CHICAGO, July 27, 2011 /PRNewswire/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today announced its second-quarter 2011 financial
results. The company reported consolidated revenue of $161.0 million in the second quarter of 2011, an
increase of 18.3% from $136.1 million
in the second quarter of 2010. Consolidated operating income was
$38.6 million in the second quarter
of 2011, an increase of 39.5% compared with $27.7 million in the same period a year ago. Net
income was $26.5 million, or
52 cents per diluted share, compared
with $18.0 million, or 36 cents per diluted share, in the second quarter
of 2010.
Excluding acquisitions and the effect of foreign currency
translations, revenue increased 11.2%. Second-quarter results
included $5.1 million in revenue from
acquisitions. Foreign currency translations had a favorable effect
of $4.6 million. Revenue excluding
acquisitions and foreign currency translations (organic revenue) is
a non-GAAP measure; the accompanying financial tables contain a
reconciliation to consolidated revenue.
In the first six months of 2011, revenue was $312.8 million, an increase of 18.3% compared
with $264.4 million in the same
period in 2010. Revenue for the first half of the year included
$14.1 million from acquisitions and a
$6.3 million benefit from foreign
currency translations.
Consolidated operating income rose 20.1% to $70.4 million in the first six months of 2011,
compared with $58.6 million in the
first half of 2010. Net income was $49.0
million, or 96 cents per
diluted share, in the first half of 2011, compared with
$38.2 million, or 76 cents per diluted share, in the same period in
2010.
Joe Mansueto, chairman and chief
executive officer of Morningstar, said, "Organic revenue rose about
11%, reflecting growth across all of our major product lines.
Leading the growth were Morningstar Direct — our institutional
research platform — and Investment Consulting. It's also
worth noting that within our credit ratings business, we had strong
revenue growth from new issue rating assignments in the commercial
mortgage-backed securities market."
He added, "In June we held our annual investment conference in
Chicago, with record attendance.
We also announced our plans to launch forward-looking
analyst-driven global fund ratings and a uniform approach for
global fund research reports later this year. During the quarter,
we also expanded our Wealth Forecasting Engine to clients in the
United Kingdom and launched a
website for fund investors in Chile."
Key Business Drivers
Morningstar has two operating segments: Investment Information
and Investment Management. The Investment Information segment
includes all of the company's 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 the company's asset management
operations, which earn more than half of their revenue from
asset-based fees.
Revenue: In the second quarter of 2011, revenue in the
Investment Information segment was $128.1
million, an increase of $19.1
million, or 17.5%, compared with the second quarter of 2010
including $4.5 million from
acquisitions. Revenue in the Investment Management segment
rose 21.5% to $32.9 million, an
increase of $5.8 million, including
$0.6 million from acquisitions.
Revenue from international operations was $47.6 million in the second quarter of 2011, an
increase of 28.2% from the same period a year ago. International
revenue included $2.1 million from
acquisitions. Foreign currency translations contributed
$4.6 million to international
revenue. Excluding acquisitions and foreign currency translations,
international revenue increased 10.3%.
For the first six months of 2011, international revenue
increased $18.4 million, or 25.3%,
including $5.6 million in revenue
from acquisitions. Foreign currency translations had a favorable
impact of $6.3 million. International
revenue excluding acquisitions and foreign currency translations is
a non-GAAP measure; the accompanying financial tables contain a
reconciliation to international revenue.
Operating Income: Consolidated operating income was
$38.6 million in the second quarter
of 2011, a 39.5% increase from the same period in 2010. Operating
expense rose $14.0 million, or 12.9%.
Incremental operating expense from businesses acquired since the
first quarter of 2010 represented approximately $3.6 million, or 25%, of the operating expense
increase. The company completed seven acquisitions in 2010. Because
of the timing of these acquisitions, the second-quarter and
year-to-date results in 2011 include operating expense that did not
exist in the comparable periods in 2010.
Approximately 60% of the growth in total operating expense was
due to higher salaries, reflecting additional headcount from
acquisitions and filling open positions, as well as salary
increases made in the third quarter of 2010.
Incentive compensation and employee benefit costs represented
approximately 11% of the overall operating expense increase. Bonus
expense rose $2.0 million compared
with the prior-year period, a portion of which relates to
acquisitions. Higher matching contributions to the company's 401(k)
plan in the United States
represented approximately $0.6
million of the increase. Lower healthcare benefit costs and
sales commissions partially offset these increases. In the second
quarter of 2010, the company had some unusually high medical claims
that did not recur in the second quarter of 2011. Sales commission
expense also declined because changes to the company's U.S. sales
commission structure made in 2010 had a greater effect on
prior-year period results.
