share attributable to Morningstar, Inc.	$	0.41	$	0.53

Diluted net income per share attributable to Morningstar, Inc.:
Net income attributable to Morningstar, Inc.:	$	20,188	$	24,962

Weighted average common shares outstanding	48,828		47,378
Net effect of dilutive stock options and restricted stock units	1,504		1,789
Weighted average common shares outstanding for computing diluted income per share	50,332		49,167

Diluted net income per share attributable to Morningstar, Inc.	$	0.40	$	0.51

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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.

· Investment Management. The Investment Management segment includes all of our asset management operations, which are registered investment advisors and 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 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 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 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.

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The following tables show selected segment data for the three months ended March 31, 2010 and 2009:

	Three months ended March 31, 2010

($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	103,524	$	24,766	$	—		$	128,290
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	67,645		10,932		6,895			85,472
Stock-based compensation expense	1,488		493		956			2,937
Depreciation and amortization	1,645		48		7,246			8,939
Operating income (loss)	$	32,746	$	13,293	$	(15,097	)	$	30,942

Capital expenditures	$	1,030	$	14	$	606		$	1,650

U.S. revenue								$	92,610
Non-U.S. revenue								$	35,680

	As of March 31, 2010
Goodwill	$	213,740	$	32,212	$	—	$	245,952

U.S. long-lived assets							$	41,733
Non-U.S. long-lived assets							$	15,828

	Three months ended March 31, 2009

($000)	Investment Information		Investment Management		Corporate Items			Total
External revenue	$	96,240	$	20,492	$	—		$	116,732
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	57,065		8,177		6,274			71,516
Stock-based compensation expense	1,267		468		990			2,725
Depreciation and amortization	1,071		20		6,775			7,866
Operating income (loss)	$	36,837	$	11,827	$	(14,039	)	$	34,625

Capital expenditures	$	3,760	$	184	$	646		$	4,590

U.S. revenue								$	88,148
Non-U.S. revenue								$	28,584

	As of March 31, 2009
Goodwill	$	154,822	$	31,470	$	—	$	186,292

U.S. long-lived assets							$	45,585
Non-U.S. long-lived assets							$	14,519

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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 into three categories: available-for-sale, held-to-maturity, and trading. We monitor the concentration, diversification, maturity, and liquidity of our investment portfolio, which is primarily invested in fixed-income securities, and classify our investment portfolio as shown below:

($000)	As of March 31 2010		As of December 31 2009
Available-for-sale	$	160,700	$	197,306
Held-to-maturity	10,417		10,588
Trading securities	4,273		4,163
Total	$	175,390	$	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 March 31, 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	$	136,022	$	263	$	(49	)	$	136,236	$	174,433	$	439	$	(50	)	$	174,822
Corporate bonds	14,020		53		(16		)	14,057		12,268		44		(1		)	12,311
Equity securities	1,993		308		(52		)	2,249		2,013		188		(28		)	2,173
Mutual funds	8,022		136		—			8,158		8,000		—		—			8,000
Total	$	160,057	$	760	$	(117	)	$	160,700	$	196,714	$	671	$	(79	)	$	197,306

Held-to-maturity:
Certificates of deposit	$	10,417	$	—	$	—		$	10,417	$	10,588	$	—	$	—		$	10,588

As of March 31, 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.

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 March 31, 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 March 31, 2010				As of December 31, 2009
($000)	Cost		Fair Value		Cost		Fair Value
Available-for-sale:
Due in one year or less	$	122,995	$	123,236	$	161,453	$	161,817
Due in one to three years	27,047		27,057		25,248		25,316
Equity securities and mutual funds	10,015		10,407		10,013		10,173
Total	$	160,057	$	160,700	$	196,714	$	197,306

Held-to-maturity:
Due in one year or less	$	10,416	$	10,416	$	10,587	$	10,587
Due in one to three years	1		1		1		1
Total	$	10,417	$	10,417	$	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.

