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

For best results when printing this announcement, please click on the link
below:

http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=urn:newsml:reuters.com:20130213:nPnCG59376

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

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

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

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

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

Accomplishments:

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

Challenges:

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

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

For the full year, international revenue increased $6.4 million, or 3.5%.
Excluding acquisitions, divestitures, and foreign currency translations,
international revenue was up 6.5%. International revenue excluding acquisitions,
divestitures, and foreign currency translations is a non-GAAP measure; the
accompanying financial tables contain a reconciliation to international revenue.

Operating Income: Consolidated operating income was $39.3 million in the
fourth quarter of 2012, a 15.0% increase from the same period in 2011. Operating
expense rose $6.9 million, or 5.5%, in the fourth quarter of 2012. For the full
year, consolidated operating income rose 8.9% to $150.7 million compared with
$138.4 million in 2011. Operating expense rose $14.6 million, or 3.0%, in
2012.

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

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

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

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

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

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

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

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

Free cash flow is a non-GAAP measure; the accompanying financial tables contain
a reconciliation to cash provided by operating activities. Morningstar defines
free cash flow as cash provided by or used for operating activities less capital
expenditures.

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

Business Segment Performance

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

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

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

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

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

Corporate Unallocated: This category includes costs related to corporate
functions, including general management, information technology used to support
corporate systems, legal, finance, human resources, marketing, and corporate
communications. It also includes capitalization of internal product development
costs. Costs in this category were $7.3 million in the fourth quarter, an
increase of $3.8 million, or 108.3%. Higher bonus expense in the fourth quarter
of 2012 contributed to the increase. The company capitalized $2.5 million of
operating expense in the quarter for software development, compared with $2.7
million in the fourth quarter of 2011.

Annual Meeting

Investors are invited to attend Morningstar's annual meeting at 9 a.m. on
Tuesday, May 14, 2013, at its corporate headquarters at 22 W. Washington Street
in Chicago. If you are interested in attending, please send an email to
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 address matters that are, to
different degrees, uncertain, and often contain words such as "may," "could,"
"expect," "intend," "plan," "seek," "anticipate," "believe," "estimate,"
"predict," "potential," or "continue." These statements involve known and
unknown risks and uncertainties that may cause the events we discussed not to
occur or to differ significantly from what we expected. For us, these risks and
uncertainties include, among others, general industry conditions and
competition, including current global financial uncertainty; the impact of
market volatility on revenue from asset-based fees; damage to our reputation
resulting from claims made about possible conflicts of interest; liability for
any losses that result from an actual or claimed breach of our fiduciary duties;
financial services industry consolidation; liability related to the storage of
personal information about our users; a prolonged outage of our database and
network facilities; challenges faced by our non-U.S. operations; and the
availability of free or low-cost investment information. A more complete
description of these risks and uncertainties can be found in our filings with
the Securities and Exchange Commission, including our Annual Report on Form 10-K
for the year ended December 31, 2011. If any of these risks and uncertainties
materialize, our actual future results may vary significantly from what we
expected. We do not undertake to update our forward-looking statements as a
result of new information or future events.

Non-GAAP Financial Measures

To supplement Morningstar's consolidated financial statements presented in
accordance with U.S. Generally Accepted Accounting Principles (GAAP),
Morningstar uses the following measures considered as non-GAAP by the Securities
and Exchange Commission: free cash flow, consolidated revenue excluding
acquisitions, divestitures, and foreign currency translations (organic revenue),
and international revenue excluding acquisitions, divestitures, and foreign
currency translations. These non-GAAP measures may not be comparable to
similarly titled measures reported by other companies.