Higher depreciation and amortization contributed $1.3 million to the operating expense increase in
the second quarter of 2011, primarily from recent acquisitions.
Morningstar had approximately 3,300 employees worldwide as of
June 30, 2011, compared with 2,965 as
of June 30, 2010. Headcount rose year
over year mainly because of continued hiring in the company's
development centers in China and
India. Morningstar hired about 30
employees in the United States in
July 2011 as part of the Morningstar
Development Program, a two-year rotational training program for
entry-level college graduates, and expects to continue hiring in
the second half of the year. In addition, the company expects to
make salary increases in the third quarter of 2011.
The company's operating margin was 24.0% in the second quarter
of 2011, up from 20.3% in the same period in 2010. Approximately
half of the margin improvement reflects lower healthcare benefits
and commission expense as a percentage of revenue. In the first six
months of 2011, operating margin was 22.5%, compared with 22.2% in
the first six months of 2010.
Effective Tax Rate: Morningstar's effective tax rate in
the second quarter of 2011 was 32.5%, a decrease of 3.7 percentage
points compared with the prior-year period. Year to date, the
company's effective tax rate was 32.2% compared with 35.7% in the
first half of 2010. In the second quarter of 2011, the company
increased its estimate of U.S. cash tax benefits by $1.1 million related to prior years. This
adjustment represents 2.8 percentage points of the decline in the
effective tax rate in the quarter and 1.5 percentage points in the
year-to-date period. This higher-than-expected income tax benefit
contributed approximately 2 cents to
earnings per share in the second-quarter and first-half periods.
The year-to-date effective tax rate also reflects the positive
effect of certain deferred income tax benefits recorded in the
first quarter of 2011.
Free Cash Flow: Morningstar generated free cash flow of
$43.4 million in the second quarter
of 2011, reflecting cash provided by operating activities of
$46.8 million and $3.4 million of capital expenditures.
Cash provided by operating activities increased $16.2 million, reflecting higher net income
(adjusted for non-cash items), a positive cash flow effect
generated from accounts receivable, and the timing of income tax
payments. Capital expenditures rose $1.2
million in the quarter.
In the first six months of 2011, Morningstar generated free cash
flow of $52.7 million, reflecting
cash provided by operating activities of $61.1 million and capital expenditures of
$8.4 million. Cash provided by
operating activities in the first six months of 2011 increased
$16.1 million, reflecting higher net
income (adjusted for non-cash items), partially offset by a
$16.1 million increase in bonuses
paid in the first quarter of 2011. Capital expenditures rose
$4.6 million, primarily reflecting
payments for the company's new development center in China.
Free cash flow is a non-GAAP measure; the accompanying financial
tables contain a reconciliation to cash provided by operating
activities. Morningstar defines free cash flow as cash provided by
or used for operating activities less capital expenditures.
As of June 30, 2011, Morningstar
had cash, cash equivalents, and investments of $430.2 million, compared with $320.4 million as of June
30, 2010. On July 29, 2011,
the company expects to pay approximately $2.5 million for its regular quarterly dividend.
It expects to make capital expenditures of approximately
$8.0 million to $11.0 million in the
second half of 2011, primarily for leasehold improvements and
computer equipment.
Business Segment Performance
Investment Information Segment: The largest products and
services in this segment based on revenue are Morningstar® Licensed
Data; Morningstar® Advisor Workstation(SM) (including Morningstar Office); Morningstar.com®, including
Premium Memberships and Internet advertising sales; and Morningstar
Direct(SM).
- Revenue was $128.1 million in the
second quarter of 2011, a 17.5% increase from $109.0 million in the second quarter of
2010.
- Acquisitions contributed revenue of $4.5
million.
- Morningstar Direct was the largest contributor to the increase
in segment revenue; Licensed Data, Internet advertising sales on
Morningstar.com, Morningstar Advisor Workstation (primarily
Morningstar Office), and credit
ratings were also positive contributors. Licenses for Morningstar
Direct rose 32.4% to 5,442. Premium Membership subscriptions for
Morningstar.com fell 5.1% because of continued weakness in new
trials. Principia subscriptions fell 6.9% to 32,335, and Advisor
Workstation (including Morningstar
Office) licenses rose slightly to 156,258.
- Operating income was $37.1
million in the second quarter of 2011, compared with
$30.5 million in the same period in
2010. Operating expense in this segment rose $12.5 million, or 16.0%, partly because of
acquisitions. Higher salaries and bonus expense also contributed to
the increase.
- Operating margin was 29.0% in the second quarter of 2011 versus
28.0% in the prior-year period. The increase mainly reflects the
favorable effect of recent acquisitions. Lower healthcare benefits
and commission expense as a percentage of revenue also contributed
to the margin improvement, but to a lesser extent.
