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Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2012 Financial Results

CHICAGO, Feb. 13, 2013 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its fourth-quarter and full-year 2012 financial results. The company reported consolidated revenue of $170.6 million in the fourth quarter of 2012, a 7.6% increase from $158.6 million in the fourth quarter of 2011. Consolidated operating income was $39.3 million in the fourth quarter of 2012, an increase of 15.0% compared with $34.1 million in the same period a year ago. Net income from continuing operations was $27.8 million, or 58 cents per diluted share, in the fourth quarter of 2012, compared with $28.0 million, or 55 cents per diluted share, in the fourth quarter of 2011.

Excluding acquisitions, divestitures, and foreign currency translations, revenue rose 8.1% in the fourth quarter of 2012. Revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.

For the year ended Dec. 31, 2012, consolidated revenue was $658.3 million, an increase of 4.3% compared with $631.4 million in 2011. Consolidated operating income was $150.7 million in 2012, an increase of 8.9% compared with $138.4 million in 2011. Net income from continuing operations was $102.9 million, or $2.10 per diluted share, in 2012, compared with $98.4 million, or $1.92 per diluted share, in 2011.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, "We're encouraged by the improving trends we saw in the fourth quarter of 2012. Organic revenue rose 8% amid an uncertain market environment. For the full year, organic revenue increased 5%. Morningstar Direct and Morningstar Data were the main drivers of organic growth for the year. We did a good job of controlling expenses, and operating margin was slightly higher year over year. We also returned $277.3 million to shareholders through dividends and stock buybacks, while maintaining our strong balance sheet."

Mansueto outlined some of the company's key accomplishments and challenges in 2012:

Accomplishments:

  • We simplified and streamlined our operations and products to focus on our core offerings. We divested several small business lines, migrated some products to Morningstar Direct, and discontinued some print and online publications. We're closing our offshore data and development center in New Delhi, India and moving the operations to our facility in Mumbai.
  • We made good progress in 2012 toward our goal of transitioning our core research platforms for institutions and advisors to our next-generation software that is more intuitive and easy to use. This will be a multi-year process, but much of the design work is complete, and we've begun development. We plan to roll out the first components of this software with Morningstar Direct, our flagship institutional research platform.
  • Our global fund analysts produced qualitative ratings for 3,425 funds, an increase of more than 40% compared with 2011. We launched Analyst Ratings and Global Fund Reports for alternative funds as well as analyst coverage of industry superannuation funds in Australia, ETFs in Hong Kong, and closed-end funds in the UK. Six of our equity research analysts were again named to The Wall Street Journal's Best on the Street list. Our equity and credit analysts launched municipal bond research.
  • Our equity and market data is gaining traction. Microsoft selected our investment data for the Bing Finance app on Windows 8.
  • The Financial Analysts Journal published Morningstar Investment Management's paper, "The Liquidity Style of Mutual Funds," and our researchers wrote a ground-breaking research paper titled "Alpha, Beta, and Now Gamma" that quantifies how much extra retirement income investors can receive by making better financial planning decisions.
  • Morningstar Managed Portfolios had a strong year with assets under management rising more than 50% to $4.7 billion.

Challenges:

  • Firms that offer variable annuities are having tough times, mainly because of record low interest rates and high hedging costs caused by market volatility. As previously announced, our largest client in the Investment Management segment began managing several fund-of-funds portfolios in-house. We recognized $3.8 million in associated revenue in 2012, down from $12.4 million in 2011.
  • The investment industry continues to face challenges as assets flow to passive and fixed-income products. Low interest rates and investor uncertainty also continue to put pressure on margins, and our clients remain cautious about spending. Amid this backdrop, we did a good job of controlling costs, particularly in bonuses, travel, hiring, and advertising.
  • Individual investors are still careful about their investment research spending. Our U.S. Premium Membership subscriptions were 5% lower this year and Internet advertising revenue fell 4%.

International Operations: Revenue from international operations was $50.1 million in the fourth quarter of 2012, an increase of 7.8% from the same period a year ago. Foreign currency translations increased international revenue by $0.3 million. Excluding acquisitions, divestitures, and foreign currency translations, international revenue rose 9.4%.