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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 March 31
($000)	2010			2009
Realized gains	$	17		$	—
Realized losses	(1		)	—
Realized gains, net	$	16		$	—

The following table shows the net unrealized gains on trading securities as recorded in our Condensed Consolidated Statements of Income:

The fair value of our assets subject to fair value measurements and the necessary disclosures are as follows:

	Fair Value as of		Fair Value Measurements as of March 31, 2010 Using Fair Value Hierarchy
($000)	March 31, 2010		Level 1		Level 2		Level 3
Available-for-sale investments
Government obligations	$	136,236	$	136,236	$	—	$	—
Corporate bonds	14,057		14,057		—		—
Equity securities	2,249		2,249		—		—
Mutual funds	8,158		8,158		—		—
Trading securities	4,273		4,273		—		—
Total	$	164,973	$	164,973	$	—	$	—

	Fair Value as of		Fair Value Measurements 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 quarter 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.

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7. Investments in Unconsolidated Entities

Our investments in unconsolidated entities consist primarily of the following:

($000)	As of March 31 2010		As of December 31 2009
Investment in MJKK	$	18,760	$	18,413
Other equity method investments	629		577
Investments accounted for using the cost method	5,085		5,089
Total investments in unconsolidated entities	$	24,474	$	24,079

Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s 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 MJKK’s publicly quoted share price:

	As of March 31 2010			As of December 31 2009
Morningstar’s approximate ownership of MJKK	34		%	34		%

Approximate market value of Morningstar’s ownership in MJKK:
Japanese yen (¥000)	¥	3,394,000		¥	2,600,000
Equivalent U.S. dollars ($000)	$	36,621		$	28,507

Other Equity Method Investments. As of March 31, 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 March 31, 2010 and December 31, 2009.

Cost Method Investments. As of March 31, 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 three months of 2010 and 2009, respectively.

8. Liability for Vacant Office Space

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 this space.

The following table shows the change in our liability for vacant office space from December 31, 2009 to March 31, 2010:

Liability for vacant office space	($000)
Balance as of December 31, 2009	$	3,815
Increase liability for vacant office space	843
Reduction of liability for lease payments	(745		)
Other, primarily currency translation	12
Balance as of March 31, 2010	$	3,925

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.

Since the adoption of the 2004 Stock Incentive Plan, we have granted stock options and, beginning in 2006, restricted stock units. Stock options granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period and expire 10 years after

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the date of grant. Almost all of the options granted under the 2004 Stock Incentive Plan have a premium feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant. Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit.

The following table summarizes the number of shares available for future grants under our 2004 Stock Incentive Plan:

(000)		As of March 31 2010		As of December 31 2009
Shares available for future grants		2,148		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). All options granted under the Prior Plans were vested as of January 1, 2010; however, because the options under all three plans expire 10 years after the date of grant, some options granted under these plans remain outstanding as of March 31, 2010. 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.

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 first three months of 2010 and 2009:

	Three months ended March 31
($000)	2010		2009
Stock-based compensation expense — restricted stock units	$	2,937	$	2,170
Stock-based compensation expense — stock options	—		555
Stock-based compensation expense	$	2,937	$	2,725

Income tax benefit related to the stock-based compensation expense	$	893	$	867

In accordance with FASB ASC 718, Compensation—Stock Compensation, we estimate forfeitures of all employee stock-based awards and recognize compensation cost only for those awards expected to vest. Because our largest annual equity grants typically have vesting dates in the second quarter, we adjust the stock-based compensation expense at that time to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.

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 three months of 2010:

Restricted Stock Units (RSUs)	Unvested		Vested but Deferred	Total		Weighted Average Grant Date Value per RSU
RSUs outstanding—December 31, 2009	681,425		39,594	721,019		$	46.99
Granted	1,901		—	1,901		49.33
Vested	(15,176	)	—	(15,176	)	50.46
Forfeited	(7,285	)	—	(7,285	)	47.53
RSUs outstanding—March 31, 2010	660,865		39,594	700,459		46.92

As of March 31, 2010, the total amount of unrecognized stock-based compensation expense related to restricted stock units was approximately $20,739,000. We expect to recognize this expense over an average period of approximately 30 months.