Investment Management Segment: The largest products in
this segment based on revenue are Investment Consulting; Retirement
Solutions, including Advice by Ibbotson® and Morningstar®
Retirement Manager(SM); and Morningstar® Managed
Portfolios(SM).
- Revenue was $32.9 million in the
second quarter of 2011, a 21.5% increase from $27.1 million in the same period in 2010.
- Acquisitions contributed revenue of $0.6
million.
- Investment Consulting was the primary driver of the segment
revenue growth. Retirement Solutions (formerly Retirement Advice)
and Morningstar Managed Portfolios also made positive
contributions, but to a lesser extent.
- Assets under advisement and management for Investment
Consulting were $141.5 billion as of
June 30, 2011, compared with
$98.7 billion as of June 30, 2010. Assets under advisement and
management rose about 43% year over year, mainly reflecting
positive market performance during the past 12 months. Assets under
advisement and management for Retirement Solutions rose to
$38.4 billion as of June 30, 2011, versus $28.3 billion as of June
30, 2010. Assets under management for Morningstar Managed
Portfolios increased to $3.0 billion
as of June 30, 2011, compared with
$2.2 billion as of June 30, 2010.
- Operating income was $18.5
million in the second quarter of 2011, an increase of 29.1%
compared with the second quarter of 2010. Operating expense in the
segment was $14.4 million, an
increase of $1.7 million, or 13.0%,
reflecting higher salaries and bonus expense. Acquisitions also
contributed to the higher operating expense, but to a lesser
extent.
- Operating margin was 56.2% in the second quarter of 2011 versus
52.9% in the prior-year period. The higher margin reflects lower
commission, salary, and healthcare benefits expense as a percentage
of revenue, partially offset by the impact of recent acquisitions.
Intangible Amortization and Corporate Depreciation Expense:
Morningstar does not allocate expense for intangible
amortization or corporate depreciation to its operating segments.
Intangible amortization, which represents the majority of the
expense in this category, was $6.6
million in the second quarter of 2011 and $13.1 million in the first half of 2011, an
increase of $0.8 million and
$1.8 million, respectively, compared
with the same periods in 2010. Corporate depreciation expense was
$1.9 million in the second quarter
and $3.7 million in the first half of
the year, essentially unchanged from the prior-year periods.
Corporate Unallocated: This category includes costs
related to corporate functions, including general management,
information technology used to support corporate systems, legal,
finance, human resources, marketing, and corporate communications.
Costs in this category were $8.5
million, a decrease of $1.1
million, or 11.2%. The company capitalized $0.4 million of operating expense in the quarter
for software development. In the second quarter of 2010, the
company expensed $0.5 million to
increase a liability for vacant office space. This expense did not
recur in the second quarter of 2011.
Investor Communication
Morningstar encourages all interested parties — including
securities analysts, current shareholders, potential shareholders,
and others — to submit questions in writing. Investors and others
may send an e-mail to investors@morningstar.com, contact the
company via fax at 312-696-6009, or write to Morningstar at the
following address:
Morningstar, Inc.
Investor Relations
22 W. Washington Street
Chicago, IL 60602
Morningstar will make written responses to selected inquiries
available to all investors at the same time in Form 8-Ks furnished
to the Securities and Exchange Commission, generally on the first
Friday of every month.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent
investment research in North
America, Europe,
Australia, and Asia. The company offers an extensive line of
products and services for individuals, financial advisors, and
institutions. Morningstar provides data on approximately 400,000
investment offerings, including stocks, mutual funds, and similar
vehicles, along with real-time global market data on more than 5
million equities, indexes, futures, options, commodities, and
precious metals, in addition to foreign exchange and Treasury
markets. Morningstar also offers investment management services
through its registered investment advisor subsidiaries and has more
than $180 billion in assets under
advisement and management as of June 30,
2011. The company has operations in 26 countries.
Caution Concerning Forward-Looking Statements
This press release 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 ongoing economic weakness and uncertainty; the effect 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; the increasing
concentration of data and development work carried out at our
offshore facilities in China and
India; failing to differentiate
our products and continuously create innovative, proprietary
research tools; failing to successfully integrate acquisitions;
challenges faced by our non-U.S. operations; and a prolonged outage
of our database and network facilities. 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, 2010. 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.
