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Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2011 Financial Results

Wednesday, February 15, 2012

Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2011 Financial Results16:01 EST Wednesday, February 15, 2012CHICAGO, Feb. 15, 2012 /PRNewswire/ -- 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."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.  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 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 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 PerformanceInvestment 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).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.Annual MeetingInvestors 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 StatementsThis 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 MeasuresTo 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.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.©2012 Morningstar, Inc.  All Rights Reserved.MORN-EMorningstar, Inc. and SubsidiariesUnaudited Condensed Consolidated Statements of IncomeThree months ended December 31Year ended December 31(in thousands, except per share amounts)20112010change20112010changeRevenue$ 158,571$ 151,1534.9%$ 631,400$ 555,35113.7%Operating expense(1):Cost of goods sold48,20342,30114.0%182,132157,06816.0%Development14,00613,7531.8%53,15749,2447.9%Sales and marketing26,19725,5962.3%106,69995,47311.8%General and administrative24,82925,632(3.1%)108,08492,84316.4%Depreciation and amortization11,20111,582(3.3%)42,91339,6648.2%   Total operating expense124,436118,8644.7%492,985434,29213.5%Operating income 34,13532,2895.7%138,415121,05914.3%Operating margin21.5%  21.4%  0.1pp21.9%  21.8%  0.1ppNon-operating income (expense), net:Interest income, net1,21974563.6%2,3612,437(3.1%)Other income (expense), net286(61)NMF(652)4,295NMF     Non-operating income, net1,505684120.0%1,7096,732(74.6%)Income before income taxes and equity in net income of unconsolidated entities35,64032,9738.1%140,124127,7919.7%Income tax expense8,0739,619(16.1%)43,65842,7562.1%Equity in net income of unconsolidated entities45124683.3%1,8481,42230.0%Consolidated net income28,01823,60018.7%98,31486,45713.7%Net (income) loss attributable to noncontrolling interests(63)(97)(35.1%)43(87)NMFNet income attributable to Morningstar, Inc.$   27,955$   23,50318.9%$   98,357$   86,37013.9%Net income per share attributable to Morningstar, Inc.:Basic$       0.56$       0.4719.1%$       1.96$       1.7512.0%Diluted$       0.55$       0.4619.6%$       1.92$       1.7012.9%Weighted average common shares outstanding:Basic49,88349,52350,03249,249Diluted50,73250,76150,98850,555Three months ended December 31Year ended December 312011201020112010(1) Includes stock-based compensation expense of:Cost of goods sold$     1,082$        891$     4,150$     3,473Development4984812,0861,840Sales and marketing4794281,8711,786General and administrative1,8011,6567,1966,694   Total stock-based compensation expense$     3,860$     3,456$   15,303$   13,793NMF ? Not meaningful, pp ? percentage pointsMorningstar, Inc. and SubsidiariesOperating Expense as a Percentage of RevenueThree months ended December 31Year ended December 3120112010change20112010changeRevenue100.0%100.0%-100.0%100.0%-Operating expense(1):Cost of goods sold30.4%28.0%2.4pp28.8%28.3%0.5ppDevelopment8.8%9.1%(0.3)pp8.4%8.9%(0.5)ppSales and marketing16.5%16.9%(0.4)pp16.9%17.2%(0.3)ppGeneral and administrative15.7%17.0%(1.3)pp17.1%16.7%0.4ppDepreciation and amortization7.1%7.7%(0.6)pp6.8%7.1%(0.3)pp   Total operating expense(2)78.5%78.6%(0.1)pp78.1%78.2%(0.1)ppOperating margin21.5%21.4%0.1pp21.9%21.8%0.1ppThree months ended December 31Year ended December 3120112010change20112010change(1) Includes stock-based compensation expense of:Cost of goods sold0.7%0.6%0.1pp0.7%0.6%0.1ppDevelopment0.3%0.3%-0.3%0.3%-Sales and marketing0.3%0.3%-0.3%0.3%-General and administrative1.1%1.1%-1.1%1.2%(0.1)pp   Total stock-based compensation expense(2)2.4%2.3%0.1pp2.4%2.5%(0.1)pp(2) Sum of percentages may not equal total because of rounding.Morningstar, Inc. and SubsidiariesUnaudited Condensed Consolidated Statements of Cash FlowsThree months ended December 31Year ended December 31($000)2011201020112010Operating