For the full year, international revenue increased $6.4 million, or 3.5%. Excluding acquisitions, divestitures, and foreign currency translations, international revenue was up 6.5%. International revenue excluding acquisitions, divestitures, 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 $39.3 million in the fourth quarter of 2012, a 15.0% increase from the same period in 2011. Operating expense rose $6.9 million, or 5.5%, in the fourth quarter of 2012. For the full year, consolidated operating income rose 8.9% to $150.7 million compared with $138.4 million in 2011. Operating expense rose $14.6 million, or 3.0%, in 2012.

The largest factor behind the operating expense increase in the fourth quarter was $3.2 million of additional stock-based compensation expense for accelerated vesting of restricted stock issued to a former executive in the structured credit research unit when Morningstar acquired the business. Salary expense rose about $1.9 million, or 3.3%, in the fourth quarter of 2012, but lower travel and bonus expense partially offset this increase. Morningstar reviews and updates its bonus expense quarterly based primarily on its expectations for full-year operating income versus budget.

Operating margin was 23.0% in the fourth quarter of 2012, up from 21.5% in the same period in 2011. For the full year, operating margin was 22.9%, compared with 21.9% in 2011. Lower bonus expense as a percentage of revenue had a favorable effect on margins of 1.3 percentage points both in the fourth quarter and full year of 2012.

Morningstar had approximately 3,495 employees worldwide as of Dec. 31, 2012, compared with 3,465 as of Dec. 31, 2011.  

Non-Operating Income (Expense): In the fourth quarter of 2012, the company sold its investment in Bundle Corporation and recorded a loss of $2.0 million. Morningstar previously accounted for this investment using the cost method.

Effective Tax Rate: Morningstar's effective tax rate in the fourth quarter of 2012 was 29.2%, compared with 22.4% in the same period in 2011. For the full year, the company's effective tax rate was 33.9% compared with 30.7% in 2011. The year-over-year increase primarily reflects lower tax credits and incentives in the current year, as well as certain deferred income tax benefits recorded in 2011. In the fourth quarter, these factors were partially offset by lower valuation allowances.

Gain on Sale of Discontinued Operations: Morningstar recorded a gain of $5.2 million, net of tax, on the sale of its investor relations services business and the Morningstar Australasia trade publishing business. The gain increased earnings per share by $0.11 and $0.10 in the quarter and full-year period, respectively.

Free Cash Flow: Morningstar generated free cash flow of $46.5 million in the fourth quarter of 2012, reflecting cash provided by operating activities of $53.7 million and $7.2 million of capital expenditures. Free cash flow declined by $3.5 million compared with the fourth quarter of 2011 as cash provided by operating activities was down $5.0 million and capital expenditures declined $1.5 million.

In 2012, Morningstar generated free cash flow of $116.0 million, reflecting cash provided by operating activities of $146.0 million and capital expenditures of $30.0 million. Cash provided by operating activities in 2012 decreased $19.0 million, primarily reflecting increased working capital needs.

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 Dec. 31, 2012, Morningstar had cash, cash equivalents, and investments of $321.4 million, compared with $470.2 million as of Dec. 31, 2011. Morningstar expects to make annual bonus payments of approximately $36 million in the first quarter of 2013, compared with $43 million in the first quarter of 2012. In 2012, the company used $251.8 million of cash for its share repurchase program. Of the $500 million authorized under the program, Morningstar has purchased a total of 5.1 million shares for $300.9 million as of Dec. 31, 2012. Morningstar ended 2012 with 46.5 million shares outstanding.

Business Segment Performance

Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Data (formerly Licensed Data); Morningstar® Advisor WorkstationSM (including Morningstar Office); Morningstar DirectSM; and Morningstar.com®, including Premium Memberships and Internet advertising sales.

