CHICAGO, Oct. 29 /PRNewswire-FirstCall/ -- Morningstar, Inc.
(NASDAQ: MORN), a leading provider of independent investment
research, today announced its third-quarter 2009 financial results.
The company reported consolidated revenue of $120.1 million in the
third quarter of 2009, a 4.3% decrease from $125.5 million in the
third quarter of 2008. Consolidated operating income was $33.7
million in the third quarter of 2009, a decrease of 1.4% compared
with $34.2 million in the same period a year ago. Net income was
$22.5 million in the third quarter of 2009, or 45 cents per diluted
share, compared with $22.2 million, or 45 cents per diluted share,
in the third quarter of 2008. Excluding acquisitions and the impact
of foreign currency translations, revenue declined 10.2% in the
third quarter of 2009. Third-quarter results included $9.3 million
in revenue from acquisitions. Foreign currency translations had an
unfavorable impact of $2.0 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. In the first nine months of 2009, revenue
was $356.4 million, a decline of 7.0% compared with $383.2 million
in the same period in 2008. Revenue for the first nine months of
the year included $22.0 million from acquisitions, which was
partially offset by an unfavorable foreign currency impact of $12.7
million. Consolidated operating income declined 8.5% to $101.0
million in the first nine months of 2009, compared with $110.4
million in the first nine months of 2008. Net income was $68.0
million, or $1.37 per diluted share, in the first nine months of
2009, down from $73.3 million, or $1.49 per diluted share, in the
same period in 2008. Joe Mansueto, chairman and chief executive
officer of Morningstar, said, "Our organic revenue declined about
10% year over year, which was in line with the second quarter. The
two biggest drivers of the revenue decline were Investment
Consulting and the end of the Global Analyst Research Settlement
period. We had about $1.5 million in GARS-related revenue during
the quarter versus $5.5 million in the same period last year.
Foreign currency translations also negatively impacted revenue, but
to a lesser extent than in previous quarters. Still, we're pleased
with our relative performance considering the tough business
environment this year." Mansueto added, "During the quarter, we
added several important enhancements to our latest edition of
Morningstar Direct. This is our flagship investment research
platform for institutions, a product that is experiencing healthy
growth. Our fund research team also introduced target-date fund
series ratings and research. This supports one of our key growth
strategies, which is to continue building thought leadership in
independent investment research. International revenue continues to
increase as a percentage of our consolidated revenue, rising about
13%, including about $8.0 million from acquisitions. Operating
margin rose slightly in the third quarter, mainly because of
cost-savings initiatives implemented earlier this year. We
generated free cash flow of $32.5 million during the quarter,
ending the period with $362.2 million in cash and investments and
no bank debt." 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 operate as registered
investment advisors and earn more than half of their revenue from
asset-based fees. Revenue: In the third quarter of 2009, revenue in
the Investment Information segment was $95.4 million, a decline of
1.7% compared with the third quarter of 2008; approximately $7.6
million of this revenue came from acquisitions. Revenue in the
Investment Management segment was down 13.2% to $24.7 million, with
approximately $1.7 million from acquisitions. Investment Consulting
was the main factor behind the decrease, primarily because, as
previously disclosed, two clients did not renew their contracts in
the fall of 2008 and May 2009, respectively. Assets under
advisement declined to $68.2 billion as of Sept. 30, 2009 from
$85.2 billion as of Sept. 30, 2008. Revenue from international
operations was $34.5 million in the third quarter of 2009, an
increase of 12.9% from the same period a year ago. International
revenue included $7.9 million from acquisitions, which was slightly
offset by a $2.0 million negative impact from foreign currency
translations. Excluding acquisitions and foreign currency
translations, international revenue declined 6.4% in the third
quarter. For the first nine months of 2009, international revenue
was $93.4 million, including $16.7 million in revenue from
acquisitions. Foreign currency translations had an unfavorable
impact of $12.7 million. Excluding acquisitions and foreign
currency translations, international revenue declined 4.5% from the
same period a year ago. 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 $33.7 million in the third quarter of 2009, a 1.4%
decrease from the same period in 2008. Operating expense declined
$4.9 million, or 5.4%, in the third quarter of 2009 as the positive
impact of cost-savings initiatives was partially offset by
incremental expense from recent acquisitions. Bonus expense
decreased $8.0 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 significant reduction in bonus expense also
