CHICAGO, Oct. 26, 2011 /PRNewswire/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today announced its third-quarter 2011 financial results.
The company reported consolidated revenue of $160.1 million in the third quarter of 2011, a
14.5% increase from $139.8 million in
the third quarter of 2010. Consolidated operating income was
$33.9 million in the third quarter of
2011, an increase of 12.3% compared with $30.2 million in the same period a year ago. Net
income was $21.4 million, or
42 cents per diluted share, compared
with $24.7 million, or 49 cents per diluted share, in the third quarter
of 2010. The company's 2010 third-quarter earnings included an
after-tax gain of $3.2 million, or
7 cents per share, related to
increasing its ownership interest in Morningstar Denmark.
Excluding acquisitions and the effect of foreign currency
translations, revenue rose 11.2%. Third-quarter results included
$0.9 million in revenue from
acquisitions. Foreign currency translations had a favorable effect
of $3.7 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 nine months of 2011, revenue was $472.8 million, an increase of 17.0% compared
with $404.2 million in the same
period in 2010. Revenue for the first nine months of the year
included $15.0 million from
acquisitions and $9.9 million from
foreign currency translations. Excluding acquisitions and foreign
currency translations, revenue rose 10.8%. Consolidated operating
income increased 17.5% to $104.3
million in the first nine months of 2011, compared with
$88.8 million in the first nine
months of 2010. Net income was $70.4
million, or $1.37 per diluted
share, in the first nine months of 2011, compared with $62.9 million, or $1.24 per diluted share, in the same period in
2010.
Joe Mansueto, chairman and chief
executive officer of Morningstar, said, "Organic revenue rose about
11% during the third quarter, which is consistent with the growth
trends we've had throughout the year. Investment Consulting and
Morningstar Direct were the primary growth drivers in the quarter,
followed by Integrated Web Tools and Structured Credit Ratings.
However, operating expense rose because of higher compensation
costs, including bonus expense.
"During the quarter, we held our second annual ETF Invest
conference in Chicago, with very
strong attendance. We aim to be the leading provider of ETF data
and research, and we also announced plans to research and rank ETF
managed portfolios. Within our Investment Management division, we
added several new strategies to the Morningstar Managed Portfolios
offering. And, we added sophisticated asset allocation
functionality to the Morningstar Direct research platform for
institutional investors."
Mansueto added, "I'm also pleased to announce that we've hired
Greg Goff to be our chief technology
officer. Greg joins us from The Nielsen Company, where he served as
senior vice president of global platform technology. He has
experience managing large data sets and integrating diverse
platforms, and we're thrilled to have him on board."
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 60% of their revenue from
asset-based fees.
Revenue: In the third quarter of 2011, revenue in the Investment
Information segment was $125.8
million, an increase of $13.7
million, or 12.3%, including $0.9
million from acquisitions. Revenue in the Investment
Management segment was $34.2 million,
an increase of $6.5 million, or
23.4%.
Revenue from international operations was $47.3 million in the third quarter of 2011, an
increase of 18.5% from the same period a year ago. Foreign currency
translations contributed $3.7 million
to international revenue. Excluding foreign currency translations,
international revenue rose 9.3%.
For the first nine months of 2011, international revenue
increased $25.8 million, or 22.9%,
including $5.6 million from
acquisitions. Foreign currency translations had a favorable effect
of $9.9 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
$33.9 million in the third quarter of
2011, a 12.3% increase from the same period in 2010. Operating
expense rose $16.5 million, or 15.1%.
The company completed seven acquisitions in 2010. Because of the
timing of these acquisitions, results for both periods in 2011
include operating expense that did not exist in the same periods in
2010.
Approximately half of the increase in total operating expense
was due to higher salaries, reflecting salary increases made in
July, and, to a lesser extent, additional headcount. The headcount
growth includes about 30 employees hired in July in the United States as part of the Morningstar
Development Program, a two-year rotational training program for
entry-level college graduates.