Non-GAAP Financial Measures
To supplement Morningstar's consolidated financial statements
presented in accordance with U.S. Generally Accepted Accounting
Principles (GAAP), Morningstar uses the following measures
considered as non-GAAP by the Securities and Exchange Commission:
free cash flow, consolidated revenue excluding acquisitions
and foreign currency translations (organic revenue), and
international revenue excluding acquisitions and foreign currency
translations. These non-GAAP measures may not be comparable to
similarly titled measures reported by other companies.
Morningstar presents free cash flow solely as supplemental
disclosure to help investors better understand how much cash is
available after Morningstar spends money to operate its business.
Morningstar uses free cash flow to evaluate its business. Free cash
flow should not be considered an alternative to any measure
required to be reported under GAAP (such as cash provided by (used
for) operating, investing, and financing activities). For more
information on free cash flow, please see the reconciliation from
cash provided by operating activities to free cash flow included in
the accompanying financial tables. Morningstar presents
consolidated revenue excluding acquisitions and foreign currency
translations (organic revenue) and international revenue excluding
acquisitions and foreign currency translations because the company
believes these non-GAAP measures help investors better compare
period-to-period results. For more information, please see the
reconciliation provided in the accompanying financial tables.
All dollar and percentage comparisons, which are often
accompanied by words such as "increase," "decrease," "grew,"
"declined," or "was similar" refer to a comparison with the same
period in the previous year unless otherwise stated.
©2011 Morningstar, Inc. All rights reserved.
MORN-E
Contacts:
Media: Margaret Kirch Cohen,
312-696-6383 or margaret.cohen@morningstar.com
Nadine Youssef, 312-696-6601 or
nadine.youssef@morningstar.com
Investors may submit questions to investors@morningstar.com or
by fax to 312-696-6009.
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)
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 161,011
|
|
$ 136,091
|
|
18.3%
|
|
$ 312,778
|
|
$ 264,381
|
|
18.3%
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
45,186
|
|
39,738
|
|
13.7%
|
|
85,855
|
|
74,054
|
|
15.9%
|
|
|
Development
|
|
13,681
|
|
11,899
|
|
15.0%
|
|
25,669
|
|
22,788
|
|
12.6%
|
|
|
Sales and marketing
|
|
26,767
|
|
24,435
|
|
9.5%
|
|
53,249
|
|
46,996
|
|
13.3%
|
|
|
General and
administrative
|
|
26,207
|
|
23,106
|
|
13.4%
|
|
56,824
|
|
43,749
|
|
29.9%
|
|
|
Depreciation and
amortization
|
|
10,563
|
|
9,246
|
|
14.2%
|
|
20,765
|
|
18,185
|
|
14.2%
|
|
|
Total operating
expense
|
|
122,404
|
|
108,424
|
|
12.9%
|
|
242,362
|
|
205,772
|
|
17.8%
|
|
Operating income
|
|
38,607
|
|
27,667
|
|
39.5%
|
|
70,416
|
|
58,609
|
|
20.1%
|
|
Operating margin
|
|
24.0%
|
|
20.3%
|
|
3.7pp
|
|
22.5%
|
|
22.2%
|
|
0.3pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense),
net
|
|
(179)
|
|
593
|
|
NMF
|
|
345
|
|
1,180
|
|
(70.8%)
|
|
|
Other income (expense),
net
|
|
188
|
|
(572)
|
|
NMF
|
|
438
|
|
(1,338)
|
|
NMF
|
|
|
Non-operating
income (expense), net
|
|
9
|
|
21
|
|
(57.1%)
|
|
783
|
|
(158)
|
|
NMF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of unconsolidated
entities
|
|
38,616
|
|
27,688
|
|
39.5%
|
|
71,199
|
|
58,451
|
|
21.8%
|
|
Income tax expense
|
|
12,724
|
|
10,225
|
|
24.4%
|
|
23,242
|
|
21,220
|
|
9.5%
|
|
Equity in net income of
unconsolidated entities
|
|
595
|
|
454
|
|
31.1%
|
|
969
|
|
843
|
|
14.9%
|
|
Consolidated net
income
|
|
26,487
|
|
17,917
|
|
47.8%
|
|
48,926
|
|
38,074
|
|
28.5%
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
(2)
|
|
85
|
|
NMF
|
|
96
|
|
116
|
|
(17.2%)
|
|
Net income attributable to
Morningstar, Inc.
