UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 
FORM 8-K

 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): February 15, 2012
 
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)

Illinois
 (State or other jurisdiction
of incorporation)	 	000-51280
 (Commission
File Number)	 	36-3297908
 (I.R.S. Employer
Identification No.)	

 	 	22 West Washington Street
Chicago, Illinois 
(Address of principal executive offices)	 	60602
 (Zip Code)	
 
(312) 696-6000
(Registrant’s telephone number, including area code)
 
N/A
(Former name or former address, if changed since last report)

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o             Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o             Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o             Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o             Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 
Item 2.02.  Results of Operations and Financial Condition.*
 
On February 15, 2012, Morningstar, Inc. issued a press release announcing its financial results for the fourth quarter and year ended December 31, 2011.  A copy of the press release is attached hereto as Exhibit 99.1.
 
Item 9.01.  Financial Statements and Exhibits.
 
(d)                                  Exhibits:

Exhibit No.	 	Description	
 	 	 	
99.1*	 	Press Release dated February 15, 2012.	

*              The information furnished under Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 	MORNINGSTAR, INC.	

Date: February 16, 2012	By:	/s/ Richard Scott Cooley	
 	Name:	Richard Scott Cooley	
 	Title:	Chief Financial Officer	
 
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EXHIBIT INDEX

Exhibit No.	 	Description	
 	 	 	
99.1*	 	Press Release dated February 15, 2012.	

*              The information furnished under Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
 
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Exhibit 99.1

		

Contacts:
 
Media: Margaret Kirch Cohen, 312-696-6383 or margaret.cohen@morningstar.com
 
Investors may submit questions to investors@morningstar.com or by fax to 312-696-6009.
 
FOR IMMEDIATE RELEASE
 
Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2011 Financial Results
 
CHICAGO, Feb. 15, 2012—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its fourth-quarter and full-year 2011 financial results. The company reported consolidated revenue of $158.6 million in the fourth quarter of 2011, a 4.9% increase from $151.2 million in the fourth quarter of 2010. Consolidated operating income was $34.1 million in the fourth quarter of 2011, an increase of 5.7% compared with $32.3 million in the same period a year ago. Net income was $28.0 million, or 55 cents per diluted share, in the fourth quarter of 2011, compared with $23.5 million, or 46 cents per diluted share, in the fourth quarter of 2010.
 
Excluding acquisitions and the effect of foreign currency translations, revenue rose 4.6% in the fourth quarter of 2011. Revenue excluding acquisitions 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, 2011, revenue was $631.4 million, an increase of 13.7% compared with $555.4 million in 2010. Revenue for the year included $15.3 million from acquisitions completed in 2010 and $10.1 million from foreign currency translations. Excluding acquisitions and foreign currency translations, revenue rose 9.1%. Consolidated operating income increased 14.3% to $138.4 million, compared with $121.1 million in 2010. Net income was $98.4 million, or $1.92 per diluted share, compared with $86.4 million, or $1.70 per diluted share, in 2010.
 
Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We made solid progress in 2011. Our total revenue surpassed the $600 million mark, and organic revenue rose 9%, despite continued market volatility. Morningstar Direct and Investment Consulting were the main drivers of organic growth for the year. Operating margin was flat year over year, partly because of higher salaries and other compensation-related expense.”
 
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He added, “Revenue was down slightly in the fourth quarter on a sequential basis, mainly because of a slowdown in the market and a weaker new-issue pipeline for commercial mortgage-backed securities. We’re more encouraged by market conditions, though, as we enter 2012.”
 
Mansueto outlined some of the company’s key accomplishments and challenges in 2011:
 
Accomplishments:
 
·                   The highlight of the year was the launch of our new forward-looking Analyst Rating for funds and Global Fund Reports. The new ratings—Gold, Silver, Bronze, Neutral, and Negative—are based on a rigorous qualitative research framework developed by our global fund analyst team.
 
·                   Morningstar Direct, our research platform for institutions, had another record year with a 29% increase in net new seats sold globally, bringing our total to 6,144.
 
·                   We rated 32% of all new-issue commercial mortgage-backed securities (CMBS) transactions in 2011. We slightly increased our market share, but the meaningful news is we were the number three player in terms of transactions rated. We also announced a surveillance service for residential mortgage-backed securities (RMBS).
 
·                   We made good progress consolidating our Investment Management businesses into one global division. We established a global investment capability team, providing the foundation to realize our vision of global capabilities and local delivery.
 
·                   Quality continues to be a key area of focus. We significantly strengthened the quality of our European data. We’re now supplying daily fund pricing data to the Financial Times , and we’ve also been appointed by the Investment Management Association (IMA) in the UK to monitor investment funds classified to IMA sectors.
 
