CHICAGO, July 30 /PRNewswire-FirstCall/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today announced its second-quarter 2009 financial
results. The company reported consolidated revenue of $119.5
million in the second quarter of 2009, a 9.6% decrease from revenue
of $132.2 million in the second quarter of 2008. Consolidated
operating income was $32.7 million in the second quarter of 2009, a
decrease of 21.4% compared with $41.6 million in the same period a
year ago. Morningstar's net income was $20.5 million in the second
quarter of 2009, or 41 cents per diluted share, compared with $28.0
million, or 57 cents per diluted share, in the second quarter of
2008. Excluding acquisitions and the impact of foreign currency
translations, revenue declined 10.9% in the second quarter of 2009.
Second-quarter results included $6.7 million in revenue from
acquisitions completed in the last 12 months. Foreign currency
translations had an unfavorable impact of $5.0 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. Results for the
second quarter of 2009 also included a $3.5 million operating
expense for estimated penalties related to the timing of deposits
for taxes withheld on stock option exercises from 2006 through June
30, 2009. The deposit penalty reduced net income by $3.5 million,
or 7 cents per diluted share, in the quarter and year-to-date
periods. In the first six months of 2009, revenue was $236.3
million, a decline of 8.3% compared with $257.7 million in the same
period in 2008. Revenue for the first half of the year included
$12.7 million from acquisitions as well as an unfavorable impact
from foreign currency translations of $10.7 million. Consolidated
operating income declined 11.7% to $67.3 million in the first six
months of 2009, compared with $76.3 million in the first half of
2008. Net income was $45.5 million, or 92 cents per diluted share,
in the first half of 2009, compared with $51.1 million, or $1.04
per diluted share, in the same period in 2008. "We continued to
face difficult business conditions during the quarter," said Joe
Mansueto, chairman and chief executive officer of Morningstar.
"Organic revenue continued to slow, declining about 11% year over
year in the second quarter, compared with a 7% decline in the first
quarter. Investment Consulting drove most of the revenue decline,
with assets under advisement down about 43% since June 2008. Assets
fell mainly because, as we've previously discussed, two consulting
clients did not renew their contracts. The U.S. market was down 26%
over the past year, which also reduced assets. Foreign currency
translations also negatively impacted revenue, partly offsetting
additional revenue from acquisitions. And, as we've said, the
Global Analyst Research Settlement, which represented about $5.4
million in revenue during the second quarter, expired at the end of
July. We expect our post-settlement equity research revenue to be
significantly lower in the second half of the year." Mansueto
added, "We're pleased with the results of the cost-savings measures
we implemented in late 2008 and early 2009, although they were
offset by incremental expense from recent acquisitions as well as a
$3.5 million operating expense for estimated penalties related to
the timing of deposits for taxes withheld on stock option exercises
since 2006. We continue to invest in our business and made four
acquisitions during the second quarter, which support our key
growth strategies of enhancing our global data, investment
management capabilities, and international footprint. We generated
$37 million in free cash flow during the second quarter. Our
balance sheet remains strong, and we ended the quarter with more
than $323 million in cash and investments and no bank debt." Key
Business Drivers Revenue: 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 operate as registered investment
advisors and earn more than half of their revenue from asset-based
fees. In the second quarter of 2009, revenue in the Investment
Information segment declined 3.8% to $97.7 million compared with
the second quarter of 2008; approximately $6.7 million of this
revenue came from acquisitions. Revenue in the Investment
Management segment declined 28.9% to $21.8 million. Investment
Consulting was the main driver behind the revenue decline in this
segment. The company had lower revenue from asset-based fees as
assets under advisement declined to $56.1 billion as of June 30,
2009 from $99.1 billion as of June 30, 2008. The majority of the
asset decline reflects the loss of two contracts, and the remaining
portion of the decline was mainly driven by the market downturn.