Incentive compensation and employee benefits costs represented
approximately 35%, or $5.7 million,
of the overall operating expense increase. Higher depreciation and
amortization contributed an additional $1.1
million to the operating expense increase in the third
quarter of 2011, partly from recent acquisitions. In the third
quarter, the company capitalized $1.6
million of operating expense, primarily for software
development within the LIM commodity data business, Structured
Credit Ratings, and Morningstar Direct.
Morningstar had approximately 3,395 employees worldwide as of
Sept. 30, 2011, compared with 3,165
as of Sept. 30, 2010. Headcount was
higher year over year mainly because of continued hiring in the
company's development centers in China and India, as well as in the United States.
The company's operating margin was 21.2% in the third quarter of
2011, a slight decrease compared with the same period in 2010. The
margin decline primarily reflects higher employee benefits expense
as a percentage of revenue. Capitalized operating expense
contributed 1.0 percentage point to the margin in the third
quarter, partially offsetting the decrease. In the first nine
months of 2011, operating margin was 22.1%, a slight increase
compared with 22.0% in the first nine months of 2010.
Non-Operating Income (Expense): In the third quarter of
2010, the company acquired an additional 75% ownership interest in
Morningstar Denmark, increasing its
ownership to 100%. In conjunction with this acquisition, the
company recorded a non-cash gain of $5.1
million and related non-cash income tax expense of
$1.9 million. The gain, net of tax,
increased net income by $3.2 million,
or 7 cents per diluted share, in the
quarter, and 6 cents per diluted
share in the year-to-date period of 2010. This gain did not recur
in 2011.
Effective Tax Rate: Morningstar's effective tax rate in the
third quarter of 2011 was 36.6%, an increase of 4.0 percentage
points compared with the prior-year period. In the third
quarter of 2010, the company's effective tax rate was 32.6%, which
includes a benefit related to non-U.S. income taxes. Year to date,
the company's effective tax rate was 33.6%, a decrease of 0.9
percentage points. The year-to-date effective tax rate primarily
reflects the positive effect of higher estimated tax benefits and
incentives, most of which relate to prior years.
Free Cash Flow: Morningstar generated free cash flow of
$38.9 million in the third quarter of
2011, reflecting cash provided by operating activities of
$45.2 million and approximately
$6.3 million of capital
expenditures.
Cash provided by operating activities rose $9.9 million, reflecting a positive cash flow
effect primarily generated from higher accrued bonus and income tax
liabilities, as well as changes in other operating assets and
liabilities. Capital expenditures were $2.4
million higher in the quarter.
In the first nine months of 2011, Morningstar generated free
cash flow of $91.6 million,
reflecting cash provided by operating activities of $106.3 million and capital expenditures of
$14.7 million. Cash provided by
operating activities in the first nine months of 2011 increased
$26.0 million, reflecting the
positive effect of changes in operating assets and liabilities and
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.
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 Sept. 30, 2011, Morningstar
had cash, cash equivalents, and investments of $433.0 million, compared with $365.4 million as of Dec.
31, 2010. In the third quarter of 2011, the company used
$28.4 million of cash for its stock
repurchase program. Of the $100
million authorized under the program, Morningstar has
purchased 646,682 shares for $35.9
million as of Sept. 30, 2011.
On Oct. 31, 2011, the company expects
to pay approximately $2.5 million for
its regular quarterly dividend. It expects to make capital
expenditures of approximately $3 million to
$5 million in the fourth quarter of 2011.
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 $125.8 million in the
third quarter of 2011, up 12.3% from $112.1
million in the third quarter of 2010.
- Acquisitions contributed revenue of $0.9
million in the third quarter of 2011.
- Morningstar Direct, Integrated Web Tools, and Structured Credit
Ratings drove most of the revenue increase. Morningstar Advisor
Workstation (including Morningstar
Office) and Licensed Data also contributed to the increase.