·                   Three fund companies launched 18 new ETFs based on the Morningstar Indexes. The iShares High Dividend Equity ETF, which is linked to the Morningstar Dividend Yield Focus Index, gathered more assets than any other U.S. ETF launched in 2011.
 
·                   We were named one of the “100 Best Companies to Work For” by FORTUNE Magazine. Making Morningstar a great place to work is a priority for all of our leaders, and it’s gratifying to receive this recognition.
 
Challenges:
 
·                   Although the market was slightly positive for the year, it was also volatile, which creates uncertainty and slows purchasing decisions across our three key audiences: individual investors, advisors, and institutions. Global economic issues, as well as record low interest rates in the United States, affected our clients’ profits. Several variable annuity firms exited the market. All of these factors created headwinds for our business.
 
·                   Managed retirement assets rose slightly, but we still have work to do in this area to increase our penetration rate among eligible plan participants.
 
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·                   Individual investors continue to be cautious about their investment research spending. Our U.S. Premium Membership subscriptions were 6% lower this year. That said, we have a large audience of engaged investors, and time spent on Morningstar.com per visit is the highest among investing sites.
 
·                   Although our European operations had strong revenue growth, revenue in our Australian business declined, mainly because of a difficult business environment for investment consulting as well as advertising sales.
 
International Operations: Revenue from international operations was $46.5 million in the fourth quarter of 2011, an increase of 4.6% from the same period a year ago. Foreign currency translations had a slightly favorable effect. Excluding acquisitions and foreign currency translations, international revenue rose 4.2%.
 
For the full year, international revenue increased $27.8 million, or 17.7%, including $5.6 million from acquisitions and $10.1 million from foreign currency translations. Excluding acquisitions and foreign currency translations, international revenue improved 7.7%. 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 $34.1 million in the fourth quarter of 2011, a 5.7% increase from the same period in 2010. Operating expense rose $5.6 million, or 4.7%, in the fourth quarter of 2011. The company completed seven acquisitions in 2010. Because of the timing of these acquisitions, results for both periods in 2011 include operating expense that did not exist in the same periods in 2010.
 
The largest factor behind the operating expense increase was salary expense, which rose $5.7 million, or 12%, in the fourth quarter of 2011, reflecting salary increases made in July 2011 and additional headcount. In addition, higher sales commissions, rent, and professional fees contributed approximately $4 million to the operating expense increase.
 
These increases were partially offset because the company capitalized $2.7 million of operating expense in the quarter for software development within several businesses compared with $0.8 million in the fourth quarter of 2010. In addition, operating expense in the fourth quarter of 2010 included $2.0 million related to a previously announced separation agreement between Morningstar and the former head of
 
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Morningstar Associates. This expense did not recur in 2011. In addition, bonus expense declined $0.7 million in the fourth quarter of 2011 compared with the prior-year period.
 
Morningstar had approximately 3,465 employees worldwide as of Dec. 31, 2011, compared with 3,225 as of Dec. 31, 2010. Headcount grew year over year mainly because of continued hiring in the company’s development centers in China and India as well as in the United States.
 
Operating margin was 21.5% in the fourth quarter of 2011, compared with 21.4% in the same period in 2010. In 2011, operating margin was 21.9%, compared with 21.8% in 2010. The relatively flat margin in both periods, compared with the prior-year periods, mainly reflects higher salaries and other compensation-related expense as a percentage of revenue offset by higher capitalized operating expense for software development as a percentage of revenue. Capitalized operating expense contributed 1.2 percentage points to the margin improvement in the fourth quarter and 0.7 percentage points in the full year.
 
Effective Tax Rate:   Morningstar’s effective tax rate in the fourth quarter of 2011 was 22.4%, a decrease of 6.6 percentage points compared with 29.0% for the fourth quarter of 2010. The fourth-quarter 2011 effective tax rate was positively affected by higher estimated tax credits and incentives, effects of tax audit settlements, and the recognition of certain deferred income tax benefits.
 
In 2011, the company’s effective tax rate was 30.7%, a decrease of 2.4 percentage points compared with 33.1% for 2010. The decrease primarily reflects the positive effect of higher estimated tax credits and incentives (some of which relate to prior years), effects of tax audit settlements, and the recognition of certain deferred income tax benefits. Additionally, in 2010, the use of foreign net operating losses that had previously been subject to a valuation allowance reduced the effective tax rate. This benefit did not recur in 2011.
 
Free Cash Flow:  Morningstar generated free cash flow of $50.0 million in the fourth quarter of 2011, reflecting cash provided by operating activities of $58.6 million and $8.6 million of capital expenditures. Free cash flow improved by $13.8 million compared with the fourth quarter of 2010 as cash provided by operating activities was up $15.4 million and capital expenditures rose $1.6 million.
 