Morningstar presents free cash flow solely as supplemental disclosure to help
investors better understand how much cash is available after Morningstar spends
money to operate its business. Morningstar uses free cash flow to evaluate its
business. Free cash flow should not be considered an alternative to any measure
required to be reported under GAAP (such as cash provided by (used for)
operating, investing, and financing activities). For more information on free
cash flow, please see the reconciliation from cash provided by operating
activities to free cash flow included in the accompanying financial tables.
Morningstar presents consolidated revenue excluding acquisitions, divestitures,
and foreign currency translations (organic revenue) and international revenue
excluding acquisitions, divestitures, and foreign currency translations because
the company believes these non-GAAP measures help investors better compare
period-to-period results. For more information, please see the reconciliation
provided in the accompanying financial tables.

All dollar and percentage comparisons, which are often accompanied by words such
as "increase," "decrease," "grew," "declined, "or "was similar" refer to a
comparison with the same period in the previous year unless otherwise stated.

©2013 Morningstar, Inc. All Rights Reserved.

MORN-E

Contacts:

Media: Margaret Kirch Cohen, 312-696-6383 or margaret.cohen@morningstar.com

Investors may submit questions to investors@morningstar.com.

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income

Three months ended December 31 Year ended December 31
(in thousands, except per share amounts) 2012 2011 change 2012 2011 change

Revenue $ 170,609 $158,571 7.6% $ 658,288 $ 631,400 4.3%
Operating expense1:
Cost of goods sold 47,868 48,203 (0.7%) 195,347 182,132 7.3%
Development 12,772 14,006 (8.8%) 51,436 53,157 (3.2%)
Sales and marketing 27,453 26,197 4.8% 108,884 106,699 2.0%
General and administrative 31,767 24,829 27.9% 108,857 108,084 0.7%
Depreciation and amortization 11,480 11,201 2.5% 43,096 42,913 0.4%
Total operating expense 131,340 124,436 5.5% 507,620 492,985 3.0%
Operating income 39,269 34,135 15.0% 150,668 138,415 8.9%
Operating margin 23.0% 21.5% 1.5pp 22.9% 21.9% 1.0pp

Non-operating income (expense), net:
Interest income, net 1,305 1,219 7.1% 5,153 2,361 118.3%
Other income (expense), net (1,882) 286 NMF (2,196) (652) 236.8%
Non-operating income (expense), net (577) 1,505 NMF 2,957 1,709 73.0%

Income before income taxes and equity in net income 38,692 35,640 8.6% 153,625 140,124 9.6%

of unconsolidated entities
Income tax expense 11,437 8,073 41.7% 52,878 43,658 21.1%
Equity in net income of unconsolidated entities 486 451 7.8% 2,027 1,848 9.7%
Consolidated net income from continuing operations 27,741 28,018 (1.0%) 102,774 98,314 4.5%
Gain on sale of discontinued operations, net of tax 5,188 - - 5,188 - -
Consolidated net income 32,929 28,018 17.5% 107,962 98,314 9.8%
Net (income) loss attributable to noncontrolling interests 55 (63) NMF 117 43 172.1%
Net income attributable to Morningstar, Inc. $ 32,984 $ 27,955 18.0% $ 108,079 $ 98,357 9.9%

Net income per share attributable to Morningstar, Inc.:
Basic
Continuing operations $ 0.59 $ 0.56 5.4% $ 2.12 $ 1.96 8.2%
Discontinued operations $ 0.11 $ - - $ 0.11 $ - -
Diluted
Continuing operations $ 0.58 $ 0.55 5.5% $ 2.10 $ 1.92 9.4%
Discontinued operations $ 0.11 $ - - $ 0.10 $ - -
Weighted average common shares outstanding:
Basic 46,913 49,883 (6.0%) 48,497 50,032 (3.1%)
Diluted 47,511 50,732 (6.3%) 49,148 50,988 (3.6%)

Three months ended December 31 Year ended December 31
2012 2011 2012 2011
(1) Includes stock-based compensation expense of:
Cost of goods sold $ 1,184 $ 1,082 $ 4,488 $ 4,150
Development 493 498 1,928 2,086
Sales and marketing 504 479 1,937 1,871
General and administrative 5,130 1,801 10,552 7,196
Total stock-based compensation expense $ 7,311 $ 3,860 $ 18,905 $ 15,303