reflects a slowdown in 2009 financial performance compared with
2008. Earlier this year, 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 2,490 employees worldwide as of Sept.
30, 2009, compared with 2,510 as of June 30, 2009, and 2,250 as of
Sept. 30, 2008. Headcount grew year over year because the company
added approximately 170 employees through acquisitions and also
continued hiring for its development center in China. The company
also reduced discretionary spending in travel, advertising,
marketing, and data purchases to align costs with the lower
revenue. In addition, the company revised the preliminary purchase
price allocations related to recent acquisitions during the
quarter, resulting in a $1.7 million reduction of previously
recorded intangible amortization expense. Partially offsetting
these reductions were additional costs related to acquisitions.
Morningstar completed five acquisitions in the second half of 2008
and four acquisitions in the first nine months of 2009. Because of
the timing of these acquisitions, third-quarter 2009 results
include operating expense that did not exist in the third quarter
of 2008. In addition, Morningstar recorded an expense of $2.4
million to increase its liability for vacant office space,
primarily for the former Ibbotson headquarters. The company is
anticipating lower sublease income and expects it will take more
time to find a tenant than previously estimated. The company's
operating margin was 28.0% in the third quarter of 2009, compared
with 27.2% in the same period in 2008. Operating margin rose
slightly in the third quarter, primarily because of the favorable
impact of cost-savings initiatives. In the first nine months of
2009, operating margin was 28.3%, compared with 28.8% in the first
nine months of 2008. The margin decline is the result of a $3.5
million operating expense recorded in the second quarter of 2009
for estimated penalties related to the timing of deposits for taxes
withheld on stock option exercises, partially offset by
cost-savings initiatives. Effective Tax Rate: Morningstar's
effective tax rate was approximately 35% in the quarter and
year-to-date periods, a decrease of 2.4 percentage points and 1.2
percentage points, respectively, compared with the prior-year
periods. The lower effective tax rate reflects the use of $2.1
million in tax credits from previous years, favorably impacting the
tax rate by approximately 6 percentage points in the quarter and 2
percentage points year to date. The 2009 year-to-date effective tax
rate also reflects the favorable effect of reversing approximately
$2.2 million in reserves for uncertain tax positions, of which $1.4
million occurred in the first quarter. These items were partially
offset by the impact of the non-deductible deposit penalty expense,
which increased the year-to-date effective tax rate by
approximately 1.3 percentage points, and the impact of foreign
taxes. Free Cash Flow: Morningstar generated free cash flow of
$32.5 million in the third quarter of 2009, reflecting cash
provided by operating activities of $36.1 million and $3.5 million
of capital expenditures. Cash flow from operating activities
decreased $13.1 million in the third quarter of 2009, compared with
the prior-year period. A lower cash flow benefit from accrued
compensation and income taxes contributed to the decline in
operating cash flow. In the third quarter of 2008, operating cash
flow included a $2.1 million benefit from tenant improvement
allowances related to the construction of the company's new
corporate headquarters. This benefit did not recur in the third
quarter of 2009. 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 $3.5 million in the quarter, primarily reflecting lower
average stock prices when employees exercised stock options and a
reduction in the number of options exercised. Capital expenditures
decreased $8.4 million for the quarter and $19.0 million for the
first nine months of the year. Capital expenditures were higher in
2008 mainly because of the timing of payments for construction of
Morningstar's new corporate headquarters. In the first nine months
of 2009, Morningstar generated free cash flow of $57.0 million,
reflecting cash provided by operating activities of $67.3 million
and capital expenditures of $10.3 million. Cash flow from
operations in the first nine months of 2009 decreased $31.1 million
from the prior-year period, reflecting lower cash flow benefits
from accrued compensation and income taxes, a reduction in tenant
improvement allowances of $11.8 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 $16.3 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 Sept. 30,
2009, Morningstar had cash, cash equivalents, and investments of
$362.2 million, compared with $309.6 million as of Sept. 30, 2008,
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 $95.4
million in the third quarter of 2009, down 1.7% from $97.1 million
in the third quarter of 2008. Acquisitions contributed revenue of
$7.6 million to the Investment Information segment in the third
quarter of 2009, offsetting the revenue decline by 7.9 percentage
points. -- The Global Analyst Research Settlement (GARS) expired in
late July 2009. Revenue associated with GARS was $1.5 million in
the third quarter of 2009, compared with $5.5 million in the same
period a year ago. Morningstar has entered into new equity research
contracts with two of the banks that were clients under GARS;
however, these contracts only represent about 10% of the previous
annual GARS revenue. The company is also continuing to provide
broad equity coverage to individual investors, financial advisors,
and institutions through a variety of other channels. -- The U.S.