In 2011, Morningstar generated free cash flow of $141.7 million, reflecting cash provided by operating activities of $165.0 million and capital expenditures of $23.3 million. Cash provided by operating activities
 
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in 2011 rose $41.6 million, primarily reflecting the positive effect of changes in operating assets and liabilities and higher net income (adjusted for non-cash items), partially offset by a $16.1 million increase in bonuses paid in the first quarter of 2011.
 
Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.
 
As of Dec. 31, 2011, Morningstar had cash, cash equivalents, and investments of $470.2 million, compared with $365.4 million as of Dec. 31, 2010. Morningstar expects to make annual bonus payments of approximately $43 million in the first quarter of 2012, compared with $37.5 million in the first quarter of 2011. In 2011, the company used $40.7 million of cash for its stock repurchase program. Of the $300 million authorized under the program, Morningstar has purchased 798,337 shares for $44.5 million as of Dec. 31, 2011.
 
Business Segment Performance
 
Investment Information Segment:  The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor Workstation SM  (including Morningstar Office); Morningstar.com®, including Premium Memberships and Internet advertising sales; and Morningstar Direct SM .
 
·                   Revenue was $126.6 million in the fourth quarter of 2011, up 5.2% from $120.4 million in the fourth quarter of 2010.
 
·                   Acquisitions contributed revenue of $0.3 million in the fourth quarter of 2011.
 
·                   Morningstar Direct, Integrated Web Tools, and Licensed Data were the major contributors to organic revenue growth. Licenses for Morningstar Direct rose 28.7% to 6,144. Premium Membership subscriptions for Morningstar.com fell 5.6% to 130,354. Principia subscriptions were down 4.3% to 31,270, and Advisor Workstation licenses rose slightly to 160,287.
 
·                   Operating income was $30.7 million in the fourth quarter of 2011, compared with $31.6 million in the same period in 2010. Operating expense in this segment rose $7.2 million, or 8.1%, primarily because of higher salaries and, to a lesser extent, higher bonus and commission expense.
 
·                   Operating margin was 24.2% in the fourth quarter of 2011 versus 26.3% in the prior-year period. The margin decline primarily reflects higher salaries and, to a lesser extent, bonus expense as a percentage of revenue. Acquisitions did not significantly affect this segment’s operating margin.
 
Investment Management Segment:  The largest products in this segment based on revenue are Investment Consulting; Retirement Solutions, including Advice by Ibbotson® and Morningstar® Retirement Manager SM ; and Morningstar® Managed Portfolios SM .
 
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·                   Revenue was $32.0 million in the fourth quarter of 2011, a 3.8% increase from $30.8 million in the same period in 2010. The revenue increase was smaller than the growth in average assets because assets as of Dec. 31, 2011 (described below) include additional assets for existing fund-of-funds programs for which Morningstar now receives asset-based fees versus flat fees.
 
·                   Retirement Solutions, Morningstar Managed Portfolios, and Investment Consulting all made positive contributions to revenue growth.
 
·                   Assets under advisement and management for Investment Consulting were $140.4 billion as of Dec. 31, 2011, compared with $111.4 billion as of Dec. 31, 2010. More than 75% of the increase reflects additional assets for existing fund-of-funds programs for which Morningstar now receives asset-based fees. The rest of the increase reflects net client flows and market performance. Assets under management and advisement for Retirement Solutions were $37.4 billion as of Dec. 31, 2011, versus $35.1 billion as of Dec. 31, 2010. Assets under management for Morningstar Managed Portfolios were $3.0 billion as of Dec. 31, 2011, compared with $2.7 billion as of Dec. 31, 2010.
 
·                   Operating income was $16.1 million in the fourth quarter of 2011, an increase of 2.4% compared with the fourth quarter of 2010. Operating expense in the segment was $15.9 million, an increase of $0.8 million compared with the fourth quarter of 2010. Higher non-U.S. operating expense as well as higher professional fees in the United States were partially offset by lower bonus expense. In addition, the company’s 2010 results included $2.0 million related to a previously announced separation agreement between Morningstar and the former head of Morningstar Associates.
 
·                   Operating margin was 50.2% in the fourth quarter of 2011 versus 50.9% in the prior-year period, because of higher expense outside the United States and, to a lesser extent, higher professional fees as a percentage of revenue. These increases were partially offset by lower bonus expense as a percentage of revenue. In addition, the separation agreement had a negative effect on the 2010 margin.
 
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 expense in this category, was $7.2 million in the fourth quarter of 2011, a slight decrease of $0.1 million compared with the same period in 2010. Corporate depreciation expense was $1.9 million in the fourth quarter, essentially unchanged from the prior-year period.
 