  • Revenue was $139.0 million in the fourth quarter of 2012, up 9.8% from $126.6 million in the fourth quarter of 2011.
  • Morningstar Direct, Morningstar Data, and Structured Credit Ratings were the major contributors to organic revenue growth. Licenses for Morningstar Direct rose 21.0% to 7,435.
  • Operating income was $40.1 million in the fourth quarter of 2012, compared with $30.7 million in the same period in 2011. Operating expense in this segment rose $3.0 million, or 3.1%, primarily because of the accelerated vesting of restricted stock for a former executive.
  • Operating margin was 28.8% in the fourth quarter of 2012 versus 24.2% in the prior-year period. The margin increase reflects lower bonus, salary, and commission expense as a percentage of revenue, partially offset by higher stock-based compensation expense as a percentage of revenue.

Investment Management Segment: The largest products in this segment based on revenue are Investment Advisory Services (formerly Investment Consulting); Retirement Solutions, including Advice by Ibbotson® and Morningstar® Retirement ManagerSM; and Morningstar® Managed PortfoliosSM.

  • Revenue was $31.7 million in the fourth quarter of 2012, a 1.0% decrease from $32.0 million in the same period in 2011. The main reason for the revenue decline was the previously announced loss of business from a large client in the Investment Management segment that began managing several fund-of-funds portfolios in-house in April 2012. The loss of revenue from this client was partially offset by higher revenue for Morningstar Managed Portfolios and Retirement Solutions. The variable annuity industry, which accounted for approximately 10% of Investment Management segment revenue in the fourth quarter of 2012, continues to face challenges. Accordingly, Morningstar expects that there will be further pressure on revenue from clients in this area.
  • Assets under advisement and management for Investment Advisory Services were $94.3 billion as of Dec. 31, 2012, compared with $137.5 billion as of Dec. 31, 2011. Assets now managed in-house by the client described above represented $11.8 billion, or 8.6%, of the company's Investment Advisory Services assets under advisement and management as of Dec. 31, 2011. In addition, a change in the scope of services the company provides to an existing client lowered assets under advisement by $42.9 billion. Excluding these effects, assets under advisement and management rose 8.3%, primarily reflecting asset inflows and market performance.
  • Assets under management and advisement for Retirement Solutions were $47.2 billion as of Dec. 31, 2012, versus $37.4 billion as of Dec. 31, 2011. Assets under management and advisement for Morningstar Managed Portfolios were $4.7 billion as of Dec. 31, 2012, compared with $3.1 billion as of Dec. 31, 2011.
  • Operating income was $15.5 million in the fourth quarter of 2012, a decrease of 3.3% compared with the fourth quarter of 2011. Operating expense in the segment was $16.1 million, an increase of $0.2 million, or 1.3%. Operating margin was 49.0% in the fourth quarter of 2012 versus 50.2% in the prior-year period.

 

Intangible Amortization and Corporate Depreciation Expense: Morningstar does not allocate expense for intangible amortization or corporate depreciation to its operating segments. Intangible amortization, which represents the majority of the expense in this category, was $6.0 million in the fourth quarter of 2012, a decrease of $1.3 million compared with the same period in 2011. Corporate depreciation expense was $3.0 million in the fourth quarter, an increase of $1.2 million compared with the same period in 2011.

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. It also includes capitalization of internal product development costs. Costs in this category were $7.3 million in the fourth quarter, an increase of $3.8 million, or 108.3%. Higher bonus expense in the fourth quarter of 2012 contributed to the increase. The company capitalized $2.5 million of operating expense in the quarter for software development, compared with $2.7 million in the fourth quarter of 2011.

Annual Meeting

Investors are invited to attend Morningstar's annual meeting at 9 a.m. on Tuesday, May 14, 2013, at its corporate headquarters at 22 W. Washington Street in Chicago. If you are interested in attending, please send an email to [email protected].

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 email to [email protected] or write to Morningstar at:

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 416,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 9 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 approximately $149 billion in assets under advisement and management as of Dec. 31, 2012. The company has operations in 27 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 current global financial uncertainty; the impact of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; financial services industry consolidation; liability related to the storage of personal information about our users; 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, 2011. 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, divestitures, and foreign currency translations (organic revenue), and international revenue excluding acquisitions, divestitures, 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, divestitures, and foreign currency translations (organic revenue) and international revenue excluding acquisitions, divestitures, 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.