Revenue from international operations was $30.2 million in the
second quarter of 2009, a decrease of 7.5% from the same period a
year ago. International revenue included $4.9 million from
acquisitions, which was offset by a $5.0 million impact from
foreign currency translations. Excluding acquisitions and foreign
currency translations, international revenue declined 7.1% in the
second quarter of 2009. For the first six months of 2009,
international revenue declined $4.2 million, or 6.6%, compared with
the prior-year period, with $8.9 million in revenue from
acquisitions. Foreign currency translations had an unfavorable
impact of $10.7 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 $32.7 million in the second quarter of 2009, a 21.4%
decrease from the same period in 2008. Operating expense declined
$3.9 million, or 4.2%, in the second quarter of 2009. Lower
expenses from cost-savings initiatives were partially offset by
incremental expense from recent acquisitions and the $3.5 million
expense for estimated tax penalties related to the timing of
deposits for taxes withheld on stock option exercises. Bonus
expense decreased $8.6 million in the quarter because Morningstar
made changes to its 2009 bonus plan as part of its efforts to
better align its cost structure with revenue in the challenging
business environment. The company suspended matching contributions
to its 401(k) plan in the United States, further reducing operating
expense by approximately $1.3 million. Morningstar had
approximately 2,510 employees worldwide as of June 30, 2009,
compared with 2,370 as of March 31, 2009, and 2,060 as of June 30,
2008. Headcount grew year over year mainly because of continued
hiring in the company's development center in China as well as
approximately 180 employees added through acquisitions. In July
2009, Morningstar hired about 30 employees in the United States as
part of the Morningstar Development Program, a two-year rotational
training program for entry-level college graduates. The company
also reduced discretionary spending in advertising and marketing as
well as travel. Advertising and marketing costs declined by $1.1
million in the second quarter of 2009 and $3.4 million in the first
half of the year compared with the prior-year periods. Partially
offsetting these reductions were additional costs related to
acquisitions, including a $1.4 million increase in intangible
amortization expense in the quarter. Morningstar completed five
acquisitions in the second half of 2008 and four in the second
quarter of 2009. Because of the timing of these acquisitions,
second-quarter 2009 results include operating expense that did not
exist in the second quarter of 2008. In addition, in the second
quarter of 2009, Morningstar recorded a $3.5 million operating
expense for estimated penalties related to the timing of deposits
for taxes withheld on stock option exercises from 2006 through June
30, 2009. For some companies, including Morningstar, it is common
practice for taxes withheld on stock-based compensation to be paid
with the company's regularly scheduled payroll deposit. This
approach, however, does not technically comply with Internal
Revenue Service guidelines concerning deposits of taxes withheld in
connection with stock-based compensation, which generally require
that if a company's cumulative deposit liability for all
compensation exceeds $100,000, the tax withholding must be
deposited by the following business day. Transactions related to
stock-based compensation frequently cause companies to exceed this
threshold outside of their regularly scheduled payroll cycles, thus
triggering the accelerated deposit rules. The subject of deposit
penalties is part of an ongoing IRS audit that began in 2009.
Morningstar believes its approach was reasonable and the potential
penalties are excessive considering the company's long record of
making tax deposit payments with its regularly scheduled
semi-monthly payroll. Morningstar has since increased the frequency
of deposits for taxes withheld on stock-option exercises. The
company's operating margin was 27.3% in the second quarter of 2009,
compared with 31.4% in the same period in 2008. In the first six
months of 2009, operating margin was 28.5%, compared with 29.6% in
the first six months of 2008. The deposit penalty expense
represented 2.9 percentage points of the margin decline in the
quarter and 1.5 percentage points year to date. Effective Tax Rate:
Morningstar's effective tax rate in the second quarter of 2009 was
40.6%, an increase of 5.6 percentage points compared with the
prior-year period. The deposit penalty, which decreased pre-tax
income by $3.5 million, accounted for 3.7 percentage points of the
increase in the effective tax rate because the expense is not
deductible for tax purposes. Year to date, the company's effective
tax rate decreased to 35.2% from 35.9% in 2008. The year-to-date
effective tax rate reflects the impact of reversing approximately
$2.0 million in reserves for uncertain tax positions, of which $1.4
million occurred in the first quarter. These non-cash benefits
contributed approximately 3 percentage points of the decrease in
the effective tax rate in the year-to-date period. This reduction
was partially offset by the impact of the non-deductible deposit
penalty expense, which increased the effective tax rate by
approximately 2 percentage points in the year-to-date period. Free
Cash Flow: Morningstar generated free cash flow of $37.4 million in
the second quarter of 2009, reflecting cash provided by operating
activities of $39.6 million and $2.2 million of capital
expenditures. Cash flow from operating activities decreased $8.1
million compared with the prior-year period. In the second quarter
of 2008, operating cash flow included a $5.9 million benefit from
tenant improvement allowances related to the construction of the
company's new corporate headquarters. This benefit did not recur in
the second quarter of 2009. Lower net income (adjusted for non-cash
items) and a lower cash flow benefit from accruals for compensation
and income taxes also contributed to the decline in operating cash
flow. These items were partially offset by the impact of excess tax
benefits. Excess tax benefits have a positive impact on cash
provided by financing activities with an equal, but offsetting,
impact on cash from operations. Excess tax benefits declined $7.2
million in the quarter, primarily reflecting lower average stock
prices on the exercise dates and a reduction in the number of
options exercised. Capital expenditures decreased $8.4 million for
the quarter and $10.6 million in the first half of the year.