Corporate Unallocated:  This category includes costs related to corporate functions, including general management, information technology used to support corporate systems, legal, finance, human resources, marketing, and corporate communications. It also includes capitalization of internal product development costs. Costs in this category were $3.5 million in the quarter, a decrease of $2.4 million, or 40.3%, because the company capitalized $2.7 million of operating expense. In the fourth quarter of 2010, the company capitalized $0.8 million of operating expense for software development. Lower bonus expense in the fourth quarter of 2011 also contributed to the decrease, but to a lesser extent.
 
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Annual Meeting
 
Investors are invited to attend Morningstar’s annual meeting at 9 a.m. on Tuesday, May 15, 2012, at the Chicago Botanic Garden, Alsdorf Auditorium, 1000 Lake Cook Road, Glencoe, Illinois. If you are interested in attending, please send an email to investors@morningstar.com.
 
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 375,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 8 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has more than $180 billion in assets under advisement and management as of Dec. 31, 2011. 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 discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, general industry conditions and competition, including ongoing economic weakness and uncertainty; the effect of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; the increasing concentration of data and development work carried out at our offshore facilities in China and India; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to successfully integrate acquisitions; challenges faced by our non-U.S. operations; and a prolonged outage of our database and network facilities. A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2010. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.
 
Non-GAAP Financial Measures
To supplement Morningstar’s consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission:  free cash flow, consolidated revenue excluding acquisitions and foreign currency translations (organic revenue), and international revenue excluding acquisitions and foreign currency translations. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
 
Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after Morningstar spends money to operate its business. Morningstar uses free cash flow to evaluate its business. Free cash flow should not be considered an alternative to any measure required to be reported under GAAP (such as cash provided by (used for) operating, investing, and financing activities). For more information on free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables. Morningstar presents consolidated revenue excluding acquisitions and foreign currency translations (organic revenue) and international revenue excluding acquisitions and foreign currency translations because the company believes these non-GAAP measures help investors better compare period-to-period results. For more information, please see the reconciliation provided in the accompanying financial tables.
 
All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,”or “was similar” refer to a comparison with the same period in the previous year unless otherwise stated.
 
###
 
©2012 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)	 	2011	 	2010	 	change	 	2011	 	2010	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	  158,571	 	$	  151,153	 	4.9%	 	$	  631,400	 	$	  555,351	 	13.7%	 	
Operating expense(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	48,203	 	42,301	 	14.0%	 	182,132	 	157,068	 	16.0%	 	
Development	 	14,006	 	13,753	 	1.8%	 	53,157	 	49,244	 	7.9%	 	
Sales and marketing	 	26,197	 	25,596	 	2.3%	 	106,699	 	95,473	 	11.8%	 	
General and administrative	 	24,829	 	25,632	 	(3.1%	)	108,084	 	92,843	 	16.4%	 	
Depreciation and amortization	 	11,201	 	11,582	 	(3.3%	)	42,913	 	39,664	 	8.2%	 	
Total operating expense	 	124,436	 	118,864	 	4.7%	 	492,985	 	434,292	 	13.5%	 	
Operating income	 	34,135	 	32,289	 	5.7%	 	138,415	 	121,059	 	14.3%	 	
Operating margin	 	21.5%	 	21.4%	 	0.1pp	 	21.9%	 	21.8%	 	0.1pp	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating income (expense), net:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income, net	 	1,219	 	745	 	63.6%	 	2,361	 	2,437	 	(3.1%	)	
Other income (expense), net	 	286	 	(61	)	NMF	 	(652	)	4,295	 	NMF	 	
Non-operating income, net	 	1,505	 	684	 	120.0%	 	1,709	 	6,732	 	(74.6%	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes and equity in net income of unconsolidated entities	 	35,640	 	32,973	 	8.1%	 	140,124	 	127,791	 	9.7%	 	
Income tax expense	 	8,073	 	9,619	 	(16.1%	)	43,658	 	42,756	 	2.1%	 	
Equity in net income of unconsolidated entities	 	451	 	246	 	83.3%	 	1,848	 	1,422	 	30.0%	 	
Consolidated net income	 	28,018	 	23,600	 	18.7%	 	98,314	 	86,457	 	13.7%	 	
Net (income) loss attributable to noncontrolling interests	 	(63	)	(97	)	(35.1%	)	43	 	(87	)	NMF	 	
Net income attributable to Morningstar, Inc.	 	$	27,955	 	$	23,503	 	18.9%	 	$	98,357	 	$	86,370	 	13.9%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income per share attributable to Morningstar, Inc.:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.56	 	$	0.47	 	19.1%	 	$	1.96	 	$	1.75	 	12.0%	 	
Diluted	 	$	0.55	 	$	0.46	 	19.6%	 	$	1.92	 	$	1.70	 	12.9%	 	
Weighted average common shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	49,883	 	49,523	 	 	 	50,032	 	49,249	 	 	 	
Diluted	 	50,732	 	50,761	 	 	 	50,988	 	50,555	 	 	 	