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Stock Option Activity

The following tables summarize stock option activity in the first three 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 outstanding—December 31, 2009	809,169		$	17.75
Exercised	(47,716	)	11.77
Options outstanding—March 31, 2010	761,453			18.31

Options exercisable—March 31, 2010	761,453		$	18.31

All Other Option Grants, Excluding Activity Shown Above	Underlying Shares		Weighted Average Exercise Price
Options outstanding—December 31, 2009	1,868,408		$	16.02
Canceled	(12	)	22.41
Exercised	(267,091	)	14.93
Options outstanding—March 31, 2010	1,601,305			16.44

Options exercisable—March 31, 2010	1,601,305		$	16.44

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:

	Three months ended March 31
($000)	2010		2009
Intrinsic value of options exercised	$	10,619	$	5,770

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 March 31, 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	1,032,166	1.9	$		11.63	$	37,634
$18.16 - $41.13	1,330,592	4.9	21.25			35,719
$8.57 - $41.13	2,362,758	3.6		17.04		$	73,353

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 March 31, 2010. The intrinsic value is based on our closing stock price of $48.09 on that date.

As of March 31, 2010, there was no unrecognized stock-based compensation expense related to stock options.

Excess Tax Benefits Related to Stock-Based Compensation

FASB ASC 718, Compensation—Stock Compensation, requires that we classify the cash flows that result from excess tax benefits as financing cash flows. Excess tax benefits correspond to the portion of the tax deduction taken on our income tax return which exceeds the amount of tax benefit related to the compensation cost recognized in our Statement of Income. The following table summarizes our excess tax benefits for the three months ended March 31, 2010 and 2009:

	Three months ended March 31
($000)	2010		2009
Excess tax benefits related to stock-based compensation	$	3,048	$	350

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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 March 31, 2010 and 2009:

	Three months ended March 31
($000)	2010			2009
Income before income taxes and equity in net income of unconsolidated entities	$	30,763		$	35,159
Equity in net income of unconsolidated entities	389			382
Net loss attributable to the noncontrolling interest	31			89
Total	$	31,183		$	35,630
Income tax expense	$	10,995		$	10,668
Effective tax rate	35.3		%	29.9		%

Our effective tax rate increased by 5.4 percentage points in the first quarter of 2010. Several items that reduced the effective tax rate in the first quarter of 2009 did not recur in the first quarter of 2010. The prior-year period included the impact of reversing a $1.4 million reserve for uncertain tax positions as a result of a lapse in the statute of limitations. This non-cash benefit favorably impacted the first-quarter 2009 effective tax rate by approximately 4.0 percentage points. The favorable effect of incentive stock-option transactions also reduced our effective tax rate in the first quarter 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.

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. There were no significant changes to uncertain tax positions in the first quarter of 2010 as a result of other lapses of statutes of limitation or audit activity.

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

Business Logic

In November 2009, Business Logic Holding Corporation filed a complaint in the Circuit Court of Cook County, Illinois against Ibbotson Associates, Inc. and Morningstar, Inc. relating to Ibbotson’s prior commercial relationship with Business Logic. Business Logic is alleging that Ibbotson Associates and Morningstar violated Business Logic’s 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.

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Online News Link LLC

In October 2009, Online News Link LLC filed a complaint in the United States District Court for the Eastern District of Texas against Morningstar, Inc. and several other providers of online information alleging that each defendant infringes U.S. Patent No. 7,508,789, which relates to ways for delivering online information. Online News Link seeks, among other things, unspecified damages and costs incurred by Online News Link because of defendants’ alleged infringing activities. Morningstar is evaluating the lawsuit but cannot predict the outcome of the proceeding.