Capital expenditures were higher in 2008 mainly because of the
timing of payments related to the construction of Morningstar's new
corporate headquarters. In the first six months of 2009,
Morningstar generated free cash flow of $24.5 million, reflecting
cash provided by operating activities of $31.3 million and capital
expenditures of $6.8 million. Compared with the prior-year period,
cash flow from operations in the first six months of 2009 decreased
$17.8 million, reflecting lower net income (adjusted for non-cash
items), a reduction in tenant improvement allowances of $9.6
million, and a $9.6 million increase in bonuses paid in the first
quarter of 2009. These items were partially offset by the impact of
excess tax benefits, which declined $12.8 million in the
year-to-date period. 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, 2009, Morningstar had cash,
cash equivalents, and investments of $323.2 million, compared with
$286.0 million as of March 31, 2009, and $297.6 million as of Dec.
31, 2008. 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); Morningstar.com , including Premium memberships
and Internet advertising sales; and Morningstar Direct(SM). --
Revenue was $97.7 million in the second quarter of 2009, down 3.8%
from $101.6 million in the second quarter of 2008. Acquisitions
contributed revenue of $6.7 million to the Investment Information
segment in the second quarter of 2009. Excluding acquisitions,
Investment Information segment revenue declined approximately 10.4%
in the second quarter, primarily reflecting the unfavorable impact
of foreign currency translations and lower revenue in many product
lines. -- The Global Analyst Research Settlement (GARS) expired in
late July 2009. Revenue associated with GARS represented $5.4
million, or 5.5%, of segment revenue in the second quarter. As
previously disclosed, Morningstar expects its post-settlement
equity research revenue to be significantly lower in the second
half of the year. The company is focused on providing high-quality
coverage and continuing to sell equity research to financial
advisors and institutions through a variety of other channels.
Morningstar expects to maintain broad equity coverage, though it
may need to adjust its coverage and staffing levels based on client
demand. -- Internet advertising sales was the biggest driver behind
the revenue decline, followed by Principia and several print
publications. Lower advertising revenue from publications sold in
Australia contributed to the decline. These declines were partially
offset by revenue growth for Morningstar Advisor Workstation,
Morningstar Direct, and Licensed Data. Advisor Workstation licenses
decreased to 152,971 from 154,269 mainly because a large
institutional client migrated its contract to the Morningstar Site
Builder product. The decline in licenses did not adversely impact
revenue growth because some contracts include unlimited usage, and
revenue is not tied to the number of users. In addition, expanded
product functionality increased the value of some contracts without
changing the number of users. Principia subscriptions declined 15%
to 38,378. Licenses for Morningstar Direct grew 18% to 3,171.
Premium Membership subscriptions for Morningstar.com fell to
160,936, a decrease of 11% compared with the second quarter of
2008. -- Operating income was $37.2 million in the second quarter
of 2009, compared with $38.7 million in the same period in 2008.