 	 	Three months ended December 31	 	Year ended December 31	 	
 	 	2011	 	2010	 	 	 	2011	 	2010	 	 	 	
(1) Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	$	1,082	 	$	891	 	 	 	$	4,150	 	$	3,473	 	 	 	
Development	 	498	 	481	 	 	 	2,086	 	1,840	 	 	 	
Sales and marketing	 	479	 	428	 	 	 	1,871	 	1,786	 	 	 	
General and administrative	 	1,801	 	1,656	 	 	 	7,196	 	6,694	 	 	 	
Total stock-based compensation expense	 	$	3,860	 	$	3,456	 	 	 	$	15,303	 	$	13,793	 	 	 	
 
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	 	
 	 	2011	 	2010	 	change	 	2011	 	2010	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	100.0%	 	100.0%	 	—	 	100.0%	 	100.0%	 	—	 	
Operating expense(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	30.4%	 	28.0%	 	2.4pp	 	28.8%	 	28.3%	 	0.5pp	 	
Development	 	8.8%	 	9.1%	 	(0.3)pp	 	8.4%	 	8.9%	 	(0.5)pp	 	
Sales and marketing	 	16.5%	 	16.9%	 	(0.4)pp	 	16.9%	 	17.2%	 	(0.3)pp	 	
General and administrative	 	15.7%	 	17.0%	 	(1.3)pp	 	17.1%	 	16.7%	 	0.4pp	 	
Depreciation and amortization	 	7.1%	 	7.7%	 	(0.6)pp	 	6.8%	 	7.1%	 	(0.3)pp	 	
Total operating expense(2)	 	78.5%	 	78.6%	 	(0.1)pp	 	78.1%	 	78.2%	 	(0.1)pp	 	
Operating margin	 	21.5%	 	21.4%	 	0.1pp	 	21.9%	 	21.8%	 	0.1pp	 	

 	 	Three months ended December 31	 	Year ended December 31	 	
 	 	2011	 	2010	 	change	 	2011	 	2010	 	change	 	
(1) Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	0.7%	 	0.6%	 	0.1pp	 	0.7%	 	0.6%	 	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%	 	1.1%	 	—	 	1.1%	 	1.2%	 	(0.1)pp	 	
Total stock-based compensation expense(2)	 	2.4%	 	2.3%	 	0.1pp	 	2.4%	 	2.5%	 	(0.1)pp	 	
 
(2) Sum of percentages may not equal total because of rounding.
 
9 

 
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	2011	 	2010	 	
 	 	 	 	 	 	 	 	 	 	
Operating activities	 	 	 	 	 	 	 	 	 	
Consolidated net income	 	$	28,018	 	$	23,600	 	$	98,314	 	$	86,457	 	
Adjustments to reconcile consolidated net income to net cash flows from operating activities:	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	11,201	 	11,582	 	42,913	 	39,664	 	
Deferred income tax (benefit) expense	 	(2,877	)	(1,558	)	(4,436	)	211	 	
Stock-based compensation expense	 	3,860	 	3,456	 	15,303	 	13,793	 	
Equity in net income of unconsolidated entities	 	(451	)	(246	)	(1,848	)	(1,422	)	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	(1,904	)	(2,418	)	(9,525	)	(7,507	)	
Holding gain upon acquisition of additional ownership of equity method investments	 	—	 	509	 	—	 	(4,564	)	
Other, net	 	(854	)	(654	)	1,829	 	323	 	
Changes in operating assets and liabilities, net of effects of acquisitions:	 	 	 	 	 	 	 	 	 	
Accounts receivable	 	(3,455	)	(16,398	)	(3,858	)	(23,652	)	
Other assets	 	732	 	167	 	2,728	 	(2,341	)	
Accounts payable and accrued liabilities	 	454	 	(2,784	)	(4,821	)	(759	)	
Accrued compensation	 	13,418	 	14,436	 	10,176	 	12,166	 	
Deferred revenue	 	8,960	 	7,690	 	9,578	 	5,752	 	
Income taxes - current	 	1,309	 	4,260	 	10,751	 	4,569	 	
Deferred rent	 	(46	)	922	 	(1,030	)	1,364	 	
Other liabilities	 	295	 	746	 	(1,098	)	(638	)	
Cash provided by operating activities	 	58,660	 	43,310	 	164,976	 	123,416	 	
Investing activities	 	 	 	 	 	 	 	 	 	
Purchases of investments	 	(38,495	)	(58,240	)	(320,193	)	(186,283	)	
Proceeds from maturities and sales of investments	 	29,447	 	37,732	 	234,868	 	214,929	 	
Capital expenditures	 	(8,633	)	(7,070	)	(23,322	)	(14,771	)	
Acquisitions, net of cash acquired	 	—	 	(13,627	)	300	 	(102,324	)	
Other, net	 	(3,295	)	(330	)	(2,420	)	500	 	
Cash used for investing activities	 	(20,976	)	(41,535	)	(110,767	)	(87,949	)	
Financing activities	 	 	 	 	 	 	 	 	 	
Proceeds from stock-option exercises, net	 	2,072	 	4,013	 	8,702	 	9,220	 	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	1,904	 	2,418	 	9,525	 	7,507	 	
Common shares repurchased	 	(12,146	)	(3,785	)	(40,672	)	(3,785	)	
Dividends paid	 	(2,502	)	—	 	(10,041	)	—	 	
Other, net	 	253	 	112	 	(110	)	(417	)	
Cash provided by (used for) financing activities	 	(10,419	)	2,758	 	(32,596	)	12,525	 	
Effect of exchange rate changes on cash and cash equivalents	 	(1,098	)	(229	)	(1,352	)	1,688	 	
Net increase in cash and cash equivalents	 	26,167	 	4,304	 	20,261	 	49,680	 	
Cash and cash equivalents—Beginning of period	 	174,270	 	175,872	 	180,176	 	130,496	 	
Cash and cash equivalents—End of period	 	$	200,437	 	$	180,176	 	$	200,437	 	$	180,176	 	
 