|
|
$ 26,485
|
|
$ 18,002
|
|
47.1%
|
|
$ 49,022
|
|
$ 38,190
|
|
28.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
0.53
|
|
$
0.37
|
|
43.2%
|
|
$
0.98
|
|
$
0.78
|
|
25.6%
|
|
|
Diluted
|
|
$
0.52
|
|
$
0.36
|
|
44.4%
|
|
$
0.96
|
|
$
0.76
|
|
26.3%
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
50,165
|
|
49,234
|
|
|
|
49,983
|
|
49,032
|
|
|
|
|
Diluted
|
|
51,142
|
|
50,533
|
|
|
|
51,041
|
|
50,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
|
|
|
2011
|
|
2010
|
|
|
|
2011
|
|
2010
|
|
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$ 1,072
|
|
$
907
|
|
|
|
$ 1,951
|
|
$ 1,622
|
|
|
|
|
Development
|
|
572
|
|
449
|
|
|
|
1,043
|
|
842
|
|
|
|
|
Sales and marketing
|
|
481
|
|
486
|
|
|
|
903
|
|
889
|
|
|
|
|
General and
administrative
|
|
1,718
|
|
1,813
|
|
|
|
3,595
|
|
3,239
|
|
|
|
|
Total stock-based
compensation expense
|
|
$ 3,843
|
|
$ 3,655
|
|
|
|
$ 7,492
|
|
$ 6,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMF — Not meaningful, pp —
percentage points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Operating Expense as a
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
|
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
100.0%
|
|
100.0%
|
|
-
|
|
100.0%
|
|
100.0%
|
|
-
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
28.1%
|
|
29.2%
|
|
(1.1)pp
|
|
27.4%
|
|
28.0%
|
|
(0.6)pp
|
|
|
Development
|
|
8.5%
|
|
8.7%
|
|
(0.2)pp
|
|
8.2%
|
|
8.6%
|
|
(0.4)pp
|
|
|
Sales and marketing
|
|
16.6%
|
|
18.0%
|
|
(1.4)pp
|
|
17.0%
|
|
17.8%
|
|
(0.8)pp
|
|
|
General and
administrative
|
|
16.3%
|
|
17.0%
|
|
(0.7)pp
|
|
18.2%
|
|
16.5%
|
|
1.7pp
|
|
|
Depreciation and
amortization
|
|
6.6%
|
|
6.8%
|
|
(0.2)pp
|
|
6.6%
|
|
6.9%
|
|
(0.3)pp
|
|
|
Total operating
expense(2)
|
|
76.0%
|
|
79.7%
|
|
(3.7)pp
|
|
77.5%
|
|
77.8%
|
|
(0.3)pp
|
|
Operating margin
|
|
24.0%
|
|
20.3%
|
|
3.7pp
|
|
22.5%
|
|
22.2%
|
|
0.3pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
|
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
0.7%
|
|
0.7%
|
|
-
|
|
0.6%
|
|
0.6%
|
|
-
|
|
|
Development
|
|
0.4%
|
|
0.3%
|
|
0.1pp
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
Sales and marketing
|
|
0.3%
|
|
0.4%
|
|
(0.1)pp
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
General and
administrative
|
|
1.1%
|
|
1.3%
|
|
(0.2)pp
|
|
1.1%
|
|
1.2%
|
|
(0.1)pp
|
|
|
Total stock-based
compensation expense(2)
|
|
2.4%
|
|
2.7%
|
|
(0.3)pp
|
|
2.4%
|
|
2.5%
|
|
(0.1)pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Sum of percentages may not
equal total because of rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$ 26,487
|
|
$ 17,917
|
|
$ 48,926
|
|
$ 38,074
|
|
Adjustments to reconcile
consolidated net income to net cash
|
|
|
|
|
|
|
|
|
|
flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
10,563
|
|
9,246
|
|
20,765
|
|
18,185
|
|
|
Deferred income tax (benefit)
expense
|
|
1,131
|
|
275
|
|
454
|
|
(1,012)
|
|
|
Stock-based compensation
expense
|
|
3,843
|
|
3,655
|
|
7,492
|
|
6,592
|
|
|
Equity in net income of
unconsolidated entities
|
|
(595)
|
|
(454)
|
|
(969)
|
|
(843)
|
|
|
Excess tax benefits from
stock-option exercises
|
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
(2,049)
|
|
(1,157)
|
|
(6,171)
|
|
(4,205)
|
|
|
Other, net
|
|
210
|
|
788
|
|
(17)
|
|
1,742
|
|
Changes in operating assets and
liabilities, net of
|
|
|
|
|
|
|
|
|
|
effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
3,974
|
|
(1,748)
|
|
617
|
|
(6,615)
|
|
|
Other assets
|
|
(845)
|
|
(31)
|
|
608
|
|
(511)
|
|
|
Accounts payable and accrued
liabilities
|
|
(2,660)
|
|
1,685
|
|
(5,260)
|
|
2,859
|
|
|
Accrued compensation
|
|
12,348
|
|
11,362
|
|
(14,528)
|
|
(11,154)
|
|
|
Deferred revenue
|
|
(1,650)
|
|
(3,253)
|
|
8,197
|
|
7,177
|
|
|
Income taxes -
current
|
|
(2,555)
|
|
(7,936)
|
|
2,742
|
|
(4,255)
|
|
|
Deferred rent
|
|
(258)
|
|
312
|
|