Morningstar Associates, LLC Subpoena from the New York Attorney General’s Office

In December 2004, Morningstar Associates, LLC, a wholly owned subsidiary of Morningstar, Inc., received a subpoena from the New York Attorney General’s office seeking information and documents related to an investigation the New York Attorney General’s 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 General’s 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 General’s office should not institute proceedings. Morningstar Associates promptly submitted its explanation and has cooperated fully with the New York Attorney General’s 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 March 31, 2010:

In April 2010, we acquired Aegis Equities Research, a leading provider of independent equity research in Sydney, Australia. Aegis Equities Research was founded in 1999 and currently serves institutional, adviser, and retail clients. It operates a web-based research platform that includes proprietary equities research and market commentary on more than 200 Australian Securities Exchange (ASX)-listed companies for brokers, financial advisers, and other institutions. Aegis also operates ShareAnalysis.com, a subscription-based website for individual investors, and publishes the ShareAnalysis weekly e-newsletter, which includes market news, analysis, and investment ideas. The Aegis business also provides model equity portfolios that can be licensed as a sub-advisory service for managed accounts or in “buy lists.”

Also in April 2010, we acquired Old Broad Street Research Ltd. (OBSR), a premier provider of fund research, ratings, and investment consulting services in the United Kingdom, for 11.95 million pounds sterling, or approximately U.S. $18.3 million, subject to post-closing adjustments. OBSR’s team of investment research analysts rates and recommends approximately 500 UK-domiciled and cross-border funds. In addition, OBSR analyses a wide range of financial products and tax wrappers, including individual and group pension products, UK onshore and offshore investment bonds, individual and business protection products, and savings products.

In May 2010, we completed the acquisition of Realpoint, LLC, a Nationally Recognized Statistical Ratings Organization (NRSRO) that specializes in structured finance. The purchase price includes approximately $42 million in cash, subject to post-closing adjustments, and approximately 199,000 shares of restricted stock (valued at approximately $10 million at the time the acquisition was announced in March 2010). Realpoint had revenue of approximately $12 million in 2009. Realpoint currently offers securities ratings, research, surveillance services, and data to help institutional investors identify credit risk in commercial mortgage-backed

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securities. More than 225 institutional investment firms subscribe to Realpoint’s trusted ratings and analytics, including the majority of money managers who invest in commercial mortgage-backed securities.

In the second quarter of 2010, we expect to use approximately $76 million of our cash, cash equivalents, and investments to complete these acquisitions.

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. They also do not affect software revenue arrangements that include services if the software is essential to the functionality of those services.

For Morningstar, ASU No. 2009-13 and ASU No. 2009-14 will be effective prospectively for revenue arrangements entered into from January 1, 2011. Early adoption is permitted. We are in the process of determining the impact, if any, these accounting standard updates will have on our Consolidated Financial Statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 requires 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, these accounting pronouncements will have on our Consolidated Financial Statements.

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Item 2. Management’s 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.

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.

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The U.S. equity market generally showed strong performance in the first quarter of 2010, continuing the positive trend from 2009. Morningstar’s U.S. Market Index, a broad market benchmark, was up 5.8% during the quarter. Total U.S. mutual fund assets increased to $11.2 trillion as of March 31, 2010, based on data from the Investment Company Institute (ICI), up from $9.2 trillion as of March 31, 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 Morningstar’s database, excluding funds of hedge funds, experienced small net outflows for the year-to-date period through February 28, 2010.

Assets in exchange-traded funds (ETFs) increased to $805 billion as of March 31, 2010, compared with $482 billion as of March 31, 2009, based on data from the ICI.

Based on data from Nielsen/Net Ratings, aggregate page views, unique users, pages viewed per visit, and time spent per visit for financial and investment sites all decreased compared with the first quarter of 2009. Overall, page views to finance and investment sites were down about 25%, based on Nielsen’s data. We attribute this trend to individual investors’ lower level of engagement with investing-related topics despite the upturn in the market over the past 12 months. 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 also declined according to Nielsen’s data.

Following the downturn in global advertising sales in 2009, we began seeing stronger growth in online advertising spending in early 2010. Based on data from the Interactive Advertising Bureau and PricewaterhouseCoopers, industry publication eMarketer projects that U.S. online advertising spending will increase 5.5% to $23.6 billion in 2010, following a 4.6% decline in 2009.

Overall, we believe that business conditions in the financial services have continued improving in recent months, although some areas, such as consumer discretionary spending, remain under pressure.