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)	 	2011	 	2010	 	2011	 	2010	 	
 	 	 	 	 	 	 	 	 	 	
Cash provided by operating activities	 	$	58,660	 	$	43,310	 	$	164,976	 	$	123,416	 	
Less: Capital expenditures	 	(8,633	)	(7,070	)	(23,322	)	(14,771	)	
Free cash flow	 	$	50,027	 	$	36,240	 	$	141,654	 	$	108,645	 	
 
10 

 
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

 	 	December 31	 	December 31	 	
($000)	 	2011	 	2010	 	
 	 	 	 	 	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	200,437	 	$	180,176	 	
Investments	 	269,755	 	185,240	 	
Accounts receivable, net	 	113,312	 	110,891	 	
Deferred tax asset, net	 	5,104	 	2,860	 	
Income tax receivable, net	 	7,445	 	10,459	 	
Other	 	15,980	 	17,654	 	
Total current assets	 	612,033	 	507,280	 	
 	 	 	 	 	 	
Property, equipment, and capitalized software, net	 	68,196	 	62,105	 	
Investments in unconsolidated entities	 	27,642	 	24,262	 	
Goodwill	 	318,492	 	317,661	 	
Intangible assets, net	 	139,809	 	169,023	 	
Other assets	 	5,912	 	5,971	 	
Total assets	 	$	1,172,084	 	$	1,086,302	 	
 	 	 	 	 	 	
Liabilities and equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable and accrued liabilities	 	$	41,403	 	$	42,680	 	
Accrued compensation	 	73,124	 	62,404	 	
Deferred revenue	 	155,494	 	146,267	 	
Other	 	612	 	1,373	 	
Total current liabilities	 	270,633	 	252,724	 	
 	 	 	 	 	 	
Accrued compensation	 	5,724	 	4,965	 	
Deferred tax liability, net	 	15,940	 	19,975	 	
Other long-term liabilities	 	22,771	 	27,213	 	
Total liabilities	 	315,068	 	304,877	 	
Total equity	 	857,016	 	781,425	 	
Total liabilities and equity	 	$	1,172,084	 	$	1,086,302	 	
 