Licenses for Morningstar Direct rose 30% to 5,726. Premium
Membership subscriptions for Morningstar.com fell 4.3%. Principia
subscriptions were down 5.8% to 31,318, and Advisor Workstation
licenses rose slightly to 155,833.
- Operating income was $31.4
million in the third quarter of 2011, compared with
$32.8 million in the same period in
2010. Operating expense in this segment rose $15.1 million, or 19.1%, with approximately 80%
of the increase from compensation-related expense, including higher
salaries, employee benefits, bonus, and commission expense.
- Operating margin was 25.0% in the third quarter of 2011 versus
29.3% in the prior-year period. The margin decline primarily
reflects higher salary, benefits, and bonus expense as a percentage
of revenue.
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 $34.2 million in the
third quarter of 2011, a 23.4% increase from $27.8 million in the same period in 2010.
- Investment Consulting was the primary driver of the segment
revenue growth. Retirement Solutions and Morningstar Managed
Portfolios also made positive contributions, but to a lesser
extent.
- Assets under advisement and management for Investment
Consulting were $128.1 billion as of
Sept. 30, 2011, up 21.2% compared
with $105.7 billion as of
Sept. 30, 2010. The increase reflects
additional assets for an existing client's fund-of-funds program
for which Morningstar now receives asset-based fees. Assets under
advisement and management for Retirement Solutions rose to
$36.3 billion as of Sept. 30, 2011, versus $31.6 billion as of Sept.
30, 2010. Assets under management for Morningstar Managed
Portfolios increased to $2.8 billion
as of Sept. 30, 2011, compared with
$2.5 billion as of Sept. 30, 2010.
- Operating income was $18.1
million in the third quarter of 2011, an increase of 33.6%
compared with the third quarter of 2010. Operating expense in the
segment was $16.1 million, an
increase of $1.9 million, or 13.7%,
primarily reflecting higher operating expense for operations
outside of the United States as
well as higher compensation expense and professional fees in
the United States.
- Operating margin was 52.7% in the third quarter of 2011 versus
48.7% in the prior-year period. The higher margin mainly reflects
lower salary, bonus, and commission expense as a percentage of
revenue.
Intangible Amortization and Corporate Depreciation Expense:
Intangible amortization, which represents the majority of the
expense in this category, was $6.9
million in the third quarter of 2011, an increase of
$0.7 million compared with the same
period in 2010. Corporate depreciation expense was $1.9 million in the third quarter, essentially
unchanged from the prior-year period.
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 $6.8
million in the quarter, a decrease of $1.3 million, or 15.7%, because the company
capitalized $1.6 million of operating
expense in the quarter for software development. Lower professional
fees also contributed to the decrease, but to a lesser extent.
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 330,000
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 $167 billion in assets under
advisement and management as of Sept. 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
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 September
30
|
|
