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):  July 23, 2014
 
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)

Illinois	 	000-51280	 	36-3297908	
(State or other jurisdiction
of incorporation)	 	(Commission
File Number)	 	(I.R.S. Employer
Identification No.)	
 	 	 	 	 	
22 West Washington Street
Chicago, Illinois	 	60602	
(Address of principal executive offices)	 	(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 July 23, 2014, Morningstar, Inc. issued a press release announcing its financial results for the second quarter ended June 30, 2014.  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 July 23, 2014.	

*               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:  July 24, 2014	 	By:	/s/ Stéphane Biehler	
 	 	Name:	Stéphane Biehler	
 	 	Title:	Chief Financial Officer	
 
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EXHIBIT INDEX

Exhibit No.	 	Description	
 	 	 	
99.1*	 	Press Release dated July 23, 2014.	

*               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, +1 312-696-6383 or margaret.cohen@morningstar.com
 
Investors may submit questions to investors@morningstar.com.
 
FOR IMMEDIATE RELEASE
 
Morningstar, Inc. Reports Second-Quarter 2014 Financial Results, Including a Previously Announced, Non-Recurring $61.0 Million Litigation Settlement Expense
 
CHICAGO, July 23, 2014—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its second-quarter 2014 financial results.
 
The company reported consolidated revenue of $189.4 million in the second quarter, an 8.0% increase from $175.4 million in the second quarter of 2013. Excluding acquisitions, divestitures, and foreign currency translations, revenue rose 6.7% in the second quarter of 2014. Revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) is a non-GAAP measure. The accompanying financial tables contain a reconciliation to comparable GAAP measures.
 
During the second quarter, the company recorded a non-recurring expense of $61.0 million—approximately $38.2 million after taxes, or 85 cents per share—related to a previously announced litigation settlement with Business Logic Holding Corp. As a result, Morningstar reported a consolidated operating loss of $24.8 million in the second quarter of 2014, compared with operating income of $43.6 million in the same period a year ago. Net loss was $9.8 million, or 22 cents per diluted share, in the second quarter of 2014, compared with net income of $31.1 million, or 66 cents per diluted share, in the second quarter of 2013.
 
Excluding the litigation settlement, Morningstar reported adjusted operating income of $36.2 million in the second quarter of 2014, a decrease of 16.9% compared with the second quarter of 2013. Adjusted operating income declined mainly because of higher compensation expense from additional headcount, reflecting new hires as well as acquisitions. Adjusted operating income is also a non-GAAP measure. The accompanying financial tables contain a reconciliation to comparable GAAP measures.
 
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In June, Morningstar acquired HelloWallet Holdings, Inc., a provider of personalized financial guidance. Because Morningstar previously had a minority stake in HelloWallet, the company recorded a non-cash and non-operating gain of $5.2 million, which had a positive effect of 11 cents per share.
 
Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We’re glad to put the dispute with Business Logic behind us. While the settlement amount is meaningful, we want to move forward and focus on the continued growth and success of our retirement business without the risk, distraction, and uncertainty posed by the lawsuit.”
 
He added, “Organic revenue growth for the second quarter was solid, and we’re seeing momentum as we continue to invest in our existing business as well as in new initiatives. During the quarter, we acquired ByAllAccounts, Inc., a provider of data aggregation technology, in addition to HelloWallet. Client response to both acquisitions has been very positive. We also held successful investment conferences around the world—in Chicago, London, Madrid, and Sydney, along with our first pan-Asian Investment Conference in Hong Kong.”
 