version of Morningstar.com, which includes Internet advertising
sales and Premium membership subscriptions, was the second largest
factor behind the revenue decline in this segment. Premium
subscriptions for Morningstar.com in the United States fell 13% to
155,200. Lower revenue from Principia also contributed to the
decline, with subscriptions down about 14% to 37,365. These
declines were partially offset by revenue growth for Morningstar
Direct, with licenses increasing 17% to 3,329. Advisor Workstation
licenses were essentially flat year over year at 153,603. --
Operating income was $33.3 million in the third quarter of 2009,
compared with $33.6 million in the same period in 2008. Operating
expense in this segment decreased $1.4 million, or 2.2%, primarily
because of the bonus expense reduction, partially offset by
additional costs from acquisitions. -- Operating margin was 34.9%
in the third quarter of 2009, compared with 34.6% in the prior-year
period, as the impact of lower bonus expense as a percentage of
revenue was offset by additional expense from 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 $24.7 million in the third quarter of 2009, a 13.2% decrease
from $28.4 million in the same period in 2008. The Intech
acquisition in Australia contributed revenue of $1.7 million to
this segment in the third quarter of 2009. The majority of the
revenue decline was driven by Investment Consulting, which suffered
because one client did not renew its contract when it expired in
the fourth quarter of 2008 and another client did not renew its
contract in May 2009. -- Assets under advisement for Investment
Consulting declined to $68.2 billion as of Sept. 30, 2009, compared
with $85.2 billion as of Sept. 30, 2008. The majority of the asset
decline reflects the two client non-renewals, partially offset by
net inflows and new client wins for Ibbotson Associates, as well as
positive market performance in 2009. Assets under management for
Retirement Advice were $14.6 billion as of Sept. 30, 2009, compared
with $13.5 billion as of Sept. 30, 2008. Assets under management
for Morningstar® Managed Portfolios(SM) were $1.9 billion as of
Sept. 30, 2009, unchanged from Sept. 30, 2008. -- Operating income
was $14.4 million in the third quarter of 2009, a decrease of 10.9%
compared with the third quarter of 2008. Operating expense in the
segment decreased $2.0 million, or 16.2%, primarily because of
lower bonus expense. These expense reductions were partially offset
by additional operating expense from the Intech acquisition. --
Operating margin was 58.3% in the third quarter of 2009, compared
with 56.8% in the prior-year period. Lower bonus expense as a
percentage of revenue was the primary reason for the margin
improvement, but was partially offset by the Intech acquisition.