(657)
|
|
(80)
|
|
|
Other liabilities
|
|
(1,134)
|
|
(81)
|
|
(1,043)
|
|
(924)
|
|
|
Cash provided by operating activities
|
|
46,810
|
|
30,580
|
|
61,156
|
|
45,030
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Purchases of
investments
|
|
(131,295)
|
|
(34,564)
|
|
(198,647)
|
|
(85,528)
|
|
Proceeds from maturities and
sales of investments
|
|
88,001
|
|
42,447
|
|
150,360
|
|
130,381
|
|
Capital expenditures
|
|
(3,381)
|
|
(2,189)
|
|
(8,418)
|
|
(3,839)
|
|
Acquisitions, net of cash
acquired
|
|
569
|
|
(66,717)
|
|
569
|
|
(67,455)
|
|
Other, net
|
|
799
|
|
889
|
|
785
|
|
889
|
|
|
Cash
used for investing activities
|
|
(45,307)
|
|
(60,134)
|
|
(55,351)
|
|
(25,552)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds from stock-option
exercises, net
|
|
(269)
|
|
156
|
|
4,652
|
|
3,650
|
|
Excess tax benefits from
stock-option exercises
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
2,049
|
|
1,157
|
|
6,171
|
|
4,205
|
|
Common shares
repurchased
|
|
(109)
|
|
-
|
|
(109)
|
|
-
|
|
Dividends paid
|
|
(2,517)
|
|
-
|
|
(5,011)
|
|
-
|
|
Other, net
|
|
-
|
|
(110)
|
|
(214)
|
|
205
|
|
|
Cash
provided by (used for) financing activities
|
|
(846)
|
|
1,203
|
|
5,489
|
|
8,060
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
992
|
|
(2,625)
|
|
3,553
|
|
(3,657)
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
1,649
|
|
(30,976)
|
|
14,847
|
|
23,881
|
|
Cash and cash equivalents —
Beginning of period
|
|
193,374
|
|
185,353
|
|
180,176
|
|
130,496
|
|
Cash and cash equivalents — End
of period
|
|
$ 195,023
|
|
$ 154,377
|
|
$ 195,023
|
|
$ 154,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from cash
provided by operating activities to free cash flow (a non-GAAP
measure):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$ 46,810
|
|
$ 30,580
|
|
$ 61,156
|
|
$ 45,030
|
|
Less: Capital
expenditures
|
|
(3,381)
|
|
(2,189)
|
|
(8,418)
|
|
(3,839)
|
|
Free cash flow
|
|
$ 43,429
|
|
$ 28,391
|
|
$ 52,738
|
|
$ 41,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Unaudited Condensed Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
December
31
|
|
($000)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
195,023
|
|
$
180,176
|
|
|
Investments
|
|
235,216
|
|
185,240
|
|
|
Accounts receivable,
net
|
|
111,518
|
|
110,891
|
|
|
Deferred tax asset,
net
|
|
2,787
|
|
2,860
|
|
|
Income tax receivable,
net
|
|
14,381
|
|
10,459
|
|
|
Other
|
|
16,497
|
|
17,654
|
|
|
Total current assets
|
|
575,422
|
|
507,280
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
62,062
|
|
62,105
|
|
Investments in unconsolidated
entities
|
|
24,424
|
|
24,262
|
|
Goodwill
|
|
326,543
|
|
317,661
|
|
Intangible assets,
net
|
|
156,940
|
|
169,023
|
|
Other assets
|
|
7,675
|
|
5,971
|
|
|
Total assets
|
|
$ 1,153,066
|
|
$ 1,086,302
|
|
|
|
|
|
|
|
|
Liabilities and
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
38,646
|
|
$
42,680
|
|
|
Accrued compensation
|
|
50,089
|
|
62,404
|
|
|
Deferred revenue
|
|
156,760
|
|
146,267
|
|
|
Other
|
|
761
|
|
1,373
|
|
|
Total current liabilities
|
|
246,256
|
|
252,724
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
4,855
|
|
4,965
|
|
Deferred tax liability,
net
|
|
19,477
|
|
19,975
|
|
Other long-term
liabilities
|
|
26,256
|
|
27,213
|
|
|
Total liabilities
|
|
296,844
|
|
304,877
|
|
|
Total equity
|
|
856,222
|
|
781,425
|
|
|
Total liabilities and
equity
|
|
$ 1,153,066
|
|
$ 1,086,302
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Segment
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$ 128,116
|
|
$ 109,021
|
|
17.5%
|
|
$ 248,515
|
|
$ 212,545
|
|
16.9%
|
|
|
Investment Management
|
|
32,895
|
|
27,070
|
|
21.5%
|
|
64,263
|
|
51,836
|
|
24.0%
|
|
|
Consolidated revenue
|
|
$ 161,011
|
|
$ 136,091
|
|
18.3%
|
|
$ 312,778
|
|
$ 264,381
|
|
18.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — U.S.