©2013 Morningstar, Inc. All Rights Reserved.

MORN-E

Contacts:

Media: Margaret Kirch Cohen, 312-696-6383 or [email protected]

Investors may submit questions to [email protected].


Morningstar, Inc. and Subsidiaries











Unaudited Condensed Consolidated Statements of Income

























Three months ended December 31


Year ended December 31

(in thousands, except per share amounts)


2012


2011


change


2012


2011


change















Revenue


$       170,609


$158,571


7.6%


$ 658,288


$ 631,400


4.3%

Operating expense1:














Cost of goods sold


47,868


48,203


(0.7%)


195,347


182,132


7.3%


Development


12,772


14,006


(8.8%)


51,436


53,157


(3.2%)


Sales and marketing


27,453


26,197


4.8%


108,884


106,699


2.0%


General and administrative


31,767


24,829


27.9%


108,857


108,084


0.7%


Depreciation and amortization


11,480


11,201


2.5%


43,096


42,913


0.4%


   Total operating expense


131,340


124,436


5.5%


507,620


492,985


3.0%

Operating income 


39,269


34,135


15.0%


150,668


138,415


8.9%

Operating margin


23.0%


21.5%


1.5pp


22.9%


21.9%


1.0pp















Non-operating income (expense), net:














Interest income, net


1,305


1,219


7.1%


5,153


2,361


118.3%


Other income (expense), net


(1,882)


286


NMF


(2,196)


(652)


236.8%


     Non-operating income (expense), net


(577)


1,505


NMF


2,957


1,709


73.0%





























Income before income taxes and equity in net income

of unconsolidated entities


38,692


35,640


8.6%


153,625


140,124


9.6%

Income tax expense


11,437


8,073


41.7%


52,878


43,658


21.1%

Equity in net income of unconsolidated entities


486


451


7.8%


2,027


1,848


9.7%

Consolidated net income from continuing operations


27,741


28,018


(1.0%)


102,774


98,314


4.5%

Gain on sale of discontinued operations, net of tax


5,188


-


-


5,188


-


-

Consolidated net income   


32,929


28,018


17.5%


107,962


98,314


9.8%

Net (income) loss attributable to noncontrolling interests


55


(63)


NMF


117


43


172.1%

Net income attributable to Morningstar, Inc.


$         32,984


$  27,955


18.0%


$ 108,079


$   98,357


9.9%















Net income per share attributable to Morningstar, Inc.:














Basic














  Continuing operations


$             0.59


$      0.56


5.4%


$       2.12


$       1.96


8.2%


  Discontinued operations


$             0.11


$             -


-


$       0.11


$              -


-


Diluted














  Continuing operations


$             0.58


$      0.55


5.5%


$       2.10


$       1.92


9.4%


  Discontinued operations


$             0.11


$             -


-


$       0.10


$              -


-

Weighted average common shares outstanding:














Basic


46,913


49,883


(6.0%)


48,497


50,032


(3.1%)


Diluted


47,511


50,732


(6.3%)


49,148


50,988


(3.6%)


















Three months ended December 31


Year ended December 31




2012


2011




2012


2011



(1)

Includes stock-based compensation expense of:














Cost of goods sold


$           1,184


$    1,082




$     4,488


$     4,150




Development


493


498




1,928


2,086




Sales and marketing


504


479




1,937


1,871




General and administrative


5,130


1,801




10,552


7,196




   Total stock-based compensation expense


$           7,311


$    3,860




$   18,905


$   15,303

















NMF — Not meaningful, pp — percentage points










 

Morningstar, Inc. and Subsidiaries









Operating Expense as a Percentage of Revenue


























Three months ended December 31


Year ended December 31




2012


2011


change


2012


2011


change















Revenue


100.0%


100.0%


-


100.0%


100.0%


-

Operating expense1:














Cost of goods sold


28.1%


30.4%


(2.3)pp


29.7%


28.8%


0.9pp


Development


7.5%


8.8%


(1.3)pp


7.8%


8.4%


(0.6)pp


Sales and marketing


16.1%


16.5%


(0.4)pp


16.5%


16.9%


(0.4)pp


General and administrative


18.6%


15.7%


2.9pp


16.5%


17.1%


(0.6)pp


Depreciation and amortization


6.7%


7.1%


(0.4)pp


6.5%


6.8%


(0.3)pp


   Total operating expense2


77.0%


78.5%


(1.5)pp


77.1%


78.1%


(1.0)pp

Operating margin


23.0%


21.5%


1.5pp


22.9%


21.9%


1.0pp


















Three months ended December 31


Year ended December 31




2012


2011


change


2012


2011


change

(1) Includes stock-based compensation expense of:












Cost of goods sold


0.7%


0.7%


-


0.7%


0.7%


-


Development


0.3%


0.3%


-


0.3%


0.3%


-


Sales and marketing


0.3%


0.3%


-


0.3%


0.3%


-


General and administrative


3.0%


1.1%


1.9pp


1.6%


1.1%


0.5pp


   Total stock-based compensation expense2


4.3%


2.4%


1.9pp


2.9%


2.4%


0.5pp















(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 December 31


Year ended December 31

($000)


2012


2011


2012


2011











Operating activities









Consolidated net income


$       32,929


$      28,018


$     107,962


$       98,314

Adjustments to reconcile consolidated net income to net cash flows from operating activities:










Depreciation and amortization


11,480


11,201


43,096


42,913


Deferred income taxes


5,824


(2,877)


6,316


(4,436)


Stock-based compensation expense


7,311


3,860


18,905


15,303


Equity in net income of unconsolidated entities


(486)


(451)


(2,027)


(1,848)


Excess tax benefits from stock-option exercises










  and vesting of restricted stock units 


(2,203)


(1,904)


(7,210)


(9,525)


Gain on sale of discontinued operations, net of tax


(5,188)


-


(5,188)


-


Loss on sale of cost method investment


2,034


-


2,034


-


Other, net


(174)


(854)


1,158


1,829

Changes in operating assets and liabilities, net of 









effects of acquisitions and dispositions:










Accounts receivable


(10,555)


(3,455)


(17,124)


(3,858)


Other assets


3,774


732


223


2,728


Accounts payable and accrued liabilities


5,489


454


1,173


(4,821)


Accrued compensation


11,990


13,418


(8,861)


10,176


Deferred revenue


85


8,960


7,769


9,578


Income taxes - current


(8,425)


1,309


(1,205)


10,751


Deferred rent


116


(46)


407


(1,030)


Other liabilities


(321)


295


(1,432)


(1,098)


          Cash provided by operating activities


53,680


58,660


145,996


164,976

Investing activities









Purchases of investments


(10,562)


(84,405)


(145,491)


(383,281)

Proceeds from maturities and sales of investments 


43,967


75,357


260,317


297,956

Capital expenditures


(7,163)


(8,633)


(30,039)


(23,322)

Acquisitions, net of cash acquired


-


-


-


300

Proceeds from sale of a business, net


5,734


-


5,734


-

Purchase of equity and cost method investments


-


(2,450)


(10,304)


(2,450)

Other, net


(21)


(845)


(25)


30


        Cash provided by (used for) investing activities


31,955


(20,976)


80,192


(110,767)

Financing activities









Proceeds from stock-option exercises, net


2,049


2,072


4,809


8,702

Excess tax benefits from stock-option exercises









  and vesting of restricted stock units


2,203


1,904


7,210


9,525

Common shares repurchased


(68,115)


(12,146)


(251,813)


(40,672)

Dividends paid


(10,620)


(2,502)


(25,487)


(10,041)

Other, net


123


253


105


(110)


       Cash used for financing activities


(74,360)


(10,419)


(265,176)


(32,596)

Effect of exchange rate changes on cash and cash equivalents

433


(1,098)


2,440


(1,352)

Net increase (decrease) in cash and cash equivalents


11,708


26,167


(36,548)


20,261

Cash and cash equivalents—Beginning of period


152,181


174,270


200,437


180,176

Cash and cash equivalents—End of period


$     163,889


$    200,437


$     163,889


$     200,437











Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):