Intangible Amortization and Corporate Depreciation Expense:
Morningstar does not allocate expense for intangible amortization
related to acquisitions or corporate depreciation to its operating
segments. Intangible amortization and corporate depreciation
expense was $5.0 million in the third quarter of 2009 and reflects
a $1.7 million reduction of previously recorded intangible
amortization expense. Intangible amortization and depreciation
expense for corporate departments in the first nine months of 2009
was $19.4 million, an increase of $4.0 million, or 25.6%, compared
with the prior-year period. 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. Costs in this category for
the third quarter of 2009 were $9.0 million, a decrease of $1.4
million, or 13.8%, compared with the prior-year period, primarily
reflecting lower bonus and other compensation-related expense,
partially offset by the $2.4 million expense for vacant office
space. Corporate unallocated costs for the first nine months of
2009 were $26.3 million, a decrease of $2.3 million, or 8.2%,
compared with the first nine months of 2008. The decrease primarily
reflects lower bonus and other compensation-related expense,
partially offset by the expense for vacant office space recorded in
the third quarter and a $3.5 million operating expense related to
the estimated deposit penalty recorded in the second quarter. 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 more than 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 20 countries and minority ownership positions in companies based
in two 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.
Contacts: Media: Margaret Kirch Cohen, 312-696-6383 or Investors
may submit questions to or by fax to 312-696-6009. ©2009
Morningstar, Inc. All rights reserved. MORN-E Morningstar, Inc. and
Subsidiaries Unaudited Condensed Consolidated Statements of Income
Three months ended Nine months ended September 30 September 30 (in
thousands, except per share amounts) 2009 2008 change 2009 2008
change ----------------- ---- ---- ------ ---- ---- ------ Revenue
$120,088 $125,505 (4.3%) $356,353 $383,186 (7.0%) Operating
Expense(1): Cost of goods sold 31,954 32,828 (2.7%) 92,900 98,930
(6.1%) Development 9,447 10,271 (8.0%) 28,185 30,187 (6.6%) Sales
and marketing 17,730 19,457 (8.9%) 53,276 62,547 (14.8%) General
and administrative 20,643 22,507 (8.3%) 57,649 62,392 (7.6%)
Depreciation and amortization 6,631 6,266 5.8% 23,347 18,699 24.9%
----- ----- ------ ------ Total operating expense 86,405 91,329
(5.4%) 255,357 272,755 (6.4%) ------ ------ ------- -------
Operating income 33,683 34,176 (1.4%) 100,996 110,431 (8.5%)
Operating margin 28.0% 27.2% 0.8pp 28.3% 28.8% (0.5)pp
Non-operating income (expense): Interest income, net 572 1,568
(63.5%) 2,314 4,468 (48.2%) Other income (expense), net 221 (241)
NMF 985 (203) NMF --- ---- --- ---- Non- operating income, net 793
1,327 (40.2%) 3,299 4,265 (22.6%) --- ----- ----- ----- Income
before income taxes and equity in net income of unconsolidated
entities 34,476 35,503 (2.9%) 104,295 114,696 (9.1%) Income tax
expense 12,407 13,547 (8.4%) 37,099 42,127 (11.9%) Equity in net
income of unconsolidated entities 429 268 60.1% 790 1,065 (25.8%)
--- --- --- ----- Consolidated net income 22,498 22,224 1.2% 67,986
73,634 (7.7%) Net (income) loss attributable to noncontrolling
interests 22 (37) NMF 40 (372) NMF --- --- --- ---- Net income
attributable to Morningstar, Inc. $22,520 $22,187 1.5% $68,026
$73,262 (7.1%) ======= ======= ======= ======= Net income per share
attributable to Morningstar, Inc: Basic $0.46 $0.48 (4.2%) $1.42
$1.60 (11.3%) Diluted $0.45 $0.45 - $1.37 $1.49 (8.1%) Weighted
average common shares outstanding: Basic 48,457 46,499 47,930
45,883 Diluted 50,048 49,421 49,623 49,221 Three months ended Nine