Financial Highlights
 
Revenue and Key Operating Metrics
 
·                   Investment information revenue was $149.5 million, a 6.8% increase from $140.0 million in the second quarter of 2013. Morningstar Direct SM , Morningstar® Advisor Workstation SM  (primarily Morningstar Office SM ), and Morningstar® Data were the main contributors to revenue growth, which was partially offset by lower revenue for Morningstar® Principia®. The company is in the process of migrating clients from Principia to Morningstar Advisor Workstation and other Morningstar products.
·                   Investment management revenue was $39.9 million, a 12.6% increase from $35.4 million in the second quarter of 2013, driven by strong results for Morningstar® Managed Portfolios SM  and Retirement Solutions. Lower revenue for Investment Advisory services partially offset the increase.
·                   Operating margin was negative 13.1% in the second quarter of 2014, down from 24.8% in the same period in 2013. Excluding the litigation settlement, adjusted operating margin was 19.1% in the second quarter of 2014. Higher compensation expense, reflecting new hires as well as acquisitions, was the primary reason for the decline. Adjusted operating margin is a non-GAAP measure; the accompanying financial tables contain a reconciliation to comparable GAAP measures.
 
Cash Flow and Balance Sheet
 
·                   Morningstar generated consolidated free cash flow of $44.8 million in the second quarter of 2014, reflecting cash provided by operating activities of $54.8 million less $10.0 million of cash used for capital expenditures. Free cash flow was down 8.0% from $48.7 million in the second quarter of 2013. Free cash flow is a non-GAAP measure; the accompanying financial tables contain a reconciliation to cash
 
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                        provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.
·                   As of June 30, 2014, cash, cash equivalents, and investments totaled $221.0 million, compared with $298.6 million as of Dec. 31, 2013. Of the $700 million authorized under its share repurchase program, Morningstar had purchased a total of 7.6 million shares for $486.5 million as of June 30, 2014. In the second quarter of 2014, Morningstar repurchased approximately 200,000 shares for $15.0 million.
·                   During the second quarter, the company used approximately $64.4 million in cash for the acquisitions of ByAllAccounts and HelloWallet.
·                   In the third quarter of 2014, Morningstar will pay Business Logic $61.0 million as part of the litigation settlement agreement.
·                   The company expects to pay approximately $7.6 million for its regular quarterly dividend on July 31, 2014.
 
Comparability of Year-Over-Year Results
 
Several items affected the comparability of second-quarter 2014 results versus the same period in 2013.
 
·                   The litigation settlement contributed the majority of the $82.3 million increase in operating expense in the second quarter of 2014.
·                   The company’s second-quarter results included $1.2 million in revenue and $4.9 million of incremental operating expense from acquisitions.
·                   During the second quarter of 2014, commission expense rose $2.1 million compared with the prior-year period, mainly because of a change to the company’s sales commission structure that requires a different accounting treatment. Morningstar now expenses sales commissions as incurred instead of amortizing them over the term of the underlying contracts.
·                   As previously disclosed, about 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue as a result of the company’s change to a centralized organizational structure in 2013. This shift did not affect total operating expense.
 
Operating Highlights
 
·                   Licenses for Morningstar Direct rose 15.9% to 9,222.
·                   Assets under management and advisement for Retirement Solutions were approximately $74.4 billion as of June 30, 2014, versus $55.9 billion as of June 30, 2013. Assets under management and advisement for Morningstar Managed Portfolios were approximately $8.6 billion as of June 30, 2014, compared with $5.9 billion as of June 30, 2013. Both product lines benefited from strong market performance and asset inflows.
·                   Investment Advisory assets under advisement as of June 30, 2014 were $18.7 billion lower versus the same date in 2013 because companies that offer variable annuities have continued to face difficult market conditions. As a result, some of Morningstar’s clients have been managing their fund-of-funds portfolios in-house instead of using outside subadvisors.
·                   Morningstar had approximately 3,800 employees worldwide as of June 30, 2014, compared with 3,425 as of June 30, 2013, reflecting the addition of product and technology roles in the United States, data analysts in India, and the ByAllAccounts and HelloWallet acquisitions.
 