Nine months ended September
30
|
|
(in thousands, except per share amounts)
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
160,051
|
|
$ 139,817
|
|
14.5%
|
|
$
472,829
|
|
$ 404,198
|
|
17.0%
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
48,074
|
|
40,713
|
|
18.1%
|
|
133,929
|
|
114,767
|
|
16.7%
|
|
|
Development
|
|
13,482
|
|
12,703
|
|
6.1%
|
|
39,151
|
|
35,491
|
|
10.3%
|
|
|
Sales and marketing
|
|
27,253
|
|
22,881
|
|
19.1%
|
|
80,502
|
|
69,877
|
|
15.2%
|
|
|
General and
administrative
|
|
26,431
|
|
23,462
|
|
12.7%
|
|
83,255
|
|
67,211
|
|
23.9%
|
|
|
Depreciation and
amortization
|
|
10,947
|
|
9,897
|
|
10.6%
|
|
31,712
|
|
28,082
|
|
12.9%
|
|
|
Total operating
expense
|
|
126,187
|
|
109,656
|
|
15.1%
|
|
368,549
|
|
315,428
|
|
16.8%
|
|
Operating income
|
|
33,864
|
|
30,161
|
|
12.3%
|
|
104,280
|
|
88,770
|
|
17.5%
|
|
Operating margin
|
|
21.2%
|
|
21.6%
|
|
(0.4)pp
|
|
22.1%
|
|
22.0%
|
|
0.1pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
797
|
|
512
|
|
55.7%
|
|
1,142
|
|
1,692
|
|
(32.5%)
|
|
|
Other income (expense),
net
|
|
(1,376)
|
|
5,694
|
|
NMF
|
|
(938)
|
|
4,356
|
|
NMF
|
|
|
Non-operating
income (expense), net
|
|
(579)
|
|
6,206
|
|
NMF
|
|
204
|
|
6,048
|
|
(96.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income of unconsolidated entities
|
|
33,285
|
|
36,367
|
|
(8.5%)
|
|
104,484
|
|
94,818
|
|
10.2%
|
|
Income tax expense
|
|
12,343
|
|
11,917
|
|
3.6%
|
|
35,585
|
|
33,137
|
|
7.4%
|
|
Equity in net income of
unconsolidated entities
|
|
428
|
|
333
|
|
28.5%
|
|
1,397
|
|
1,176
|
|
18.8%
|
|
Consolidated net
income
|
|
21,370
|
|
24,783
|
|
(13.8%)
|
|
70,296
|
|
62,857
|
|
11.8%
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
10
|
|
(106)
|
|
NMF
|
|
106
|
|
10
|
|
NMF
|
|
Net income attributable to
Morningstar, Inc.
|
|
$
21,380
|
|
$ 24,677
|
|
(13.4%)
|
|
$
70,402
|
|
$ 62,867
|
|
12.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
attributable to Morningstar, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
0.42
|
|
$
0.50
|
|
(16.0%)
|
|
$
1.40
|
|
$
1.27
|
|
10.2%
|
|
|
Diluted
|
|
$
0.42
|
|
$
0.49
|
|
(14.3%)
|
|
$
1.37
|
|
$
1.24
|
|
10.5%
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
50,278
|
|
49,401
|
|
|
|
50,082
|
|
49,157
|
|
|
|
|
Diluted
|
|
51,123
|
|
50,544
|
|
|
|
51,071
|
|
50,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
|
|
|
2011
|
|
2010
|
|
|
|
2011
|
|
2010
|
|
|
|
(1) Includes stock-based
compensation expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
1,117
|
|
$
960
|
|
|
|
$
3,068
|
|
$ 2,582
|
|
|
|
|
Development
|
|
545
|
|
517
|
|
|
|
1,588
|
|
1,359
|
|
|
|
|
Sales and marketing
|
|
489
|
|
469
|
|
|
|
1,392
|
|
1,358
|
|
|
|
|
General and
administrative
|
|
1,800
|
|
1,799
|
|
|
|
5,395
|
|
5,038
|
|
|
|
|
Total stock-based
compensation expense
|
|
$
3,951
|
|
$ 3,745
|
|
|
|
$
11,443
|
|
$ 10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NMF — Not meaningful, pp —
percentage points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense as a
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended September 30
|
|
Nine months
ended September 30
|
|
|
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
100.0%
|
|
100.0%
|
|
-
|
|
100.0%
|
|
100.0%
|
|
-
|
|
Operating expense(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