11 

 
Morningstar, Inc. and Subsidiaries
Segment Information

 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	change	 	2011	 	2010	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Information	 	$	126,590	 	$	120,357	 	5.2%	 	$	500,909	 	$	444,957	 	12.6%	 	
Investment Management	 	31,981	 	30,796	 	3.8%	 	130,491	 	110,394	 	18.2%	 	
Consolidated revenue	 	$	158,571	 	$	151,153	 	4.9%	 	$	631,400	 	$	555,351	 	13.7%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue—U.S.	 	$	112,075	 	$	106,686	 	5.1%	 	$	446,470	 	$	398,215	 	12.1%	 	
Revenue—International	 	$	46,496	 	$	44,467	 	4.6%	 	$	184,930	 	$	157,136	 	17.7%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue—U.S. (percentage of consolidated revenue)	 	70.7%	 	70.6%	 	0.1pp	 	70.7%	 	71.7%	 	(1.0)pp	 	
Revenue—International (percentage of consolidated revenue)	 	29.3%	 	29.4%	 	(0.1)pp	 	29.3%	 	28.3%	 	1.0pp	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income (loss)(1)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Information	 	$	30,684	 	$	31,641	 	(3.0%	)	$	131,514	 	$	127,740	 	3.0%	 	
Investment Management	 	16,050	 	15,679	 	2.4%	 	69,649	 	56,816	 	22.6%	 	
Intangible amortization and corporate depreciation expense	 	(9,094	)	(9,164	)	(0.8%	)	(34,659	)	(32,094	)	8.0%	 	
Corporate unallocated	 	(3,505	)	(5,867	)	(40.3%	)	(28,089	)	(31,403	)	(10.6%	)	
Consolidated operating income	 	$	34,135	 	$	32,289	 	5.7%	 	$	138,415	 	$	121,059	 	14.3%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin(1)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment Information	 	24.2%	 	26.3%	 	(2.1)pp	 	26.3%	 	28.7%	 	(2.4)pp	 	
Investment Management	 	50.2%	 	50.9%	 	(0.7)pp	 	53.4%	 	51.5%	 	1.9pp	 	
Consolidated operating margin	 	21.5%	 	21.4%	 	0.1pp	 	21.9%	 	21.8%	 	0.1pp	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(1) Includes stock-based compensation expense allocated to each segment.	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Top Five Products (Segment)	 	Revenue	 	% of	 	 	 	 	 	 	 	 	 	 	
Year Ended December 31, 2011	 	($000)	 	Revenue	 	 	 	 	 	 	 	 	 	 	
Licensed Data (Investment Information)	 	$	106,732	 	16.9%	 	 	 	 	 	 	 	 	 	 	
Investment Consulting (Investment Management)	 	78,574	 	12.4%	 	 	 	 	 	 	 	 	 	 	
Morningstar Advisor Workstation (Investment Information)	 	77,459	 	12.3%	 	 	 	 	 	 	 	 	 	 	
Morningstar.com (Investment Information)	 	54,169	 	8.6%	 	 	 	 	 	 	 	 	 	 	
Morningtar Direct (Investment Information)	 	52,481	 	8.3%	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Top Five Products (Segment)	 	Revenue	 	% of	 	 	 	 	 	 	 	 	 	 	
Year Ended December 31, 2010	 	($000)	 	Revenue	 	 	 	 	 	 	 	 	 	 	
Licensed Data (Investment Information)	 	$	98,186	 	17.7%	 	 	 	 	 	 	 	 	 	 	
Morningstar Advisor Workstation (Investment Information)	 	69,321	 	12.5%	 	 	 	 	 	 	 	 	 	 	
Investment Consulting (Investment Management)	 	66,264	 	11.9%	 	 	 	 	 	 	 	 	 	 	
Morningstar.com (Investment Information)	 	49,673	 	8.9%	 	 	 	 	 	 	 	 	 	 	
Morningtar Direct (Investment Information)	 	38,069	 	6.9%	 	 	 	 	 	 	 	 	 	 	
 
12 

 
Morningstar, Inc. and Subsidiaries
Supplemental Data

 	 	 	 	As of December 31	 	
 	 	 	 	2011	 	2010	 	% change	 	
Our employees	 	 	 	 	 	 	 	 	 	
Worldwide headcount (approximate)	 	 	 	3,465	 	3,225	 	7.4%	 	
Number of worldwide equity and credit analysts (approximate)	 	165	 	145	(1)	13.8%	 	
Number of worldwide fund analysts (approximate)	 	 	 	95	 	95	 	0.0%	 	
 	 	 	 	 	 	 	 	 	 	
Our business	 	 	 	 	 	 	 	 	 	
Investment Information	 	 	 	 	 	 	 	 	 	
Morningstar.com Premium Membership subscriptions (U.S.)	 	 	 	130,354	 	138,149	(2)	(5.6%	)	
Registered users for Morningstar.com (U.S.)	 	 	 	6,891,458	 	6,300,033	 	9.4%	 	
U.S. Advisor Workstation and Morningstar Office licenses	 	 	 	160,287	 	157,395	(3)	1.8%	 	
Principia subscriptions	 	 	 	31,270	 	32,681	 	(4.3%	)	
Morningstar Direct licenses	 	 	 	6,144	 	4,773	 	28.7%	 	
 	 	 	 	 	 	 	 	 	 	
Investment Management	 	 	 	 	 	 	 	 	 	
Assets under advisement and management	 	 	 	 	 	 	 	 	 	
Investment Consulting	 	 	 	$140.4 bil	 	$111.4 bil	(5)	26.0%	 	
Retirement Solutions(4)	 	 	 	$37.4 bil	 	$35.1 bil	 	6.6%	 	
Morningstar Managed Portfolios	 	 	 	$3.0 bil	 	$2.7 bil	 	11.1%	 	