NMF - Not meaningful, pp - percentage points

Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue

Three months ended December 31 Year ended December 31
2012 2011 change 2012 2011 change

Revenue 100.0% 100.0% - 100.0% 100.0% -
Operating expense1:
Cost of goods sold 28.1% 30.4% (2.3)pp 29.7% 28.8% 0.9pp
Development 7.5% 8.8% (1.3)pp 7.8% 8.4% (0.6)pp
Sales and marketing 16.1% 16.5% (0.4)pp 16.5% 16.9% (0.4)pp
General and administrative 18.6% 15.7% 2.9pp 16.5% 17.1% (0.6)pp
Depreciation and amortization 6.7% 7.1% (0.4)pp 6.5% 6.8% (0.3)pp
Total operating expense2 77.0% 78.5% (1.5)pp 77.1% 78.1% (1.0)pp
Operating margin 23.0% 21.5% 1.5pp 22.9% 21.9% 1.0pp

Three months ended December 31 Year ended December 31
2012 2011 change 2012 2011 change
(1) Includes stock-based compensation expense of:
Cost of goods sold 0.7% 0.7% - 0.7% 0.7% -
Development 0.3% 0.3% - 0.3% 0.3% -
Sales and marketing 0.3% 0.3% - 0.3% 0.3% -
General and administrative 3.0% 1.1% 1.9pp 1.6% 1.1% 0.5pp
Total stock-based compensation expense2 4.3% 2.4% 1.9pp 2.9% 2.4% 0.5pp

(2) Sum of percentages may not equal total because of rounding.

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

Three months ended December 31 Year ended December 31
($000) 2012 2011 2012 2011

Operating activities
Consolidated net income $ 32,929 $ 28,018 $ 107,962 $ 98,314
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization 11,480 11,201 43,096 42,913
Deferred income taxes 5,824 (2,877) 6,316 (4,436)
Stock-based compensation expense 7,311 3,860 18,905 15,303
Equity in net income of unconsolidated entities (486) (451) (2,027) (1,848)
Excess tax benefits from stock-option exercises
and vesting of restricted stock units (2,203) (1,904) (7,210) (9,525)
Gain on sale of discontinued operations, net of tax (5,188) - (5,188) -
Loss on sale of cost method investment 2,034 - 2,034 -
Other, net (174) (854) 1,158 1,829
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (10,555) (3,455) (17,124) (3,858)
Other assets 3,774 732 223 2,728
Accounts payable and accrued liabilities 5,489 454 1,173 (4,821)
Accrued compensation 11,990 13,418 (8,861) 10,176
Deferred revenue 85 8,960 7,769 9,578
Income taxes - current (8,425) 1,309 (1,205) 10,751
Deferred rent 116 (46) 407 (1,030)
Other liabilities (321) 295 (1,432) (1,098)
Cash provided by operating activities 53,680 58,660 145,996 164,976
Investing activities
Purchases of investments (10,562) (84,405) (145,491) (383,281)
Proceeds from maturities and sales of investments 43,967 75,357 260,317 297,956
Capital expenditures (7,163) (8,633) (30,039) (23,322)
Acquisitions, net of cash acquired - - - 300
Proceeds from sale of a business, net 5,734 - 5,734 -
Purchase of equity and cost method investments - (2,450) (10,304) (2,450)
Other, net (21) (845) (25) 30
Cash provided by (used for) investing activities 31,955 (20,976) 80,192 (110,767)
Financing activities
Proceeds from stock-option exercises, net 2,049 2,072 4,809 8,702
Excess tax benefits from stock-option exercises
and vesting of restricted stock units 2,203 1,904 7,210 9,525
Common shares repurchased (68,115) (12,146) (251,813) (40,672)
Dividends paid (10,620) (2,502) (25,487) (10,041)
Other, net 123 253 105 (110)
Cash used for financing activities (74,360) (10,419) (265,176) (32,596)
Effect of exchange rate changes on cash and cash equivalents 433 (1,098) 2,440 (1,352)
Net increase (decrease) in cash and cash equivalents 11,708 26,167 (36,548) 20,261
Cash and cash equivalents-Beginning of period 152,181 174,270 200,437 180,176
Cash and cash equivalents-End of period $ 163,889 $ 200,437 $ 163,889 $ 200,437