Three months ended December 31


Year ended December 31

($000)


2012


2011


2012


2011











Cash provided by operating activities


$       53,680


$      58,660


$     145,996


$     164,976

Less: Capital expenditures


(7,163)


(8,633)


(30,039)


(23,322)

Free cash flow


$       46,517


$      50,027


$     115,957


$     141,654











Morningstar, Inc. and Subsidiaries






Unaudited Condensed Consolidated Balance Sheets

















December 31


December 31

($000)



2012


2011








Assets






Current assets:







Cash and cash equivalents



$        163,889


$        200,437


Investments



157,529


269,755


Accounts receivable, net



114,361


113,312


Deferred tax asset, net



3,741


5,104


Income tax receivable, net



14,267


7,445


Other



20,823


15,980


          Total current assets



474,610


612,033








Property, equipment, and capitalized software, net



84,022


68,196

Investments in unconsolidated entities



35,305


27,642

Goodwill



320,845


318,492

Intangible assets, net



116,732


139,809

Other assets



10,438


5,912


Total assets



$     1,041,952


$     1,172,084








Liabilities and equity






Current liabilities:







Accounts payable and accrued liabilities



$          43,777


$          41,403


Accrued compensation



67,317


73,124


Deferred revenue



146,015


155,494


Other



256


612


          Total current liabilities



257,365


270,633








Accrued compensation



8,281


5,724

Deferred tax liability, net



21,583


15,940

Other long-term liabilities



27,828


22,771


Total liabilities



315,057


315,068


Total equity



726,895


857,016


Total liabilities and equity



$     1,041,952


$     1,172,084








Morningstar, Inc. and Subsidiaries











Segment Information





























Three months ended December 31


Year ended December 31



($000)


2012


2011


change


2012


2011


change















Revenue














Investment Information


$  138,953


$126,590


9.8%


$    529,984


$  500,909


5.8%


Investment Management


31,656


31,981


(1.0%)


128,304


130,491


(1.7%)


Consolidated revenue


$  170,609


$158,571


7.6%


$    658,288


$  631,400


4.3%
















Revenue—U.S.


$  120,505


$112,075


7.5%


$    466,947


$  446,470


4.6%


Revenue—International


$    50,104


$  46,496


7.8%


$    191,341


$  184,930


3.5%
















Revenue—U.S. (percentage of consolidated revenue)

70.6%


70.7%


(0.1)pp


70.9%


70.7%


0.2pp


Revenue—International (percentage of consolidated revenue)

29.4%


29.3%


0.1pp


29.1%


29.3%


(0.2)pp















Operating income (loss)1














Investment Information


$    40,056


$  30,684


30.5%


$    150,700


$  131,514


14.6%


Investment Management


15,521


16,050


(3.3%)


61,127


69,649


(12.2%)


Intangible amortization and corporate depreciation expense

(9,006)


(9,094)


(1.0%)


(33,674)


(34,659)


(2.8%)


Corporate unallocated


(7,302)


(3,505)


108.3%


(27,485)


(28,089)


(2.2%)


Consolidated operating income


$    39,269


$  34,135


15.0%


$    150,668


$  138,415


8.9%















Operating margin1














Investment Information


28.8%


24.2%


4.6pp


28.4%


26.3%


2.1pp


Investment Management


49.0%


50.2%


(1.2)pp


47.6%


53.4%


(5.8)pp


Consolidated operating margin


23.0%


21.5%


1.5pp


22.9%


21.9%


1.0pp















(1) Includes stock-based compensation expense allocated to each segment.




