 	
(1) Revised to include structured credit analysts	
 	
(2) Revised	
 	
(3) Revised to include licenses from the Annuity Intelligence business	
 	
(4) Revised to include Plan Sponsor Advice	
 	
(5) Revised; in addition, Ibbotson Australia is now included in the total	

 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	2011	 	2010	 	
Effective tax rate	 	 	 	 	 	 	 	 	 	
Income before income taxes and equity in net income of unconsolidated entities	 	$	35,640	 	$	32,973	 	$	140,124	 	$	127,791	 	
Equity in net income of unconsolidated entities	 	451	 	246	 	1,848	 	1,422	 	
Net (income) loss attributable to noncontrolling interests	 	(63	)	(97	)	43	 	(87	)	
Total	 	$	36,028	 	$	33,122	 	$	142,015	 	$	129,126	 	
Income tax expense	 	$	8,073	 	$	9,619	 	$	43,658	 	$	42,756	 	
Effective tax rate	 	22.4%	 	29.0%	 	30.7%	 	33.1%	 	
 
13 

 
Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures
 
Morningstar includes an acquired operation as part of revenue and expense from acquisitions for 12 months after the acquisition is completed. Operating expense related to acquisitions also includes amortization of intangible assets, professional fees, and expense related to vacant office space incurred as part of the acquisition process. It’s important to note that it’s difficult to precisely quantify the amount of operating expense from acquisitions. Morningstar doesn’t always maintain acquired operations as stand-alone businesses, and the company often integrates administrative or other functions with existing operations.
 
Reconciliation from consolidated revenue to revenue excluding acquisitions and foreign currency translations (organic revenue):

 	 	 	 	 	 	
 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	% change	 	2011	 	2010	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated revenue	 	$	158,571	 	$	151,153	 	4.9%	 	$	631,400	 	$	555,351	 	13.7%	 	
Less: acquisitions	 	(306	)	—	 	NMF	 	(15,326	)	—	 	NMF	 	
Favorable impact of foreign currency translations	 	(180	)	—	 	NMF	 	(10,116	)	—	 	NMF	 	
Revenue excluding acquisitions and foreign currency translations	 	$	158,085	 	$	151,153	 	4.6%	 	$	605,958	 	$	555,351	 	9.1%	 	
 
Reconciliation from international revenue to international revenue excluding acquisitions and foreign currency translations:

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	% change	 	2011	 	2010	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
International revenue	 	$	46,496	 	$	44,467	 	4.6%	 	$	184,930	 	$	157,136	 	17.7%	 	
Less: acquisitions	 	—	 	—	 	—	 	(5,561	)	—	 	NMF	 	
Favorable impact of foreign currency translations	 	(180	)	—	 	NMF	 	(10,116	)	—	 	NMF	 	
International revenue excluding acquisitions and foreign currency translations	 	$	46,316	 	$	44,467	 	4.2%	 	$	169,253	 	$	157,136	 	7.7%	 	
 
The following table summarizes the change in operating expense:

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended December 31	 	Year ended December 31	 	
($000)	 	2011	 	2010	 	$ change	 	2011	 	2010	 	$ change	 	
Total operating expense	 	$	124,436	 	$	118,864	 	$	5,572	 	$	492,985	 	$	434,292	 	$	58,693	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions	 	 	 	 	 	$	137	 	 	 	 	 	$	13,411	 	
Unfavorable impact of foreign currency translations	 	 	 	 	 	335	 	 	 	 	 	9,462	 	
All other changes in operating expense	 	 	 	 	 	5,100	 	 	 	 	 	35,820	 	
Total	 	 	 	 	 	$	5,572	 	 	 	 	 	$	58,693	 	

The table below shows the period in which Morningstar included each acquired operation in revenue and expense from acquisitions:

Acquisition	 	Date of acquisition	 	2011 revenue and expense from acquisitions	
Footnoted business of Financial Fineprint Inc.	 	February 1, 2010	 	January 1 through January 31, 2011	
Aegis Equities Research	 	April 1, 2010	 	January 1 through March 31, 2011	
Old Broad Street Research Ltd.	 	April 12, 2010	 	January 1 through April 11, 2011	
Realpoint, LLC	 	May 3, 2010	 	January 1 through May 2, 2011	
Morningstar Danmark A/S	 	July 1, 2010	 	January 1 through June 30, 2011	
Seeds Group	 	July 1, 2010	 	January 1 through June 30, 2011	
Annuity intelligence business of Advanced Sales and Marketing Corporation	 	November 1, 2010	 	January 1 through October 31, 2011	
 
14