Exhibit 99.1
| News Release | |
| 22 West Washington Street | Telephone: +1 312 696-6000 |
| Chicago | Facsimile: +1 312 696-6009 |
| Illinois 60602 | |
Contacts:
Media: Margaret Kirch Cohen, 312-696-6383 or margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com.
FOR IMMEDIATE RELEASE
Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2012 Financial Results
CHICAGO, Feb. 13, 2013—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.”
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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%.
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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.
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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. |
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| · | 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.
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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 investors@morningstar.com.
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 investors@morningstar.com 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
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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.
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©2013 Morningstar, Inc. All Rights Reserved.
MORN-E
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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 expense(1): | | | | | | | | | | | | | |
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
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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 expense(1): | | | | | | | | | | | | | |
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 expense(2) | | 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 expense(2) | | 4.3% | | 2.4% | | 1.9pp | | 2.9% | | 2.4% | | 0.5pp | |
(2) Sum of percentages may not equal total because of rounding.
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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 | |
10
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 | |
11
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 margin(1) | | | | | | | | | | | | | |
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% | |
| | | | | | |
12
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% | |
13
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 | |
| | | | | | | | | | | | | | | | | | | |
14