months ended September 30 September 30 2009 2008 2009 2008 ----
---- ---- ---- (1) Includes stock-based compensation expense of:
Cost of goods sold $690 $547 $1,954 $1,511 Development 410 359
1,177 1,047 Sales and marketing 407 366 1,185 1,090 General and
administrative 1,356 1,546 4,340 4,883 ----- ----- ----- -----
Total stock- based compensation expense $2,863 $2,818 $8,656 $8,531
====== ====== ====== ====== NMF - Not meaningful, pp - percentage
points Morningstar, Inc. and Subsidiaries Operating Expense as a
Percentage of Revenue Three months ended Nine months ended
September 30 September 30 2009 2008 change 2009 2008 change ----
---- ------ ---- ---- ------ Revenue 100.0% 100.0% - 100.0% 100.0%
- Operating expense(1): Cost of goods sold 26.6% 26.2% 0.4pp 26.1%
25.8% 0.3pp Development 7.9% 8.2% (0.3)pp 7.9% 7.9% - Sales and
marketing 14.8% 15.5% (0.7)pp 15.0% 16.3% (1.3)pp General and
administrative 17.2% 17.9% (0.7)pp 16.2% 16.3% (0.1)pp Depreciation
and amortization 5.5% 5.0% 0.5pp 6.6% 4.9% 1.7pp --- --- --- ---
Total operating expense(2) 72.0% 72.8% (0.8)pp 71.7% 71.2% 0.5pp
---- ---- ---- ---- Operating margin 28.0% 27.2% 0.8pp 28.3% 28.8%
(0.5)pp ==== ==== ==== ==== Three months ended Nine months ended
September 30 September 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 0.3% 0.3% -
0.3% 0.3% - General and administrative 1.1% 1.2% (0.1)pp 1.2% 1.3%
(0.1)pp --- --- --- --- Total stock-based compensation expense(2)
2.4% 2.2% 0.2pp 2.4% 2.2% 0.2pp === === === === (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 Nine months ended September 30
September 30 ($000) 2009 2008 2009 2008 ----- ---- ---- ---- ----
Operating activities Consolidated net income $22,498 $22,224
$67,986 $73,634 Adjustments to reconcile net income to net cash
flows from operating activities: Depreciation and amortization
6,631 6,266 23,347 18,699 Deferred income tax expense (benefit) 109
(1,637) (847) 1,282 Stock-based compensation expense 2,863 2,818
8,656 8,531 Equity in net income of unconsolidated entities (429)
(268) (790) (1,065) Excess tax benefits from stock option exercises
and vesting of restricted stock units (1,180) (4,700) (5,724)
(22,043) Other, net (61) 319 (626) (791) Changes in operating
assets and liabilities, net of effects of acquisitions: Accounts
receivable 4,209 3,043 13,521 (179) Other assets 1,865 (1,614)
2,206 (3,460) Accounts payable and accrued liabilities 4,005 431
(2,007) 1,428 Accrued compensation 3,637 14,369 (41,794) (14,521)
Deferred revenue (9,780) (8,407) (8,974) (1,635) Income taxes -
current 2,603 14,003 12,999 27,107 Deferred rent (67) 2,093 (353)
11,399 Other liabilities (837) 305 (267) (22) ---- --- ---- ---
Cash provided by operating activities 36,066 49,245 67,333 98,364
Investing activities Purchases of investments (61,330) (24,915)
(111,603) (71,861) Proceeds from sale of investments 26,351 13,580
64,479 95,793 Capital expenditures (3,518) (11,936) (10,286)
(29,290) Acquisitions, net of cash acquired (744) (4,964) (19,315)
(55,981) Other, net (6) - 623 - --- --- --- --- Cash used for
investing activities (39,247) (28,235) (76,102) (61,339) Financing
activities Proceeds from stock option exercises 2,725 4,687 14,378
17,282 Excess tax benefits from stock option exercises and vesting
of restricted stock units 1,180 4,700 5,724 22,043 Other, net (127)
1 (305) (3) ---- --- ---- --- Cash provided by financing activities
3,778 9,388 19,797 39,322 Effect of exchange rate changes on cash
and cash equivalents 1,704 (3,660) 4,481 (2,308) ----- ------ -----
------ Net increase in cash and cash equivalents 2,301 26,738
15,509 74,039 Cash and cash equivalents - Beginning of period
187,099 206,877 173,891 159,576 ------- ------- ------- -------
Cash and cash equivalents - End of period $189,400 $233,615