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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 questions about Morningstar’s business to investors@morningstar.com or write to the company 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 individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 473,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 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 investment advisory subsidiaries and had approximately $169 billion in assets under advisement and management as of June 30, 2014. 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, liability for any losses that result from an actual or claimed breach of our fiduciary duties; failing to differentiate our products and continuously create innovative, proprietary research tools; failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy; a prolonged outage of our database and network facilities; any failures or disruptions in our electronic delivery systems and the Internet; liability and/or damage to our reputation as a result of some of our pending litigation; liability related to the storage of personal information about our users; general industry conditions and competition, including current global financial uncertainty, trends in the mutual fund industry, and continued growth in passively managed investment vehicles; the impact of market volatility on revenue from asset-based fees; failing to maintain and protect our brand, independence, and reputation; changes in laws applicable to our investment advisory or credit rating operations, compliance failures, or regulatory action; and challenges faced by our non-U.S. operations, including the concentration of development work at our offshore facilities in China and India. 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, 2013. 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 U.S. Securities and Exchange Commission: consolidated revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue), consolidated operating income excluding the litigation settlement (adjusted operating income), consolidated operating margin excluding the litigation settlement (adjusted operating margin), and free cash flow. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
 
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Morningstar presents consolidated revenue excluding acquisitions, divestitures, and foreign currency translations (organic revenue) because the company believes this non-GAAP measure helps investors better compare period-over-period results.
 
Morningstar presents operating income and operating margin excluding the litigation settlement (adjusted operating income and adjusted operating margin) to show the effect of this non-recurring charge, better reflect period-over-period comparisons, and improve overall understanding of Morningstar’s current and future financial performance.
 
In addition, 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 about free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables.
 
For more information about these non-GAAP measures, please see the reconciliations 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.
 
###
 
©2014 Morningstar, Inc. All Rights Reserved.
 
MORN-E
 
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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations

 	 	 	 	 	 	
 	 	Three months ended June 30	 	Six months ended June 30	 	
(in thousands, except per share amounts)	 	2014	 	2013	 	change	 	2014	 	2013	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	189,385	 	$	175,428	 	8.0%	 	$	370,550	 	$	344,284	 	7.6%	 	
Operating expense(1)(2):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenue	 	81,387	 	64,427	 	26.3%	 	157,101	 	126,077	 	24.6%	 	
Sales and marketing	 	27,949	 	28,035	 	(0.3%	)	56,377	 	56,015	 	0.6%	 	
General and administrative	 	30,438	 	28,120	 	8.2%	 	56,542	 	55,447	 	2.0%	 	
Depreciation and amortization	 	13,391	 	11,262	 	18.9%	 	25,778	 	22,601	 	14.1%	 	
Litigation settlement	 	61,000	 	—	 	—	 	61,000	 	—	 	—	 	
Total operating expense	 	214,165	 	131,844	 	62.4%	 	356,798	 	260,140	 	37.2%	 	
Operating income (loss)	 	(24,780	)	43,584	 	NMF	 	13,752	 	84,144	 	(83.7%	)	
Operating margin	 	(13.1%	)	24.8%	 	(37.9)pp	 	3.7%	 	24.4%	 	(20.7)pp	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating income:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income, net	 	634	 	664	 	(4.5%	)	1,219	 	1,405	 	(13.2%	)	
Other income, net	 	5,264	 	2,447	 	115.1%	 	5,544	 	2,651	 	109.1%	 	
Non-operating income, net	 	5,898	 	3,111	 	89.6%	 	6,763	 	4,056	 	66.7%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and equity in net income of unconsolidated entities	 	(18,882	)	46,695	 	NMF	 	20,515	 	88,200	 	(76.7%	)	
Equity in net income of unconsolidated entities	 	497	 	360	 	38.1%	 	1,096	 	857	 	27.9%	 	
Income tax expense (benefit)	 	(8,611	)	15,955	 	NMF	 	5,039	 	28,382	 	(82.2%	)	
Consolidated net income (loss)	 	(9,774	)	31,100	 	NMF	 	16,572	 	60,675	 	(72.7%	)	
Net loss attributable to noncontrolling interests	 	5	 	21	 	(76.2%	)	35	 	64	 	(45.3%	)	
Net income (loss) attributable to Morningstar, Inc.	 	$	(9,769	)	$	31,121	 	NMF	 	$	16,607	 	$	60,739	 	(72.7%	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) per share attributable to Morningstar, Inc.:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	(0.22	)	$	0.67	 	NMF	 	$	0.37	 	$	1.31	 	(71.8%	)	
Diluted	 	$	(0.22	)	$	0.66	 	NMF	 	$	0.37	 	$	1.30	 	(71.5%	)	
Weighted average shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	44,777	 	46,400	 	(3.5%	)	44,778	 	46,403	 	(3.5%	)	
Diluted	 	44,777	 	46,853	 	(4.4%	)	45,039	 	46,756	 	(3.7%	)	