Operating expense in this segment decreased $2.4 million, or 3.8%,
as cost reductions for discretionary expense such as bonuses,
advertising, and marketing were partially offset by additional
operating expense from acquisitions. -- Operating margin was 38.1%
in the second quarter of 2009, unchanged from the prior-year
period. The impact of lower bonus expense, advertising, and
marketing as a percentage of revenue was offset by the impact of
recent acquisitions. Investment Management Segment: The largest
products in this segment based on revenue are Investment
Consulting; Retirement Advice, including Advice by Ibbotson and
Morningstar Retirement Manager(SM); and Morningstar Managed
Portfolios(SM). -- Revenue was $21.8 million in the second quarter
of 2009, a 28.9% decrease from $30.7 million in the same period in
2008. Revenue declined across all products in the Investment
Management segment. However, the majority of the revenue decline
was driven by Investment Consulting, which suffered because of the
U.S. market decline over the past year, as well as the impact of
one client not renewing when its contract expired in the fourth
quarter of 2008, and to a lesser extent by another client not
renewing when its contract expired in May 2009. -- Assets under
advisement for Investment Consulting declined to $56.1 billion as
of June 30, 2009, compared with $63.3 billion as of March 31, 2009,
$66.2 billion as of Dec. 31, 2008, and $99.1 billion as of June 30,
2008. Assets under management for Retirement Advice were $12.5
billion as of June 30, 2009, compared with $10.2 billion as of
March 31, 2009, $11.0 billion as of Dec. 31, 2008, and $14.6
billion as of June 30, 2008. Assets under management for
Morningstar Managed Portfolios(SM) were $1.7 billion as of June 30,
2009, compared with $1.4 billion as of March 31, 2009, $1.6 billion
as of Dec. 31, 2008, and $2.1 billion as of June 30, 2008. --
Operating income was $13.1 million in the second quarter of 2009, a
decrease of 25.3% compared with the second quarter of 2008.
Operating expense in the segment decreased $4.5 million, or 33.7%,
primarily because of lower bonus expense and the suspension of the
company's matching contribution to its 401(k) plan. -- Operating
margin was 59.9% in the second quarter of 2009, compared with 57.1%
in the prior-year period. Lower bonus expense as a percentage of
revenue was the primary reason for the margin improvement.
Intangible Amortization and Corporate Depreciation Expense:
Morningstar does not allocate intangible amortization expense
related to acquisitions or corporate depreciation expense to its
operating segments. Intangible amortization and depreciation
expense for corporate departments was $7.6 million in the second
quarter of 2009, an increase of $2.4 million, or 45.4%, compared
with the prior-year period. Intangible amortization and
depreciation expense for corporate departments in the first six
months of 2009 was $14.3 million, an increase of $4.0 million, or
39.6%, compared with the prior-year period. The increase in both
periods reflects additional amortization expense for acquisitions
that occurred in the second half of 2008 and the first half of
2009. Also, in the fourth quarter of 2008, Morningstar relocated to
its new corporate headquarters, resulting in higher depreciation
expense in the second quarter and first half of 2009. Corporate
Unallocated: This category of expense includes the costs related to
the company's corporate functions, including general management,
information technology used to support corporate systems, legal,
finance, human resources, marketing, and corporate communications.