|
|
$ 113,424
|
|
$ 98,986
|
|
14.6%
|
|
$ 221,605
|
|
$ 191,596
|
|
15.7%
|
|
|
Revenue —
International
|
|
$ 47,587
|
|
$ 37,105
|
|
28.2%
|
|
$ 91,173
|
|
$ 72,785
|
|
25.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — U.S. (percentage of
consolidated revenue)
|
|
70.4%
|
|
72.7%
|
|
(2.3)pp
|
|
70.9%
|
|
72.5%
|
|
(1.6)pp
|
|
|
Revenue — International
(percentage of consolidated revenue)
|
|
29.6%
|
|
27.3%
|
|
2.3pp
|
|
29.1%
|
|
27.5%
|
|
1.6pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$ 37,097
|
|
$ 30,542
|
|
21.5%
|
|
$ 69,404
|
|
$ 63,288
|
|
9.7%
|
|
|
Investment Management
|
|
18,491
|
|
14,321
|
|
29.1%
|
|
35,537
|
|
27,614
|
|
28.7%
|
|
|
Intangible amortization and
corporate depreciation expense
|
|
(8,476)
|
|
(7,620)
|
|
11.2%
|
|
(16,777)
|
|
(14,866)
|
|
12.9%
|
|
|
Corporate unallocated
|
|
(8,505)
|
|
(9,576)
|
|
(11.2%)
|
|
(17,748)
|
|
(17,427)
|
|
1.8%
|
|
|
Consolidated operating
income
|
|
$ 38,607
|
|
$ 27,667
|
|
39.5%
|
|
$ 70,416
|
|
$ 58,609
|
|
20.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
29.0%
|
|
28.0%
|
|
1.0pp
|
|
27.9%
|
|
29.8%
|
|
(1.9)pp
|
|
|
Investment Management
|
|
56.2%
|
|
52.9%
|
|
3.3pp
|
|
55.3%
|
|
53.3%
|
|
2.0pp
|
|
|
Consolidated operating
margin
|
|
24.0%
|
|
20.3%
|
|
3.7pp
|
|
22.5%
|
|
22.2%
|
|
0.3pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation expense allocated to each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30
|
|
|
|
|
|
2011
|
|
2010
|
|
%
change
|
|
Our employees
|
|
|
|
|
|
|
|
Worldwide headcount
(approximate)
|
|
3,300
|
|
2,965
|
|
11.3%
|
|
Number of worldwide equity and
credit analysts
|
|
161
|
|
151
|
(1)
|
6.6%
|
|
Number of worldwide fund
analysts
|
|
118
|
|
104
|
(2)
|
13.5%
|
|
|
|
|
|
|
|
|
|
|
|
Our business
|
|
|
|
|
|
|
|
Investment
Information
|
|
|
|
|
|
|
|
Morningstar.com Premium
subscriptions (U.S.)
|
|
136,008
|
|
143,392
|
|
(5.1%)
|
|
Registered users for
Morningstar.com (U.S.)
|
|
6,810,581
|
|
6,175,874
|
|
10.3%
|
|
U.S. Advisor Workstation and
Morningstar Office licenses
|
|
156,258
|
|
154,226
|
|
1.3%
|
|
Principia
subscriptions
|
|
32,335
|
|
34,715
|
|
(6.9%)
|
|
Morningstar Direct
licenses
|
|
5,442
|
|
4,109
|
|
32.4%
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
Assets under advisement and
management
|
|
|
|
|
|
|
|
|
Investment Consulting
|
|
$141.5 bil
|
|
$98.7 bil
|
(3)
|
43.4%
|
|
|
Retirement Solutions
(4)
|
|
$38.4 bil
|
|
$28.3 bil
|
|
35.7%
|
|
|
Morningstar Managed
Portfolios
|
|
$3.0 bil
|
|
$2.2 bil
|
|
36.4%
|
|
|
|
|
|
|
|
|
|
|
|
(1) Revised to include
structured credit analysts.
|
|
(2) Revised.