 	 	 	 	 	 	
 	 	Three months ended June 30	 	Six months ended June 30	 	
 	 	2014	 	2013	 	 	 	2014	 	2013	 	change	 	
(1) Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenue	 	$	1,890	 	$	1,691	 	11.8%	 	$	3,652	 	$	3,392	 	7.7%	 	
Sales and marketing	 	530	 	522	 	1.5%	 	1,027	 	1,034	 	(0.7%	)	
General and administrative	 	1,943	 	1,741	 	11.6%	 	3,623	 	3,311	 	9.4%	 	
Total stock-based compensation expense	 	$	4,363	 	$	3,954	 	10.3%	 	$	8,302	 	$	7,737	 	7.3%	 	
 
(2) Morningstar moved to a more centralized organizational structure in 2013. As a result, approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. For the second quarter of 2014 as compared with the same period in 2013, changes related to our more centralized organizational structure added approximately $7 million of compensation expense to cost of revenue and reduced the compensation expense in our sales and marketing and general and administrative expense categories by approximately $4 million and $3 million, respectively.
 
NMF — Not meaningful, pp — percentage points
 
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Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue (Unaudited)

 	 	 	 	 	 	
 	 	Three months ended June 30	 	Six months ended June 30	 	
 	 	2014	 	2013	 	change	 	2014	 	2013	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	100.0%	 	100.0%	 	—	 	100.0%	 	100.0%	 	—	 	
Operating expense(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenue	 	43.0%	 	36.7%	 	6.3pp	 	42.4%	 	36.6%	 	5.8pp	 	
Sales and marketing	 	14.8%	 	16.0%	 	(1.2)pp	 	15.2%	 	16.3%	 	(1.1)pp	 	
General and administrative	 	16.1%	 	16.0%	 	0.1pp	 	15.3%	 	16.1%	 	(0.8)pp	 	
Depreciation and amortization	 	7.1%	 	6.4%	 	0.7pp	 	7.0%	 	6.6%	 	0.4pp	 	
Litigation settlement	 	32.2%	 	0.0%	 	32.2pp	 	16.5%	 	0.0%	 	16.5pp	 	
Total operating expense(2)	 	113.1%	 	75.2%	 	37.9pp	 	96.3%	 	75.6%	 	20.7pp	 	
Operating margin	 	-13.1%	 	24.8%	 	(37.9)pp	 	3.7%	 	24.4%	 	(20.7)pp	 	

 	 	 	 	 	 	
 	 	Three months ended June 30	 	Six months ended June 30	 	
 	 	2014	 	2013	 	change	 	2014	 	2013	 	change	 	
(1) Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenue	 	1.0%	 	1.0%	 	—	 	1.0%	 	1.0%	 	—	 	
Sales and marketing	 	0.3%	 	0.3%	 	—	 	0.3%	 	0.3%	 	—	 	
General and administrative	 	1.0%	 	1.0%	 	—	 	1.0%	 	1.0%	 	—	 	
Total stock-based compensation expense(2)	 	2.3%	 	2.3%	 	—	 	2.2%	 	2.2%	 	—	 	
 