This category also includes a $3.5 million operating expense
related to the estimated deposit penalty. Costs in this category
for the second quarter of 2009 were $10.1 million, an increase of
$0.7 million, or 6.7%, compared with the prior-year period,
primarily reflecting the deposit penalty expense offset by lower
bonus and other compensation-related expense. Costs in this
category for the first half of 2009 were $17.3 million, a decrease
of $0.9 million, or 4.9%, compared with the first half of 2008,
primarily reflecting lower bonus expense and other
compensation-related expense, partially offset by the deposit
penalty. 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 Internet, software, and print-based products and services for
individuals, financial advisors, and institutions. Morningstar
provides data on nearly 325,000 investment offerings, including
stocks, mutual funds, and similar vehicles, along with real-time
global market data on more than 4 million equities, indexes,
futures, options, commodities, and precious metals, in addition to
foreign exchange and Treasury markets. The company has operations
in 19 countries and minority ownership positions in companies based
in three other 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 discussed not to occur
or to differ significantly from what we expected. For us, these
risks and uncertainties include, among others, general industry
conditions and competition, including the global financial crisis
that began in 2007; 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 filings with the Securities
and Exchange Commission, including our Annual Report on Form 10-K
for the year ended December 31, 2008. If any of these risks and
uncertainties materialize, our actual future results may vary
significantly from what we expected. 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 the performance of its business. Free cash flow should not
be considered an alternative to any measure of performance as
promulgated 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. 2009
Morningstar, Inc. All rights reserved. Morningstar, Inc. and
Subsidiaries Unaudited Condensed Consolidated Statements of Income
(in thousands, except per Three months ended June 30 Six months
ended June 30 share amounts) 2009 2008 change 2009 2008 change ----
---- ------ ---- ---- ------ Revenue $119,533 $132,237 (9.6%)
$236,265 $257,681 (8.3%) Operating expense(1): Cost of goods sold
30,694 33,164 (7.4%) 60,946 66,102 (7.8%) Development 9,438 9,801
(3.7%) 18,738 19,916 (5.9%) Sales and marketing 18,010 20,866
(13.7%) 35,546 43,090 (17.5%) General and administrative 19,853
20,560 (3.4%) 37,006 39,885 (7.2%) Depreciation and amortization
8,850 6,276 41.0% 16,716 12,433 34.4% ----- ----- ------ ------
Total operating expense 86,845 90,667 (4.2%) 168,952 181,426 (6.9%)
------ ------ ------- ------- Operating income 32,688 41,570
(21.4%) 67,313 76,255 (11.7%) Operating margin 27.3% 31.4% (4.1)pp
28.5% 29.6% (1.1)pp Non-operating income (expense): Interest
income, net 764 1,381 (44.7%) 1,742 2,900 (39.9%) Other income
(expense), net 1,208 (234) NMF 764 38 NMF ----- ---- --- --
Non-operating income, net 1,972 1,147 71.9% 2,506 2,938 (14.7%)
----- ----- ----- ----- Income before income taxes and equity in
net income (loss) of unconsolidated entities 34,660 42,717 (18.9%)
69,819 79,193 (11.8%) Income tax expense 14,024 15,076 (7.0%)
24,692 28,580 (13.6%) Equity in net income (loss) of unconsolidated
entities (21) 445 NMF 361 797 (54.7%) --- --- --- --- Consolidated
net income 20,615 28,086 (26.6%) 45,488 51,410 (11.5%) Net (income)
loss attributable to the noncontrolling interest (71) (87) (18.4%)
18 $(335) NMF --- --- -- ------ Net income attributable to
Morningstar, Inc. $20,544 $27,999 (26.6%) $45,506 $51,075 (10.9%)