30.0%
|
|
29.1%
|
|
0.9pp
|
|
28.3%
|
|
28.4%
|
|
(0.1)pp
|
|
|
Development
|
|
8.4%
|
|
9.1%
|
|
(0.7)pp
|
|
8.3%
|
|
8.8%
|
|
(0.5)pp
|
|
|
Sales and marketing
|
|
17.0%
|
|
16.4%
|
|
0.6pp
|
|
17.0%
|
|
17.3%
|
|
(0.3)pp
|
|
|
General and
administrative
|
|
16.5%
|
|
16.8%
|
|
(0.3)pp
|
|
17.6%
|
|
16.6%
|
|
1.0pp
|
|
|
Depreciation and
amortization
|
|
6.8%
|
|
7.1%
|
|
(0.3)pp
|
|
6.7%
|
|
6.9%
|
|
(0.2)pp
|
|
|
Total operating
expense(2)
|
|
78.8%
|
|
78.4%
|
|
0.4pp
|
|
77.9%
|
|
78.0%
|
|
(0.1)pp
|
|
Operating margin
|
|
21.2%
|
|
21.6%
|
|
(0.4)pp
|
|
22.1%
|
|
22.0%
|
|
0.1pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended September 30
|
|
Nine months
ended September 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
|
|
0.3%
|
|
0.4%
|
|
(0.1)pp
|
|
0.3%
|
|
0.3%
|
|
-
|
|
|
Sales and marketing
|
|
0.3%
|
|
0.3%
|
|
-
|
|
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)
|
|
2.5%
|
|
2.7%
|
|
(0.2)pp
|
|
2.4%
|
|
2.6%
|
|
(0.2)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 September 30
|
|
Nine months
ended September 30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Consolidated net
income
|
|
$ 21,370
|
|
$ 24,783
|
|
$ 70,296
|
|
$ 62,857
|
|
Adjustments to reconcile
consolidated net income to net cash
|
|
|
|
|
|
|
|
flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
10,947
|
|
9,897
|
|
31,712
|
|
28,082
|
|
|
Deferred income tax (benefit)
expense
|
|
(2,013)
|
|
2,781
|
|
(1,559)
|
|
1,769
|
|
|
Stock-based compensation
expense
|
|
3,951
|
|
3,745
|
|
11,443
|
|
10,337
|
|
|
Equity in net income of
unconsolidated entities
|
|
(428)
|
|
(333)
|
|
(1,397)
|
|
(1,176)
|
|
|
Excess tax benefits from
stock-option exercises
|
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
(1,450)
|
|
(680)
|
|
(7,621)
|
|
(4,885)
|
|
|
Holding gain upon acquisition of
additional
|
|
|
|
|
|
|
|
|
|
|
ownership of equity method
investments
|
|
-
|
|
(5,073)
|
|
-
|
|
(5,073)
|
|
|
Other, net
|
|
2,700
|
|
(765)
|
|
2,683
|
|
977
|
|
Changes in operating assets and
liabilities, net of
|
|
|
|
|
|
|
|
|
|
effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,020)
|
|
(639)
|
|
(403)
|
|
(7,254)
|
|
|
Other assets
|
|
1,388
|
|
(1,997)
|
|
1,996
|
|
(2,508)
|
|
|
Accounts payable and accrued
liabilities
|
|
(15)
|
|
(834)
|
|
(5,275)
|
|
2,025
|
|
|
Accrued compensation
|
|
11,286
|
|
8,884
|
|
(3,242)
|
|
(2,270)
|
|
|
Deferred revenue
|
|
(7,579)
|
|
(9,115)
|
|
618
|
|
(1,938)
|
|
|
Income taxes -
current
|
|
6,700
|
|
4,564
|
|
9,442
|
|
309
|
|
|
Deferred rent
|
|
(327)
|
|
522
|
|
(984)
|
|
442
|
|
|
Other liabilities
|
|
(350)
|
|
(460)
|
|
(1,393)
|
|
(1,384)
|
|
|
Cash provided by operating activities
|
|
45,160
|
|
35,280
|
|
106,316
|
|
80,310
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Purchases of
investments
|
|
(83,051)
|
|
(42,515)
|
|
(281,698)
|
|
(128,043)
|
|
Proceeds from maturities and
sales of investments
|
|
55,061
|
|
46,816
|
|
205,421
|
|
177,197
|
|
Capital expenditures
|
|
(6,271)
|
|
(3,862)
|
|
(14,689)
|
|
(7,701)
|
|
Acquisitions, net of cash
acquired
|
|
(269)
|
|
(21,242)
|
|
300
|
|
(88,697)
|
|
Other, net
|
|
90
|
|
(59)
|
|
875
|
|
830
|
|
|
Cash
used for investing activities
|
|
(34,440)
|
|
(20,862)
|
|
(89,791)
|
|
(46,414)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds from stock-option