(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 June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	2014	 	2013	 	
 	 	 	 	 	 	 	 	 	 	
Operating activities	 	 	 	 	 	 	 	 	 	
Consolidated net income (loss)	 	$	(9,774	)	$	31,100	 	$	16,572	 	$	60,675	 	
Adjustments to reconcile consolidated net income (loss) to net cash flows from operating activities:	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	13,391	 	11,262	 	25,778	 	22,601	 	
Stock-based compensation expense	 	4,363	 	3,954	 	8,302	 	7,737	 	
Other, net	 	(7,795	)	(1,826	)	(11,843	)	(7,301	)	
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions	 	54,619	 	13,972	 	27,879	 	1,423	 	
Cash provided by operating activities	 	54,804	 	58,462	 	66,688	 	85,135	 	
Investing activities	 	 	 	 	 	 	 	 	 	
Purchases of investments	 	(6,018	)	(78,605	)	(7,715	)	(82,299	)	
Proceeds from maturities and sales of investments	 	21,787	 	34,976	 	95,499	 	96,128	 	
Capital expenditures	 	(10,006	)	(9,763	)	(30,799	)	(18,881	)	
Acquisitions, net of cash acquired	 	(64,447	)	(11,125	)	(64,447	)	(11,125	)	
Proceeds from sale of a business, net	 	—	 	957	 	—	 	957	 	
Purchase of equity and cost method investments	 	—	 	(909	)	—	 	(909	)	
Other, net	 	(1	)	(456	)	259	 	436	 	
Cash used for investing activities	 	(58,685	)	(64,925	)	(7,203	)	(15,693	)	
Financing activities	 	 	 	 	 	 	 	 	 	
Proceeds from stock-option exercises	 	794	 	722	 	2,072	 	2,810	 	
Employee taxes withheld for restricted stock units	 	(4,996	)	(5,075	)	(5,003	)	(5,157	)	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	1,340	 	2,255	 	1,913	 	3,842	 	
Common shares repurchased	 	(15,023	)	(38,697	)	(36,720	)	(53,937	)	
Dividends paid	 	(7,665	)	(5,889	)	(15,309	)	(5,889	)	
Other, net	 	19	 	(47	)	14	 	(50	)	
Cash used for financing activities	 	(25,531	)	(46,731	)	(53,033	)	(58,381	)	
Effect of exchange rate changes on cash and cash equivalents	 	1,033	 	(1,888	)	1,642	 	(5,140	)	
Net increase (decrease) in cash and cash equivalents	 	(28,379	)	(55,082	)	8,094	 	5,921	 	
Cash and cash equivalents—Beginning of period	 	204,633	 	224,892	 	168,160	 	163,889	 	
Cash and cash equivalents—End of period	 	$	176,254	 	$	169,810	 	$	176,254	 	$	169,810	 	
 
8 

 
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

 	 	June 30	 	December 31	 	
($000)	 	2014	 	2013	 	
 	 	 	 	 	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	176,254	 	$	168,160	 	
Investments	 	44,696	 	130,407	 	
Accounts receivable, net	 	135,017	 	114,131	 	
Deferred tax asset, net	 	6,437	 	3,892	 	
Income tax receivable, net	 	18,616	 	3,942	 	
Other	 	21,565	 	26,361	 	
Total current assets	 	402,585	 	446,893	 	
 	 	 	 	 	 	
Property, equipment, and capitalized software, net	 	109,900	 	104,986	 	
Investments in unconsolidated entities	 	30,287	 	38,714	 	
Goodwill	 	390,367	 	326,450	 	
Intangible assets, net	 	109,311	 	103,909	 	
Other assets	 	7,835	 	9,716	 	
Total assets	 	$	1,050,285	 	$	1,030,668	 	
 	 	 	 	 	 	