activitiesConsolidated net income$   28,018$   23,600$   98,314$   86,457Adjustments to reconcile consolidated net income to net cashflows from operating activities:Depreciation and amortization11,20111,58242,91339,664Deferred income tax (benefit) expense(2,877)(1,558)(4,436)211Stock-based compensation expense3,8603,45615,30313,793Equity 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)1,829323Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable(3,455)(16,398)(3,858)(23,652)Other assets7321672,728(2,341)Accounts payable and accrued liabilities454(2,784)(4,821)(759)Accrued compensation13,41814,43610,17612,166Deferred revenue8,9607,6909,5785,752Income taxes - current1,3094,26010,7514,569Deferred rent(46)922(1,030)1,364Other liabilities295746(1,098)(638)          Cash provided by operating activities58,66043,310164,976123,416Investing activitiesPurchases of investments(38,495)(58,240)(320,193)(186,283)Proceeds from maturities and sales of investments 29,44737,732234,868214,929Capital 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 activitiesProceeds from stock-option exercises, net2,0724,0138,7029,220Excess tax benefits from stock-option exercises  and vesting of restricted stock units1,9042,4189,5257,507Common shares repurchased(12,146)(3,785)(40,672)(3,785)Dividends paid(2,502)-(10,041)-Other, net253112(110)(417)       Cash provided by (used for) financing activities(10,419)2,758(32,596)12,525Effect of exchange rate changes on cash and cash equivalents(1,098)(229)(1,352)1,688Net increase in cash and cash equivalents26,1674,30420,26149,680Cash and cash equivalents?Beginning of period174,270175,872180,176130,496Cash and cash equivalents?End of period$ 200,437$ 180,176$ 200,437$ 180,176Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):Three months ended December 31Year ended December 31($000)2011201020112010Cash provided by operating activities$   58,660$   43,310$ 164,976$ 123,416Less: Capital expenditures(8,633)(7,070)(23,322)(14,771)Free cash flow$   50,027$   36,240$ 141,654$ 108,645Morningstar, Inc. and SubsidiariesUnaudited Condensed Consolidated Balance SheetsDecember 31December 31($000)20112010AssetsCurrent assets:Cash and cash equivalents$        200,437$        180,176Investments269,755185,240Accounts receivable, net113,312110,891Deferred tax asset, net5,1042,860Income tax receivable, net7,44510,459Other15,98017,654          Total current assets612,033507,280Property, equipment, and capitalized software, net68,19662,105Investments in unconsolidated entities27,64224,262Goodwill318,492317,661Intangible assets, net139,809169,023Other assets5,9125,971Total assets$     1,172,084$     1,086,302Liabilities and equityCurrent liabilities:Accounts payable and accrued liabilities$          41,403$          42,680Accrued compensation73,12462,404Deferred revenue155,494146,267Other6121,373          Total current liabilities270,633252,724Accrued compensation5,7244,965Deferred tax liability, net15,94019,975Other long-term liabilities22,77127,213Total liabilities315,068304,877Total equity857,016781,425Total liabilities and equity$     1,172,084$     1,086,302Morningstar, Inc. and SubsidiariesSegment InformationThree months ended December 31Year ended December 31($000)20112010change20112010changeRevenueInvestment Information$ 126,590$ 120,3575.2%$ 500,909$ 444,95712.6%Investment Management31,98130,7963.8%130,491110,39418.2%Consolidated revenue$ 158,571$ 151,1534.9%$ 631,400$ 555,35113.7%Revenue?U.S.$ 112,075$ 106,6865.1%$ 446,470$ 398,21512.1%Revenue?International$   46,496$   44,4674.6%$ 184,930$ 157,13617.7%Revenue?U.S. (percentage of consolidated revenue)70.7%70.6%0.1pp70.7%71.7%(1.0)ppRevenue?International (percentage of consolidated revenue)29.3%29.4%(0.1)pp29.3%28.3%1.0ppOperating income (loss)(1)Investment Information$   30,684$   31,641(3.0%)$ 131,514$ 127,7403.0%Investment Management16,05015,6792.4%69,64956,81622.6%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$   32,2895.7%$ 138,415$ 121,05914.3%Operating margin(1)Investment Information24.2%26.3%(2.1)pp26.3%28.7%(2.4)ppInvestment Management50.2%50.9%(0.7)pp53.4%51.5%1.9ppConsolidated operating margin21.5%21.4%0.1pp21.9%21.8%0.1pp(1) Includes stock-based compensation expense allocated to each segment.Top Five Products (Segment)Revenue% ofYear Ended December 31, 2011($000)RevenueLicensed Data (Investment Information)$ 106,73216.9%Investment Consulting (Investment Management)78,57412.4%Morningstar Advisor Workstation (Investment Information)77,45912.3%Morningstar.com (Investment Information)54,1698.6%Morningtar Direct (Investment Information)52,4818.3%Top Five Products (Segment)Revenue% ofYear Ended December 31, 2010($000)RevenueLicensed Data (Investment Information)$   98,18617.7%Morningstar Advisor Workstation (Investment Information)69,32112.5%Investment Consulting (Investment Management)66,26411.9%Morningstar.com (Investment Information)49,6738.9%Morningtar Direct (Investment Information)38,0696.9%Morningstar, Inc. and SubsidiariesSupplemental DataAs of December 3120112010% changeOur employeesWorldwide headcount (approximate)3,4653,2257.4%Number of worldwide equity and credit analysts (approximate)165145(1)13.8%Number of worldwide fund analysts (approximate)95950.0%Our businessInvestment InformationMorningstar.com Premium Membership subscriptions (U.S.)130,354138,149(2)(5.6%)Registered users for Morningstar.com (U.S.)6,891,4586,300,0339.4%U.S. Advisor Workstation and Morningstar Office licenses 160,287157,395(3)1.8%Principia subscriptions 31,27032,681(4.3%)Morningstar Direct licenses6,1444,77328.7%Investment ManagementAssets under advisement and managementInvestment Consulting$140.4 bil$111.4 bil(5)26.0%Retirement Solutions(4)$37.4 bil$35.1 bil6.6%Morningstar Managed Portfolios$3.0 bil$2.7 bil11.1%(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 totalThree months ended December 31Year ended December 31($000)2011201020112010Effective tax rateIncome before income taxes and equity in net income of unconsolidated entities$     35,640$      32,973$    140,124$    127,791Equity in net income of unconsolidated entities4512461,8481,422Net (income) loss attributable to noncontrolling interests(63)(97)43(87)Total$     36,028$      33,122$    142,015$    129,126Income tax expense$       8,073$        9,619$      43,658$      42,756Effective tax rate22.4%29.0%30.7%33.1%Morningstar, Inc. and SubsidiariesReconciliations of Non-GAAP Measures with the Nearest Comparable GAAP MeasuresMorningstar 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 31Year ended December 31($000)20112010% change20112010% changeConsolidated revenue $ 158,571$ 151,1534.9%$ 631,400$ 555,35113.7%Less: acquisitions(306)-NMF(15,326)-NMFFavorable impact of foreign currency translations(180)-NMF(10,116)-NMFRevenue excluding acquisitions and foreign currency translations$ 158,085$ 151,1534.6%$ 605,958$ 555,3519.1%Reconciliation from international revenue to international revenue excluding acquisitions and foreign currency translations:Three months ended December 31Year ended December 31($000)20112010% change20112010% changeInternational revenue $   46,496$   44,4674.6%$ 184,930$ 157,13617.7%Less: acquisitions---(5,561)-NMFFavorable impact of foreign currency translations(180)-NMF(10,116)-NMFInternational revenue excluding acquisitions and foreign currency translations$   46,316$   44,4674.2%$ 169,253$ 157,1367.7%The following table summarizes the change in operating expense:Three months ended December 31Year ended December 31($000)20112010$ change20112010$ changeTotal operating expense$ 124,436$ 118,864$     5,572$ 492,985$ 434,292$   58,693Acquisitions$        137$   13,411Unfavorable impact of foreign currency translations3359,462All other changes in operating expense5,10035,820Total$     5,572$   58,693The table below shows the period in which Morningstar included each acquired operation in revenue and expense from acquisitions:AcquisitionDate of acquisition2011 revenue and expense from acquisitionsFootnoted business of Financial Fineprint Inc.February 1, 2010January 1 through January 31, 2011Aegis Equities ResearchApril 1, 2010January 1 through March 31, 2011Old Broad Street Research Ltd.April 12, 2010January 1 through April 11, 2011Realpoint, LLCMay 3, 2010January 1 through May 2, 2011Morningstar Danmark A/SJuly 1, 2010January 1 through June 30, 2011Seeds GroupJuly 1, 2010January 1 through June 30, 2011Annuity intelligence business of Advanced Sales and Marketing CorporationNovember 1, 2010January 1 through October 31, 2011SOURCE Morningstar, Inc.