exercises, net
|
|
1,978
|
|
1,557
|
|
6,630
|
|
5,207
|
|
Excess tax benefits from
stock-option exercises
|
|
|
|
|
|
|
|
|
|
and vesting of restricted
stock units
|
|
1,450
|
|
680
|
|
7,621
|
|
4,885
|
|
Common shares
repurchased
|
|
(28,417)
|
|
-
|
|
(28,526)
|
|
-
|
|
Dividends paid
|
|
(2,528)
|
|
-
|
|
(7,539)
|
|
-
|
|
Other, net
|
|
(149)
|
|
(734)
|
|
(363)
|
|
(529)
|
|
|
Cash
provided by (used for) financing activities
|
|
(27,666)
|
|
1,503
|
|
(22,177)
|
|
9,563
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
(3,807)
|
|
5,574
|
|
(254)
|
|
1,917
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
(20,753)
|
|
21,495
|
|
(5,906)
|
|
45,376
|
|
Cash and cash
equivalents—Beginning of period
|
|
195,023
|
|
154,377
|
|
180,176
|
|
130,496
|
|
Cash and cash equivalents—End of
period
|
|
$ 174,270
|
|
$ 175,872
|
|
$ 174,270
|
|
$ 175,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from cash
provided by operating activities to free cash flow (a non-GAAP
measure):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended September 30
|
|
Nine months
ended September 30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$ 45,160
|
|
$ 35,280
|
|
$ 106,316
|
|
$ 80,310
|
|
Less: Capital
expenditures
|
|
(6,271)
|
|
(3,862)
|
|
(14,689)
|
|
(7,701)
|
|
Free cash flow
|
|
$ 38,889
|
|
$ 31,418
|
|
$ 91,627
|
|
$ 72,609
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
Unaudited Condensed Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
December
31
|
|
($000)
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
174,270
|
|
$
180,176
|
|
|
Investments
|
|
|
|
258,749
|
|
185,240
|
|
|
Accounts receivable,
net
|
|
|
|
110,444
|
|
110,891
|
|
|
Deferred tax asset,
net
|
|
|
|
3,814
|
|
2,860
|
|
|
Income tax receivable,
net
|
|
|
|
10,045
|
|
10,459
|
|
|
Other
|
|
|
|
16,076
|
|
17,654
|
|
|
Total current assets
|
|
|
|
573,398
|
|
507,280
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
|
63,703
|
|
62,105
|
|
Investments in unconsolidated
entities
|
|
|
|
24,761
|
|
24,262
|
|
Goodwill
|
|
|
|
319,367
|
|
317,661
|
|
Intangible assets,
net
|
|
|
|
147,311
|
|
169,023
|
|
Other assets
|
|
|
|
5,726
|
|
5,971
|
|
|
Total assets
|
|
|
|
$
1,134,266
|
|
$
1,086,302
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
|
|
$
42,184
|
|
$
42,680
|
|
|
Accrued compensation
|
|
|
|
59,908
|
|
62,404
|
|
|
Deferred revenue
|
|
|
|
146,877
|
|
146,267
|
|
|
Other
|
|
|
|
322
|
|
1,373
|
|
|
Total current liabilities
|
|
|
|
249,291
|
|
252,724
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
|
|
5,427
|
|
4,965
|
|
Deferred tax liability,
net
|
|
|
|
17,490
|
|
19,975
|
|
Other long-term
liabilities
|
|
|
|
25,930
|
|
27,213
|
|
|
Total liabilities
|
|
|
|
298,138
|
|
304,877
|
|
|
Total equity
|
|
|
|
836,128
|
|
781,425
|
|
|
Total liabilities and
equity
|
|
|
|
$
1,134,266
|
|
$
1,086,302
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2011
|
|
2010
|
|
change
|
|
2011
|
|
2010
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$ 125,804
|
|
$ 112,055
|
|
12.3%
|
|
$ 374,319
|
|
$ 324,600
|
|
15.3%
|
|
|
Investment Management
|
|
34,247
|
|
27,762
|
|
23.4%
|
|
98,510
|
|
79,598
|
|
23.8%
|
|
|
Consolidated revenue
|
|
$ 160,051
|
|
$ 139,817
|
|
14.5%
|
|
$ 472,829
|
|
$ 404,198
|
|
17.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S.