$189,400 $233,615 ======== ======== ======== ========
Reconciliation from cash provided by operating activities to free
cash flow (a non-GAAP measure): Three months ended Nine months
ended September 30 September 30 ($000) 2009 2008 2009 2008 -----
---- ---- ---- ---- Cash provided by operating activities $36,066
$49,245 $67,333 $98,364 Less: Capital expenditures (3,518) (11,936)
(10,286) (29,290) ------ ------- ------- ------- Free cash flow
$32,548 $37,309 $57,047 $69,074 ======= ======= ======= =======
Morningstar, Inc. and Subsidiaries Unaudited Condensed Consolidated
Balance Sheets September 30 December 31 ($000) 2009 2008 ----- ----
---- Assets Current assets: Cash and cash equivalents $189,400
$173,891 Investments 172,835 123,686 Accounts receivable, net
80,428 89,537 Deferred tax asset, net 5,542 3,538 Income tax
receivable, net 1,757 9,193 Other 12,534 13,891 ------ ------ Total
current assets 462,496 413,736 Property and equipment, net 60,751
58,822 Investments in unconsolidated entities 20,266 20,404
Goodwill 217,105 187,242 Intangible assets, net 113,612 119,812
Other assets 4,748 3,924 ----- ----- Total assets $878,978 $803,940
======== ======== Liabilities and equity Current liabilities:
Accounts payable and accrued liabilities $30,517 $30,071 Accrued
compensation 33,727 73,012 Deferred revenue 125,504 130,270 Other 6
88 --- --- Total current liabilities 189,754 233,441 Accrued
compensation 4,551 3,611 Deferred tax liability, net 7,310 7,531
Other long-term liabilities 24,778 23,428 ------ ------ Total
liabilities 226,393 268,011 Total equity 652,585 535,929 -------
------- Total liabilities and equity $878,978 $803,940 ========
======== Morningstar, Inc. and Subsidiaries Segment Information
Three months ended Nine months ended September 30 September 30
($000) 2009 2008 change 2009 2008 change ----- ---- ---- ------
---- ---- ------ Revenue Investment Information $95,410 $97,075
(1.7%) $289,389 $295,161 (2.0%) Investment Management 24,678 28,430
(13.2%) 66,964 88,025 (23.9%) ------ ------ ------ ------
Consolidated revenue $120,088 $125,505 (4.3%) $356,353 $383,186
(7.0%) ======== ======== ======== ======== Revenue - U.S. $85,548
$94,924 (9.9%) $262,982 $289,621 (9.2%) Revenue - International
$34,540 $30,581 12.9% $93,371 $93,565 (0.2%) Revenue-U.S.
(percentage of consolidated revenue) 71.2% 75.6% (4.4)pp 73.8%
75.6% (1.8)pp Revenue- International (percentage of consolidated
revenue) 28.8% 24.4% 4.4pp 26.2% 24.4% 1.8pp Operating income
(loss)(1) Investment Information $33,298 $33,595 (0.9%) $107,377
$105,580 1.7% Investment Management 14,391 16,149 (10.9%) 39,280
48,904 (19.7%) Intangible amortization and corporate depreciation
expense (5,022) (5,144) (2.4%) (19,357) (15,412) 25.6% Corporate
unallocated (8,984) (10,424) (13.8%) (26,304) (28,641) (8.2%)
------ ------- ------- ------- Consolidated operating income
$33,683 $34,176 (1.4%) $100,996 $110,431 (8.5%) ======= =======
======== ======== Operating margin(1) Investment Information 34.9%
34.6% 0.3pp 37.1% 35.8% 1.3pp Investment Management 58.3% 56.8%
1.5pp 58.7% 55.6% 3.1pp Consolidated operating margin 28.0% 27.2%
0.8pp 28.3% 28.8% (0.5)pp ------- (1) Includes stock-based
compensation expense allocated to each segment. Morningstar, Inc.
and Subsidiaries Supplemental Data As of September 30 2009 2008 %
change --- ---- ---- -------- Our employees Worldwide headcount
(approximate) 2,490 2,250 10.7% Number of U.S. stock analysts 90
103 (12.6%) Number of worldwide stock analysts 111 133 (16.5%)
Number of U.S. fund analysts 28 28 - Number of worldwide fund
analysts 83 81 2.5% Our business Investment Information
---------------------- Morningstar.com Premium subscriptions
155,200 178,355 (13.0%) Registered users for Morningstar.com (U.S.)