======= ======= ======= ======= Net income per share attributable
to Morningstar, Inc: Basic $0.43 $0.61 (29.5%) $0.95 $1.12 (15.2%)
Diluted $0.41 $0.57 (28.1%) $0.92 $1.04 (11.5%) Weighted average
common shares outstanding: Basic 47,941 45,921 47,661 45,572
Diluted 49,631 49,290 49,385 49,150 Three months ended June 30 Six
months ended June 30 2009 2008 2009 2008 ---- ---- ---- ---- (1)
Includes stock-based compensation expense of: Cost of goods sold
$715 $528 $1,264 $964 Development 413 367 767 688 Sales and
marketing 422 379 778 724 General and administrative 1,518 1,695
2,984 3,337 ----- ----- ----- ----- Total stock-based compensation
expense $3,068 $2,969 $5,793 $5,713 ====== ====== ====== ====== NMF
- Not meaningful, pp - percentage points Morningstar, Inc. and
Subsidiaries Operating Expense as a Percentage of Revenue Three
months ended Six months ended June 30 June 30 2009 2008 change 2009
2008 change ---- ---- ------ ---- ---- ------ Revenue 100.0% 100.0%
- 100.0% 100.0% - Operating expense(1): Cost of goods sold 25.7%
25.1% 0.6pp 25.8% 25.7% 0.1pp Development 7.9% 7.4% 0.5pp 7.9% 7.7%
0.2pp Sales and marketing 15.1% 15.8% (0.7)pp 15.0% 16.7% (1.7)pp
General and administrative 16.6% 15.5% 1.1pp 15.7% 15.5% 0.2pp
Depreciation and amortization 7.4% 4.7% 2.7pp 7.1% 4.8% 2.3pp ---
--- --- --- Total operating expense(2) 72.7% 68.6% 4.1pp 71.5%
70.4% 1.1pp ---- ---- ---- ---- Operating margin 27.3% 31.4%
(4.1)pp 28.5% 29.6% (1.1)pp ==== ==== ==== ==== Three months ended
Six months ended June 30 June 30 2009 2008 change 2009 2008 change
---- ---- ------ ---- ---- ------ (1) Includes stock-based
compensation expense of: Cost of goods sold 0.6% 0.4% 0.2pp 0.5%
0.4% 0.1pp Development 0.3% 0.3% - 0.3% 0.3% - Sales and marketing
0.4% 0.3% 0.1pp 0.3% 0.3% - General and administrative 1.3% 1.3% -
1.3% 1.3% - --- --- --- --- Total stock-based compensation
expense(2) 2.6% 2.2% 0.4pp 2.5% 2.2% 0.3pp === === === === (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 Six months ended June
30 June 30 ($000) 2009 2008 2009 2008 ------ ---- ---- ---- ----
Operating activities Consolidated net income $20,615 $28,086
$45,488 $51,410 Adjustments to reconcile net income to net cash
flows from operating activities: Depreciation and amortization
8,850 6,276 16,716 12,433 Deferred income tax expense (benefit) 355
43 (956) 2,919 Stock-based compensation expense 3,068 2,969 5,793
5,713 Equity in net (income) loss of unconsolidated entities 21
(445) (361) (797) Excess tax benefits from stock option exercises
and vesting of restricted stock units (4,194) (11,376) (4,544)
(17,343) Other, net (1,197) (1,107) (565) (1,110) Changes in
operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 9,143 2,484 9,312 (3,222) Other assets (10) 121
341 (1,846) Accounts payable and accrued liabilities (1,901)
(1,773) (6,012) 997 Accrued compensation 9,608 13,040 (45,431)
(28,890) Deferred revenue (3,254) (2,449) 806 6,772 Income taxes -
current (986) 6,002 10,396 13,104 Deferred rent (130) 5,923 (286)
9,306 Other liabilities (399) (52) 570 (327) ---- --- --- ---- Cash
provided by operating activities 39,589 47,742 31,267 49,119
Investing activities Purchases of investments (27,870) (22,645)
(50,273) (46,946) Proceeds from sale of investments 21,376 38,262
38,128 82,213 Capital expenditures (2,178) (10,643) (6,768)
(17,354) Acquisitions, net of cash acquired (18,511) (115) (18,571)
(51,017) Other, net 531 - 629 - --- --- --- --- Cash provided by
(used for) investing activities (26,652) 4,859 (36,855) (33,104)
Financing activities Proceeds from stock option exercises 8,721
6,845 11,653 12,595 Excess tax benefits from stock option exercises
and vesting of restricted stock units 4,194 11,376 4,544 17,343
Other, net (2) (4) (178) (4) -- -- ---- -- Cash provided by
financing activities 12,913 18,217 16,019 29,934 Effect of exchange