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

Three months ended December 31 Year ended December 31
($000) 2012 2011 2012 2011

Cash provided by operating activities $ 53,680 $ 58,660 $ 145,996 $ 164,976
Less: Capital expenditures (7,163) (8,633) (30,039) (23,322)
Free cash flow $ 46,517 $ 50,027 $ 115,957 $ 141,654

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

December 31 December 31
($000) 2012 2011

Assets
Current assets:
Cash and cash equivalents $ 163,889 $ 200,437
Investments 157,529 269,755
Accounts receivable, net 114,361 113,312
Deferred tax asset, net 3,741 5,104
Income tax receivable, net 14,267 7,445
Other 20,823 15,980
Total current assets 474,610 612,033

Property, equipment, and capitalized software, net 84,022 68,196
Investments in unconsolidated entities 35,305 27,642
Goodwill 320,845 318,492
Intangible assets, net 116,732 139,809
Other assets 10,438 5,912
Total assets $ 1,041,952 $ 1,172,084

Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities $ 43,777 $ 41,403
Accrued compensation 67,317 73,124
Deferred revenue 146,015 155,494
Other 256 612
Total current liabilities 257,365 270,633

Accrued compensation 8,281 5,724
Deferred tax liability, net 21,583 15,940
Other long-term liabilities 27,828 22,771
Total liabilities 315,057 315,068
Total equity 726,895 857,016
Total liabilities and equity $ 1,041,952 $ 1,172,084

Morningstar, Inc. and Subsidiaries
Segment Information

Three months ended December 31 Year ended December 31
($000) 2012 2011 change 2012 2011 change

Revenue
Investment Information $ 138,953 $126,590 9.8% $ 529,984 $ 500,909 5.8%
Investment Management 31,656 31,981 (1.0%) 128,304 130,491 (1.7%)
Consolidated revenue $ 170,609 $158,571 7.6% $ 658,288 $ 631,400 4.3%

Revenue-U.S. $ 120,505 $112,075 7.5% $ 466,947 $ 446,470 4.6%
Revenue-International $ 50,104 $ 46,496 7.8% $ 191,341 $ 184,930 3.5%

Revenue-U.S. (percentage of consolidated revenue) 70.6% 70.7% (0.1)pp 70.9% 70.7% 0.2pp
Revenue-International (percentage of consolidated revenue) 29.4% 29.3% 0.1pp 29.1% 29.3% (0.2)pp

Operating income (loss)1
Investment Information $ 40,056 $ 30,684 30.5% $ 150,700 $ 131,514 14.6%
Investment Management 15,521 16,050 (3.3%) 61,127 69,649 (12.2%)
Intangible amortization and corporate depreciation expense (9,006) (9,094) (1.0%) (33,674) (34,659) (2.8%)
Corporate unallocated (7,302) (3,505) 108.3% (27,485) (28,089) (2.2%)
Consolidated operating income $ 39,269 $ 34,135 15.0% $ 150,668 $ 138,415 8.9%

Operating margin1
Investment Information 28.8% 24.2% 4.6pp 28.4% 26.3% 2.1pp
Investment Management 49.0% 50.2% (1.2)pp 47.6% 53.4% (5.8)pp
Consolidated operating margin 23.0% 21.5% 1.5pp 22.9% 21.9% 1.0pp

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

Top Five Products (Segment) Revenue % of
Year Ended December 31, 2012 ($000) Revenue `
Morningstar Data (Investment Information) $ 150,352 22.8%
Morningstar Advisor Workstation (Investment Information) 84,264 12.8%
Morningtar Direct (Investment Information) 66,236 10.1%
Investment Advisory Services (Investment Management) 66,126 10.0%
Morningstar.com (Investment Information) 53,671 8.2%