6,131,977 5,590,862 9.7% U.S. Advisor Workstation licenses 153,603
153,398(1) 0.1% Principia subscriptions 37,365 43,660 (14.4%)
Morningstar Direct licenses 3,329 2,843 17.1% Investment Management
--------------------- Assets under management for Morningstar
Managed Portfolios $1.9 bil $1.9 bil - Assets under management for
Intech(2) $3.3 bil - - Assets under management for managed
retirement accounts $14.6 bil $13.5 bil 8.1% Morningstar Associates
$1.4 bil $1.2 bil 16.7% Ibbotson Associates $13.2 bil $12.3 bil
7.3% Assets under advisement for Investment Consulting $68.2 bil
$85.2 bil (20.0%) Morningstar Associates $20.2 bil $43.0 bil
(53.0%) Ibbotson Associates $48.0 bil $42.2 bil 13.7% --- (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
Nine months ended September 30 September 30 ($000) 2009 2008 2009
2008 ----- ---- ---- ---- ---- Effective tax rate Income before
income taxes and equity in net income of unconsolidated entities
$34,476 $35,503 $104,295 $114,696 Equity in net income of
unconsolidated entities 429 268 790 1,065 Net (income) loss
attributable to noncontrolling interests 22 (37) 40 (372) --- ---
--- ---- Total $34,927 $35,734 $105,125 $115,389 ======= =======
======== ======== Income tax expense $12,407 $13,547 $37,099
$42,127 Effective tax rate 35.5% 37.9% 35.3% 36.5% 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 Nine months
ended September 30 September 30 ($000) 2009 2008 % change 2009 2008
% change ----- ---- ---- -------- ---- ---- --------- Consolidated
revenue $120,088 $125,505 (4.3%) $356,353 $383,186 (7.0%) Less:
acquisitions (9,342) - NMF (22,002) - NMF Unfavorable impact of
foreign currency 1,969 - NMF 12,697 - NMF Revenue excluding
acquisitions and foreign currency -------- -------- --------
-------- translations $112,715 $125,505 (10.2%) $347,048 $383,186
(9.4%) ======== ======== ======== ======== Reconciliation from
international revenue to international revenue excluding
acquisitions and foreign currency translations: Three months ended
Nine months ended September 30 September 30 ($000) 2009 2008 %
change 2009 2008 % change ----- ---- ---- -------- ---- ----
-------- International revenue $34,540 $30,581 12.9% $93,371
$93,565 (0.2%) Less: acquisitions (7,888) - NMF (16,742) - NMF
Unfavorable impact of foreign currency 1,969 - NMF 12,697 - NMF
International revenue excluding acquisitions and foreign -------
------- ------- ------- currency translations $28,621 $30,581
(6.4%) $89,326 $93,565 (4.5%) ======= ======= ======= =======
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 September 1, 2009 Fundamental Data Limited January 1
through September 30, 2009 10-K Wizard Technology, LLC January 1
through September 30, 2009 Tenfore Systems Limited January 1
through September 30, 2009 InvestData (Proprietary) Limited January
1 through September 30, 2009 Global financial filings database
business of Global Reports LLC April 20 through September 30, 2009
Equity research and data business of C.P.M.S. Computerized
Portfolio Management Services Inc. May 1 through September 30, 2009
Andex Associates, Inc. May 1 through September 30, 2009 Intech Pty
Ltd June 30 through September 30, 2009 Morningstar Korea Co., Ltd.
September 10 through September 30, 2009 DATASOURCE: Morningstar,
Inc. CONTACT: Margaret Kirch Cohen of Morningstar, Inc.,
+1-312-696-6383, Web Site: http://www.morningstar.com/
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