Three Months Ended March 31, 2010 vs. Three Months Ended March 31, 2009

Consolidated Results

	Three months ended March 31
Key Metrics ($000)	2010				2009			Change
Revenue	$	128,290			$	116,732		9.9	%
Operating income	30,942				34,625			(10.6	)%
Operating margin	24.1			%	29.7		%	(5.6	)pp

Cash provided by (used for) investing activities	$		34,582		$	(10,203	)	NMF
Cash provided by financing activities	6,857				3,106			120.8	%

Cash provided by (used for) operating activities	$	14,450			$	(8,322	)	NMF
Capital expenditures	(1,650			)	(4,590		)	(64.1	)%
Free cash flow	$	12,800			$	(12,912	)	NMF

NMF — not meaningful

pp — percentage points

We define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow solely as supplemental disclosure to help 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 the performance of our business. Free cash flow is not a measure of performance set forth under U.S. generally accepted accounting principles (GAAP). Also, the free cash flow definition we use may not be comparable to similarly titled measures used by other companies.

Because we’ve 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.

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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	Three months ended March 31, 2010
Global financial filings database business of Global Reports LLC	April 20, 2009	Entire period
Equity research and data business of C.P.M.S. Computerized Portfolio Management Services Inc.	May 1, 2009	Entire period
Andex Associates, Inc.	May 1, 2009	Entire period
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 March 31, 2010

Consolidated Revenue

In the first quarter of 2010, our consolidated revenue increased 9.9% to $128.3 million. We had $9.7 million in incremental revenue from acquisitions during the quarter, which contributed about 8 percentage points to our consolidated revenue growth. Currency movements also had a positive effect in the quarter, as the U.S. dollar was weaker against most other major currencies compared with the prior-year period. This factor contributed about 3 percentage points to our consolidated revenue growth.

Excluding acquisitions and the impact of foreign currency translations, consolidated revenue declined by about $1.9 million, or 1.6%, in the first quarter of 2010. The main factor behind this decline was the loss of revenue associated with the Global Analyst Research Settlement (GARS), which ended in July 2009. We had equity research revenue of $5.5 million related to GARS in the first quarter of 2009 that did not recur in the first quarter of 2010. Higher revenue from Morningstar Direct, Internet advertising, and our Investment Management services partially offset this loss.

The table below reconciles consolidated revenue with organic revenue (revenue excluding acquisitions and the impact of foreign currency translations):

	Three months ended March 31
($000)	2010			2009		Change
Consolidated revenue	$	128,290		$	116,732	9.9	%
Less: acquisitions	(9,704		)	—		NMF
Favorable impact of foreign currency translations	(3,731		)	—		NMF
Organic revenue	$	114,855		$	116,732	(1.6	)%

International revenue continues to increase as a percentage of our consolidated revenue and made up about 28% of our consolidated revenue in the first quarter of 2010. Revenue from international operations rose $7.1 million, or 24.8%, to $35.7 million for the period. Acquisitions contributed $4.1 million of additional revenue outside the United States, and foreign currency translations also had a positive impact of $3.7 million. Excluding acquisitions and the impact of foreign currency translations, non-U.S. revenue declined 2.6%, reflecting weaker product sales in Europe, Australia, and Canada.

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 March 31
($000)	2010			2009		Change
International revenue	$	35,680		$	28,584	24.8	%
Less: acquisitions	(4,101		)	—		NMF
Favorable impact of foreign currency translations	(3,731		)	—		NMF
International organic revenue	$	27,848		$	28,584	(2.6)	%

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Consolidated Operating Expense

	Three months ended March 31
($000)	2010			2009			Change
Operating expense	$	97,348		$	82,107		18.6	%
% of revenue	75.9		%	70.3		%	5.6	pp

In the first quarter of 2010, our consolidated operating expense increased $15.2 million, or 18.6%. We completed six acquisitions in 2009 and one in the first quarter of 2010. Because of the timing of these acquisitions, our first-quarter 2010 results include operating expense that did not exist in the same period last year.