Top Five Products (Segment) Revenue % of
Year Ended December 31, 2011 ($000) Revenue
Morningstar Data (Investment Information) $ 140,594 22.3%
Morningstar Advisor Workstation (Investment Information) 77,882 12.3%
Investment Advisory Services (Investment Management) 71,253 11.3%
Morningstar.com (Investment Information) 56,352 8.9%
Morningtar Direct (Investment Information) 52,481 8.3%

Morningstar, Inc. and Subsidiaries
Supplemental Data

As of December 31
2012 2011 % change
Our employees
Worldwide headcount (approximate) 3,495 3,465 0.9%
Number of worldwide equity and credit analysts (approximate) 155 140 (1) 10.7%
Number of worldwide fund analysts (approximate) 110 105 (1) 4.8%

Our business
Investment Information
Morningstar.com Premium Membership subscriptions (U.S.) 123,899 130,354 (5.0%)
Registered users for Morningstar.com (U.S.) 7,521,043 6,891,458 9.1%
U.S. Advisor Workstation and Morningstar Office licenses  162,904 160,287 1.6%
Principia subscriptions 26,807 31,270 (14.3%)
Morningstar Direct licenses 7,435 6,144 21.0%

Investment Management
Assets under advisement and management (approximate)
Investment Advisory Services $94.3 bil $137.5 bil (31.4%)
Retirement Solutions $47.2 bil $37.4 bil 26.2%
Morningstar Managed Portfolios $4.7 bil $3.1 bil (1) 51.6%
Ibbotson Australia $3.3 bil $2.9 bil 13.8%

(1) Revised

Three months ended December 31 Year ended December 31
($000) 2012 2011 2012 2011
Effective tax rate
Income before income taxes and equity in net income of unconsolidated entities $ 38,692 $ 35,640 $ 153,625 $ 140,124
Equity in net income of unconsolidated entities 486 451 2,027 1,848
Net (income) loss attributable to noncontrolling interests 55 (63) 117 43
Total $ 39,233 $ 36,028 $ 155,769 $ 142,015
Income tax expense $ 11,437 $ 8,073 $ 52,878 $ 43,658
Effective tax rate 29.2% 22.4% 33.9% 30.7%

Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures

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

Three months ended December 31 Year ended December 31
($000) 2012 2011 % change 2012 2011 % change

Consolidated revenue $ 170,609 $ 158,571 7.6% $ 658,288 $ 631,400 4.3%
Less: divestitures - (1,057) NMF - (1,057) NMF
Less: acquisitions - - n/a - - n/a
(Favorable) unfavorable impact of foreign currency translations (292) - NMF 4,620 - NMF
Revenue excluding divestitures and
foreign currency translations $ 170,317 $ 157,514 8.1% $ 662,908 $ 630,343 5.2%

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

Three months ended December 31 Year ended December 31
($000) 2012 2011 % change 2012 2011 % change

International revenue $ 50,104 $ 46,496 7.8% $ 191,341 $ 184,930 3.5%
Less: divestitures - (982) NMF - (982) NMF
Less: acquisitions - - n/a - - n/a
(Favorable) unfavorable impact of foreign currency translations (292) - NMF 4,620 - NMF
International revenue excluding divestitures
and foreign currency translations $ 49,812 $ 45,514 9.4% $ 195,961 $ 183,948 6.5%

The following table summarizes the change in operating expense:

Three months ended December 31 Year ended December 31
($000) 2012 2011 $ change 2012 2011 $ change
Total operating expense $ 131,340 $ 124,436 $ 6,904 $ 507,620 $ 492,985 $ 14,635

(Favorable) unfavorable impact of foreign currency translations 614 (3,332)
All other changes in operating expense 6,290 17,967
Total $ 6,904 $ 14,635

SOURCE Morningstar, Inc.