Liabilities and equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable and accrued liabilities	 	$	97,251	 	$	42,131	 	
Accrued compensation	 	58,409	 	71,403	 	
Deferred revenue	 	161,921	 	149,225	 	
Other	 	4,607	 	6,786	 	
Total current liabilities	 	322,188	 	269,545	 	
 	 	 	 	 	 	
Accrued compensation	 	7,512	 	8,193	 	
Deferred tax liability, net	 	18,245	 	23,755	 	
Other long-term liabilities	 	33,678	 	37,885	 	
Total liabilities	 	381,623	 	339,378	 	
Total equity	 	668,662	 	691,290	 	
Total liabilities and equity	 	$	1,050,285	 	$	1,030,668	 	
 
9 

 
Morningstar, Inc. and Subsidiaries
Supplemental Data (Unaudited)

 	 	As of June 30	 	
 	 	2014	 	2013	 	% change	 	
 	 	 	 	 	 	 	 	
Our business	 	 	 	 	 	 	 	
Morningstar.com Premium Membership subscriptions (U.S.)	 	122,736	 	123,881	 	(0.9%	)	
Registered users for Morningstar.com (U.S.)	 	8,021,734	 	7,690,300	 	4.3%	 	
U.S. Advisor Workstation clients	 	170	 	151	(2)	12.6%	 	
U.S. Morningstar Office licenses	 	4,201	 	3,985	(2)	5.4%	 	
Principia subscriptions	 	14,805	 	22,464	 	(34.1%	)	
Morningstar Direct licenses	 	9,222	 	7,960	(1)	15.9%	 	
Assets under advisement and management (approximate)	 	 	 	 	 	 	 	
Investment Advisory services	 	$82.7 bil	 	$101.4 bil	 	(18.4%	)	
Retirement Solutions	 	$74.4 bil	 	$55.9 bil	 	33.1%	 	
Morningstar Managed Portfolios	 	$8.6 bil	 	$5.9 bil	 	45.8%	 	
Ibbotson Australia	 	$3.3 bil	 	$2.9 bil	 	13.8%	 	
 	 	 	 	 	 	 	 	
Our employees (approximate)	 	 	 	 	 	 	 	
Worldwide headcount	 	3,800	 	3,425	 	10.9%	 	
Number of worldwide equity and credit analysts	 	175	 	150	 	16.7%	 	
Number of worldwide fund analysts	 	100	 	105	 	(4.8%	)	
 	 	 	 	 	 	 	 	
(1) Revised to reflect a minor calculation change.	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
(2) Beginning in the second quarter of 2014, we changed our reporting to show the number of enterprise clients for Morningstar Advisor Workstation instead of the number of individual licenses. We believe this is a more meaningful indicator of underlying business trends because per-user pricing varies significantly depending on the scope of the license. We also began disclosing the number of licenses for Morningstar Office as a separate line item.	

 	 	Three months ended June 30	 	Six months ended June 30	 	
 	 	2014	 	2013	 	2014	 	2013	 	
Average assets under management and advisement	 	$166.3 bil	 	$161.6 bil	 	$164.0 bil	 	$157.6 bil	 	
Number of new commercial mortgage-backed securities (CMBS) new-issue ratings completed	 	9	 	8	 	18	 	18	 	
Rated balance for CMBS new-issue ratings	 	$4.7 bil	 	$6.8 bil	 	$10.3 bil	 	$12.2 bil	 	

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	2014	 	2013	 	
Revenue	 	 	 	 	 	 	 	 	 	
Investment information	 	$	149,527	 	$	140,031	 	$	290,797	 	$	275,116	 	
Investment management	 	39,858	 	$	35,397	 	79,753	 	$	69,168	 	
Consolidated revenue	 	$	189,385	 	$	175,428	 	$	370,550	 	$	344,284	 	
 	 	 	 	 	 	 	 	 	 	