|
|
$ 112,790
|
|
$ 99,933
|
|
12.9%
|
|
$ 334,395
|
|
$ 291,529
|
|
14.7%
|
|
|
Revenue—International
|
|
$ 47,261
|
|
$ 39,884
|
|
18.5%
|
|
$ 138,434
|
|
$ 112,669
|
|
22.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue—U.S. (percentage of
consolidated revenue)
|
70.5%
|
|
71.5%
|
|
(1.0)pp
|
|
70.7%
|
|
72.1%
|
|
(1.4)pp
|
|
|
Revenue—International
(percentage of consolidated revenue)
|
29.5%
|
|
28.5%
|
|
1.0pp
|
|
29.3%
|
|
27.9%
|
|
1.4pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
$ 31,426
|
|
$ 32,811
|
|
(4.2%)
|
|
$ 100,830
|
|
$ 96,099
|
|
4.9%
|
|
|
Investment Management
|
|
18,062
|
|
13,523
|
|
33.6%
|
|
53,599
|
|
41,137
|
|
30.3%
|
|
|
Intangible amortization and
corporate depreciation expense
|
(8,788)
|
|
(8,064)
|
|
9.0%
|
|
(25,565)
|
|
(22,930)
|
|
11.5%
|
|
|
Corporate unallocated
|
|
(6,836)
|
|
(8,109)
|
|
(15.7%)
|
|
(24,584)
|
|
(25,536)
|
|
(3.7%)
|
|
|
Consolidated operating
income
|
|
$ 33,864
|
|
$ 30,161
|
|
12.3%
|
|
$ 104,280
|
|
$ 88,770
|
|
17.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
25.0%
|
|
29.3%
|
|
(4.3)pp
|
|
26.9%
|
|
29.6%
|
|
(2.7)pp
|
|
|
Investment Management
|
|
52.7%
|
|
48.7%
|
|
4.0pp
|
|
54.4%
|
|
51.7%
|
|
2.7pp
|
|
|
Consolidated operating
margin
|
|
21.2%
|
|
21.6%
|
|
(0.4)pp
|
|
22.1%
|
|
22.0%
|
|
0.1pp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation expense allocated to each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morningstar, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September
30
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
%
change
|
|
Our employees
|
|
|
|
|
|
|
|
|
|
Worldwide headcount
(approximate)
|
|
|
|
3,395
|
|
3,165
|
|
7.3%
|
|
Number of worldwide equity and
credit analysts
|
|
|
|
161
|
|
143
|
(1)
|
12.6%
|
|
Number of worldwide fund
analysts
|
|
|
|
109
|
|
99
|
(2)
|
10.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our business
|
|
|
|
|
|
|
|
|
|
Investment
Information
|
|
|
|
|
|
|
|
|
|
Morningstar.com Premium
subscriptions (U.S.)
|
|
|
|
133,734
|
|
139,677
|
(2)
|
(4.3%)
|
|
Registered users for
Morningstar.com (U.S.)