Top Five Products (Segment)


Revenue


% of









Year Ended December 31, 2012


($000)


Revenue


`







Morningstar Data (Investment Information)


$  150,352


22.8%









Morningstar Advisor Workstation (Investment Information)

84,264


12.8%









Morningtar Direct (Investment Information)


66,236


10.1%









Investment Advisory Services (Investment Management)

66,126


10.0%









Morningstar.com (Investment Information)


53,671


8.2%





































Top Five Products (Segment)


Revenue


% of









Year Ended December 31, 2011


($000)


Revenue









Morningstar Data (Investment Information)


$  140,594


22.3%









Morningstar Advisor Workstation (Investment Information)

77,882


12.3%









Investment Advisory Services (Investment Management)

71,253


11.3%









Morningstar.com (Investment Information)


56,352


8.9%









Morningtar Direct (Investment Information)


52,481


8.3%









 

Morningstar, Inc. and Subsidiaries








Supplemental Data




























As of December 31








2012


2011


% change


Our employees










Worldwide headcount (approximate)




3,495


3,465


0.9%


Number of worldwide equity and credit analysts (approximate)


155


140 (1)


10.7%


Number of worldwide fund analysts (approximate)



110


105 (1)


4.8%














Our business










Investment Information










Morningstar.com Premium Membership subscriptions (U.S.)


123,899


130,354


(5.0%)


Registered users for Morningstar.com (U.S.)




7,521,043


6,891,458


9.1%


U.S. Advisor Workstation and Morningstar Office licenses 


162,904


160,287


1.6%


Principia subscriptions 




26,807


31,270


(14.3%)


Morningstar Direct licenses




7,435


6,144


21.0%














Investment Management










Assets under advisement and management (approximate)









Investment Advisory Services




$94.3 bil


$137.5 bil


(31.4%)



Retirement Solutions




$47.2 bil


$37.4 bil


26.2%



Morningstar Managed Portfolios




$4.7 bil


$3.1 bil (1)


51.6%



Ibbotson Australia




$3.3 bil


$2.9 bil


13.8%


























(1) Revised










































































Three months ended December 31


Year ended December 31


($000)


2012


2011


2012


2011


Effective tax rate










Income before income taxes and equity in net income of  unconsolidated entities


 

$ 38,692


 

$ 35,640


 

$ 153,625


 

$ 140,124


Equity in net income of unconsolidated entities


486


451


2,027


1,848


Net (income) loss attributable to noncontrolling interests

55


(63)


117


43



Total


$     39,233


$      36,028


$    155,769


$    142,015


Income tax expense


$     11,437


$        8,073


$      52,878


$      43,658


Effective tax rate


29.2%


22.4%


33.9%


30.7%














Morningstar, Inc. and Subsidiaries







Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures

































Reconciliation from consolidated revenue to revenue excluding divestitures, acquisitions, and foreign currency translations (organic revenue):


















Three months ended December 31


Year ended December 31



($000)


2012


2011


% change


2012


2011


% change















Consolidated revenue 


$ 170,609


$  158,571


7.6%


$  658,288


$   631,400


4.3%

Less: divestitures


-


(1,057)


NMF


-


(1,057)


NMF

Less: acquisitions


-


-


n/a


-


-


n/a

(Favorable) unfavorable impact of foreign currency translations

(292)


-


NMF


4,620


-


NMF

Revenue excluding divestitures and 














foreign currency translations


$ 170,317


$  157,514


8.1%


$  662,908


$   630,343


5.2%





























Reconciliation from international revenue to international revenue excluding divestitures, acquisitions, and foreign currency translations:


















Three months ended December 31


Year ended December 31



($000)


2012


2011


% change


2012


2011


% change















International revenue 


$   50,104


$    46,496


7.8%


$  191,341


$   184,930


3.5%

Less: divestitures


-


(982)


NMF


-


(982)


NMF

Less: acquisitions


-


-


n/a


-


-


n/a

(Favorable) unfavorable impact of foreign currency translations

(292)


-


NMF


4,620


-


NMF

International revenue excluding divestitures














and foreign currency translations


$   49,812


$    45,514


9.4%


$  195,961


$   183,948


6.5%





























The following table summarizes the change in operating expense:
























Three months ended December 31


Year ended December 31



($000)


2012


2011


$ change


2012


2011


$ change

Total operating expense


$ 131,340


$  124,436


$   6,904


$  507,620


$   492,985


$ 14,635



























(Favorable) unfavorable impact of foreign currency translations






614






 

(3,332)


All other changes in operating expense






6,290






17,967


Total






$   6,904






$ 14,635

 

SOURCE Morningstar, Inc.

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