Revenue—U.S.	 	$	136,453	 	$	126,335	 	$	266,405	 	$	247,748	 	
Revenue—International	 	$	52,932	 	$	49,093	 	$	104,145	 	$	96,536	 	

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	2014	 	2013	 	
Effective tax rate	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes and equity in net income of unconsolidated entities	 	$	(18,882	)	$	46,695	 	$	20,515	 	$	88,200	 	
Equity in net income of unconsolidated entities	 	497	 	360	 	1,096	 	857	 	
Net loss attributable to noncontrolling interests	 	5	 	21	 	35	 	64	 	
Total	 	$	(18,380	)	$	47,076	 	$	21,646	 	$	89,121	 	
Income tax expense (benefit)	 	$	(8,611	)	$	15,955	 	$	5,039	 	$	28,382	 	
Effective tax rate	 	46.8%	 	33.9%	 	23.3%	 	31.8%	 	
 
10 

 
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 June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	% change	 	2014	 	2013	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated revenue	 	$	189,385	 	$	175,428	 	8.0%	 	$	370,550	 	$	344,284	 	7.6%	 	
Less: divestitures	 	—	 	—	 	NMF	 	—	 	—	 	NMF	 	
Less: acquisitions	 	(1,236	)	—	 	NMF	 	(2,713	)	—	 	NMF	 	
Favorable effect of foreign currency translations	 	(885	)	—	 	NMF	 	(79	)	—	 	NMF	 	
Revenue excluding acquisitions, divestitures, and foreign currency translations	 	$	187,264	 	$	175,428	 	6.7%	 	$	367,758	 	$	344,284	 	6.8%	 	
 
Reconciliation from operating income to operating income, excluding the litigation settlement (adjusted operating income):

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	% change	 	2014	 	2013	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	$	(24,780	)	$	43,584	 	(156.9%	)	$	13,752	 	$	84,144	 	(83.7%	)	
Less: litigation settlement	 	61,000	 	—	 	—	 	61,000	 	—	 	—	 	
Operating income, excluding litigation settlement	 	$	36,220	 	$	43,584	 	(16.9%	)	$	74,752	 	$	84,144	 	(11.2%	)	
 
Reconciliation from operating margin to operating margin, excluding the litigation settlement (adjusted operating margin):

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	% change	 	2014	 	2013	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	(13.1%	)	24.8%	 	(37.9)pp	 	3.7%	 	24.4%	 	(20.7)pp	 	
Less: litigation settlement	 	32.2%	 	—	 	32.2pp	 	16.5%	 	—	 	16.5pp	 	
Operating margin, excluding litigation settlement	 	19.1%	 	24.8%	 	(5.7)pp	 	20.2%	 	24.4%	 	(4.2)pp	 	
 
Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	% change	 	2014	 	2013	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash provided by operating activities	 	$	54,804	 	$	58,462	 	(6.3%	)	$	66,688	 	$	85,135	 	(21.7%	)	
Less: Capital expenditures	 	(10,006	)	(9,763	)	2.5%	 	(30,799	)	(18,881	)	63.1%	 	
Free cash flow	 	$	44,798	 	$	48,699	 	(8.0%	)	$	35,889	 	$	66,254	 	(45.8%	)	
 
The following table summarizes the change in operating expense:

 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2014	 	2013	 	$ change	 	2014	 	2013	 	$ change	 	
Total operating expense	 	$	214,165	 	$	131,844	 	$	82,321	 	$	356,798	 	$	260,140	 	$	96,658	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions	 	 	 	 	 	4,890	 	 	 	 	 	4,890	 	
Unfavorable impact of currency	 	 	 	 	 	64	 	 	 	 	 	556	 	
Litigation settlement	 	 	 	 	 	61,000	 	 	 	 	 	61,000	 	
All other changes in operating expense	 	 	 	 	 	16,367	 	 	 	 	 	30,212	 	
Total	 	 	 	 	 	$	82,321	 	 	 	 	 	$	96,658	 	

11