|
|
|
|
6,891,406
|
|
6,226,554
|
|
10.7%
|
|
U.S. Advisor Workstation and
Morningstar Office licenses
|
|
|
|
155,833
|
|
154,403
|
|
0.9%
|
|
Principia
subscriptions
|
|
|
|
31,318
|
|
33,252
|
|
(5.8%)
|
|
Morningstar Direct
licenses
|
|
|
|
5,726
|
|
4,403
|
|
30.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
Assets under advisement and
management
|
|
|
|
|
|
|
|
|
|
Investment
Consulting
|
|
|
|
$128.1 bil
|
|
$105.7 bil
|
(3)
|
21.2%
|
|
Retirement
Solutions(4)
|
|
|
|
$36.3 bil
|
|
$31.6 bil
|
|
14.9%
|
|
Morningstar
Managed Portfolios
|
|
|
|
$2.8 bil
|
|
$2.5 bil
|
|
12.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30
|
|
Nine months
ended September 30
|
|
($000)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
Effective tax
rate
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in net income of
|
|
|
|
|
|
|
|
|
|
unconsolidated
entities
|
|
$ 33,285
|
|
$ 36,367
|
|
$ 104,484
|
|
$ 94,818
|
|
Equity in net income of
unconsolidated entities
|
|
428
|
|
333
|
|
1,397
|
|
1,176
|
|
Net (income) loss attributable
to noncontrolling interests
|
|
10
|
|
(106)
|
|
106
|
|
10
|
|
Total
|
|
$ 33,723
|
|
$ 36,594
|
|
$ 105,987
|
|
$ 96,004
|
|
Income tax expense
|
|
$ 12,343
|
|
$ 11,917
|
|
$ 35,585
|
|
$ 33,137
|
|
Effective tax rate
|
|
36.6%
|
|
32.6%
|
|
33.6%
|
|
34.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Morningstar
doesn't
|
|
always maintain acquired
operations as stand-alone businesses, and the company often
integrates administrative or other functions with existing
operations.
|
|
|
|
Reconciliation from consolidated
revenue to revenue excluding acquisitions and foreign currency
translations (organic revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2011
|
|
2010
|
|
%
change
|
|
2011
|
|
2010
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$ 160,051
|
|
$
139,817
|
|
14.5%
|
|
$ 472,829
|
|
$ 404,198
|
|
17.0%
|
|
Less: acquisitions
|
|
(908)
|
|
-
|
|
NMF
|
|
(15,020)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(3,683)
|
|
-
|
|
NMF
|
|
(9,936)
|
|
-
|
|
NMF
|
|
Revenue excluding acquisitions
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreign currency
translations
|
|
$ 155,460
|
|
$
139,817
|
|
11.2%
|
|
$ 447,873
|
|
$ 404,198
|
|
10.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2011
|
|
2010
|
|
%
change
|
|
2011
|
|
2010
|
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International revenue
|
|
$ 47,261
|
|
$
39,884
|
|
18.5%
|
|
$ 138,434
|
|
$ 112,669
|
|
22.9%
|
|
Less: acquisitions
|
|
-
|
|
-
|
|
n/a
|
|
(5,561)
|
|
-
|
|
NMF
|
|
Favorable impact of foreign
currency translations
|
|
(3,683)
|
|
-
|
|
NMF
|
|
(9,936)
|
|
-
|
|
NMF
|
|
International revenue excluding
acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and foreign currency
translations
|
|
$ 43,578
|
|
$
39,884
|
|
9.3%
|
|
$ 122,937
|
|
$ 112,669
|
|
9.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the change in operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30
|
|
Nine months ended September
30
|
|
($000)
|
|
2011
|
|
2010
|
|
$
change
|
|
2011
|
|
2010
|
|
$
change
|
|
Total operating
expense
|
|
$ 126,187
|
|
$
109,656
|
|
$ 16,531
|
|
$ 368,549
|
|
$ 315,428
|
|
$ 53,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
$
476
|
|
|
|
|
|
$ 13,274
|
|
|
Unfavorable impact of foreign
currency translations
|
|
|
|
|
|
3,353
|
|
|
|
|
|
9,127
|
|
|
All other changes in operating
expense
|
|
|
|
|
|
12,702
|
|
|
|
|
|
30,720
|
|
|
Total
|
|
|
|
|
|
$ 16,531
|
|
|
|
|
|
$ 53,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOURCE Morningstar, Inc.