rate changes on cash and cash equivalents 4,537 122 2,777 1,352
----- --- ----- ----- Net increase in cash and cash equivalents
30,387 70,940 13,208 47,301 Cash and cash equivalents - Beginning
of period 156,712 135,937 173,891 159,576 ------- ------- -------
------- Cash and cash equivalents - End of period $187,099 $206,877
$187,099 $206,877 ======== ======== ======== ========
Reconciliation from cash provided by operating activities to free
cash flow (a non-GAAP measure): Three months ended Six months ended
June 30 June 30 ($000) 2009 2008 2009 2008 ------ ---- ---- ----
---- Cash provided by operating activities $39,589 $47,742 $31,267
$49,119 Less: Capital expenditures (2,178) (10,643) (6,768)
(17,354) ------ ------- ------ ------- Free cash flow $37,411
$37,099 $24,499 $31,765 ======= ======= ======= =======
Morningstar, Inc. and Subsidiaries Unaudited Condensed Consolidated
Balance Sheets June 30, December 31, ($000) 2009 2008 ----- ----
---- Assets Current assets: Cash and cash equivalents $187,099
$173,891 Investments 136,096 123,686 Accounts receivable, net
84,146 89,537 Deferred tax asset, net 3,766 3,538 Income tax
receivable 3,261 9,193 Other 13,469 13,891 ------ ------ Total
current assets 427,837 413,736 Property and equipment, net 60,367
58,822 Investments in unconsolidated entities 20,150 20,404
Goodwill 207,113 187,242 Intangible assets, net 123,675 119,812
Other assets 3,683 3,924 ----- ----- Total assets $842,825 $803,940
======== ======== Liabilities and equity Current liabilities:
Accounts payable and accrued liabilities $27,949 $30,071 Accrued
compensation 27,100 73,012 Deferred revenue 133,997 130,270 Other
31 88 -- -- Total current liabilities 189,077 233,441 Accrued
compensation 4,449 3,611 Deferred tax liability, net 7,606 7,531
Other long-term liabilities 23,279 23,428 ------ ------ Total
liabilities 224,411 268,011 Total equity 618,414 535,929 -------
------- Total liabilities and equity $842,825 $803,940 ========
======== Morningstar, Inc. and Subsidiaries Segment Information
Three months ended June 30 Six months ended June 30 ($000) 2009
2008 change 2009 2008 change ------ ---- ---- ------ ---- ----
------ Revenue Investment Information $97,739 $101,580 (3.8%)
$193,979 $198,086 (2.1%) Investment Management 21,794 30,657
(28.9%) 42,286 59,595 (29.0%) ------ ------ ------ ------
Consolidated revenue $119,533 $132,237 (9.6%) $236,265 $257,681
(8.3%) ======= ======= ======= ======= Revenue - U.S. $89,286
$99,534 (10.3%) $177,434 $194,697 (8.9%) Revenue - International
$30,247 $32,703 (7.5%) $58,831 $62,984 (6.6%) Revenue-U.S.
(percentage of consolidated revenue) 74.7% 75.3% (0.6)pp 75.1%
75.6% (0.5)pp Revenue- International (percentage of consolidated
revenue) 25.3% 24.7% 0.6pp 24.9% 24.4% 0.5pp Operating income
(loss)(1) Investment Information $37,242 $38,697 (3.8%) $74,079
$71,985 2.9% Investment Management 13,062 17,496 (25.3%) 24,889
32,755 (24.0%) Intangible amortization and corporate depreciation
expense (7,560) (5,198) 45.4% (14,335) (10,268) 39.6% Corporate
unallocated (10,056) (9,425) 6.7% (17,320) (18,217) (4.9%) -------
------ ------- ------- Consolidated operating income $32,688
$41,570 (21.4%) $67,313 $76,255 (11.7%) ======= ======= =======
======= Operating margin(1) Investment Information 38.1% 38.1% -
38.2% 36.3% 1.9pp Investment Management 59.9% 57.1% 2.8pp 58.9%
55.0% 3.9pp Consolidated operating margin 27.3% 31.4%(4.1)pp 28.5%
29.6% (1.1)pp ------------------ (1) Includes stock-based
compensation expense allocated to each segment. Morningstar, Inc.
and Subsidiaries Supplemental Data As of June 30 2009 2008 % change
---- ---- -------- Our employees Worldwide headcount (approximate)
2,510 2,060 21.8% Number of U.S. stock analysts 96 103 (6.8%)
Number of worldwide stock analysts 119 132 (9.8%) Number of U.S.