|
|
(3) Revised; in addition,
Ibbotson Australia is now included in the total.
|
|
(4) Revised to include Plan
Sponsor Advice.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
Effective tax
rate
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income of
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
entities
|
|
$
38,616
|
|
$
27,688
|
|
$
71,199
|
|
$
58,451
|
|
Equity in net income of
unconsolidated entities
|
|
595
|
|
454
|
|
969
|
|
843
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
(2)
|
|
85
|
|
96
|
|
116
|
|
|
Total
|
|
$
39,209
|
|
$
28,227
|
|
$
72,264
|
|
$
59,410
|
|
Income tax expense
|
|
$
12,724
|
|
$
10,225
|
|
$
23,242
|
|
$
21,220
|
|
Effective tax rate
|
|
32.5%
|
|
36.2%
|
|
32.2%
|
|
35.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
Reconciliations of Non-GAAP
Measures with the Nearest Comparable GAAP Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar includes an acquired
operation as part of revenue and expense from acquisitions for 12
months after we complete the acquisition. Operating expense related
to acquisitions also includes amortization of intangible assets,
professional fees, and expense related to vacant office space
incurred as part of the acquisition process. It's
important to note that it's difficult to precisely quantify the
amount of operating expense from acquisitions. We don't
always maintain acquired operations as
stand-alone businesses, and we often integrate administrative or
other functions with existing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from consolidated
revenue to revenue excluding acquisitions and foreign currency
translations (organic revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
%
change
|
|
2011
|
|
2010
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$ 161,011
|
|
$
136,091
|
|
18.3%
|
|
$
312,778
|
|
$ 264,381
|
|
18.3%
|
|
Less: acquisitions
|
|
(5,097)
|
|
-
|
|
NMF
|
|
(14,112)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(4,573)
|
|
-
|
|
NMF
|
|
(6,253)
|
|
-
|
|
NMF
|
|
Revenue excluding acquisitions
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreign currency
translations
|
|
$ 151,341
|
|
$
136,091
|
|
11.2%
|
|
$
292,413
|
|
$ 264,381
|
|
10.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
%
change
|
|
2011
|
|
2010
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International revenue
|
|
$ 47,587
|
|
$
37,105
|
|
28.2%
|
|
$
91,173
|
|
$ 72,785
|
|
25.3%
|
|
Less: acquisitions
|
|
(2,076)
|
|
-
|
|
NMF
|
|
(5,561)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(4,573)
|
|
-
|
|
NMF
|
|
(6,253)
|
|
-
|
|
NMF
|
|
International revenue excluding
acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and foreign currency
translations
|
|
$ 40,938
|
|
$
37,105
|
|
10.3%
|
|
$
79,359
|
|
$ 72,785
|
|
9.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes
the change in operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June
30
|
|
Six months ended June
30
|
|
($000)
|
|
2011
|
|
2010
|
|
$
change
|
|
2011
|
|
2010
|
|
$
change
|
|
Total operating
expense
|
|
$
122,404
|
|
$
108,424
|
|
$
13,980
|
|
$
242,362
|
|
$
205,772
|
|
$
36,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
$
3,552
|
|
|
|
|
|
$
12,798
|
|
|
Unfavorable impact of foreign
currency translations
|
|
|
|
4,328
|
|
|
|
|
|
5,774
|
|
|
All other changes in operating
expense
|
|
|
|
|
|
6,100
|
|
|
|
|
|
18,018
|
|
|
Total
|
|
|
|
|
|
$
13,980
|
|
|
|
|
|
$
36,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below shows the period
in which we included each acquired operation in revenue and expense
from acquisitions:
|
|
|
|
|
|
|
|
Acquisition
|
|
Date of acquisition
|
|
2011 revenue and expense from
acquisitions
|
|
Footnoted business of Financial
Fineprint Inc.
|
|
February 1, 2010
|
|
January 1 through January 31,
2011
|
|
Aegis Equities
Research
|
|
April 1, 2010
|
|
January 1 through March 31,
2011
|
|
Old Broad Street Research
Ltd.
|
|
April 12, 2010
|
|
January 1 through April 11,
2011
|
|
Realpoint, LLC
|
|
May 3, 2010
|
|
January 1 through May 2,
2011
|
|
Morningstar Danmark
A/S
|
|
July 1, 2010
|
|
January 1 through June 30,
2011
|
|
Seeds Group
|
|
July 1, 2010
|
|
January 1 through June 30,
2011
|
|
Annuity intelligence business of
Advanced Sales and Marketing Corporation
|
|
November 1, 2010
|
|
January 1 through June 30,
2011
|
|
|
|
|
|
|
SOURCE Morningstar, Inc.