fund analysts 27 22 22.7% Number of worldwide fund analysts 81 53
52.8% Our business Investment Information ----------------------
Morningstar.com Premium subscriptions 160,936 179,827 (10.5%)
Registered users for Morningstar.com (U.S.) 6,057,941 5,502,739
10.1% U.S. Advisor Workstation licenses 152,971 154,269 (1) (0.8%)
Principia subscriptions 38,378 45,219 (15.1%) Morningstar Direct
licenses 3,171 2,683 18.2% Investment Management
--------------------- Assets under management for Morningstar
Managed Portfolios $1.7 bil $2.1 bil (19.0%) Assets under
management for Intech(2) $2.7 bil - n/a Assets under management for
managed retirement accounts $12.5 bil $14.6 bil (14.4%) Morningstar
Associates $1.2 bil $1.2 bil 0.0% Ibbotson Associates $11.3 bil
$13.4 bil (15.7%) Assets under advisement for Investment Consulting
$56.1 bil $99.1 bil (43.4%) Morningstar Associates $17.5 bil $54.1
bil (67.7%) Ibbotson Associates $38.6 bil $45.0 bil (14.2%)
----------------------------- (1) Revised to exclude Site Builder
licenses. Beginning in 2009, Morningstar no longer includes the
Site Builder product as part of Advisor Workstation. The number of
Advisor Workstation licenses reported in 2008 has been adjusted to
reflect this change. (2) Intech (Australia) was acquired on June
30, 2009. Three months ended Six months ended June 30 June 30
($000) 2009 2008 2009 2008 ------ ---- ---- ---- ---- Effective
income tax expense rate Income before income taxes and equity in
net income (loss) of unconsolidated entities $34,660 $42,717
$69,819 $79,193 Equity in net income (loss) of unconsolidated
entities (21) 445 361 797 Net (income) loss attributable to the
noncontrolling interest (71) (87) 18 (335) --- --- -- ---- Total
$34,568 $43,075 $70,198 $79,655 ======= ======= ======= =======
Income tax expense $14,024 $15,076 $24,692 $28,580 Effective income
tax expense rate 40.6% 35.0% 35.2% 35.9% Morningstar, Inc. and
Subsidiaries Reconciliations of Non-GAAP Measures with the Nearest
Comparable GAAP Measures 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) 2009 2008 % change 2009 2008 % change ---- ---- --------
---- ---- -------- Consolidated revenue $119,533 $132,237 (9.6%)
$236,265 $257,681 (8.3%) Less: acquisitions (6,732) - NMF (12,660)
- NMF Unfavorable impact of foreign currency 5,031 - NMF 10,728 -
NMF ----- --- ------ --- Revenue excluding acquisitions and foreign
currency translations $117,832 $132,237 (10.9%) $234,333 $257,681
(9.1%) ======== ======== ======== ======== Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations: Three months ended
June 30 Six months ended June 30 ($000) 2009 2008 % change 2009
2008 % change ----- ---- ---- -------- ---- ---- --------
International revenue $30,247 $32,703 (7.5%) $58,831 $62,984 (6.6%)
Less: acquisitions (4,902) - NMF (8,854) - NMF Unfavorable impact
of foreign currency 5,031 - NMF 10,728 - NMF ----- --- ------ ---
International revenue excluding acquisitions and foreign currency
translations $30,376 $32,703 (7.1%) $60,705 $62,984 (3.6%) =======
======= ======= ======= Morningstar includes an acquired operation
as part of revenue from acquisitions for 12 months after we
complete the acquisition. After that, we include it as part of our
organic revenue. The table below shows the period in which we
included each acquired operation in revenue from acquisitions:
Acquisition 2009 Revenue from Acquisitions ------------
------------------------------ Hemscott data, media, and investor
relations Web site businesses January 1 through January 8, 2009
Financial Computer Support, Inc. January 1 through June 30, 2009
Fundamental Data Limited January 1 through June 30, 2009 10-K
Wizard Technology, LLC January 1 through June 30, 2009 Tenfore
Systems Limited January 1 through June 30, 2009 InvestData
(Proprietary) Limited January 1 through June 30, 2009 Global
financial filings database business of Global Reports LLC April 20
through June 30, 2009 Equity research and data business of C.P.M.S.
Computerized Portfolio Management Services Inc. May 1 through June
30, 2009 Andex Associates, Inc. May 1 through June 30, 2009
Contact: Media: Margaret Kirch Cohen, 312-696-6383 or Investors may
submit questions to or by fax to 312-696-6009. MORN-E DATASOURCE:
Morningstar, Inc. CONTACT: Media, Margaret Kirch Cohen,
+1-312-696-6383, , Investors may submit questions to , fax,
+1-312-696-6009. Web Site: http://www.morningstar.com/
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