Morningstar, Inc. Reports Third-Quarter 2009 Financial Results

CHICAGO, Oct. 29 /PRNewswire-FirstCall/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today announced its third-quarter 2009 financial results. The company reported consolidated revenue of $120.1 million in the third quarter of 2009, a 4.3% decrease from $125.5 million in the third quarter of 2008. Consolidated operating income was $33.7 million in the third quarter of 2009, a decrease of 1.4% compared with $34.2 million in the same period a year ago. Net income was $22.5 million in the third quarter of 2009, or 45 cents per diluted share, compared with $22.2 million, or 45 cents per diluted share, in the third quarter of 2008.

Excluding acquisitions and the impact of foreign currency translations, revenue declined 10.2% in the third quarter of 2009. Third-quarter results included $9.3 million in revenue from acquisitions. Foreign currency translations had an unfavorable impact of $2.0 million. Revenue excluding acquisitions and foreign currency translations (organic revenue) is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.

In the first nine months of 2009, revenue was $356.4 million, a decline of 7.0% compared with $383.2 million in the same period in 2008. Revenue for the first nine months of the year included $22.0 million from acquisitions, which was partially offset by an unfavorable foreign currency impact of $12.7 million. Consolidated operating income declined 8.5% to $101.0 million in the first nine months of 2009, compared with $110.4 million in the first nine months of 2008. Net income was $68.0 million, or $1.37 per diluted share, in the first nine months of 2009, down from $73.3 million, or $1.49 per diluted share, in the same period in 2008.

Joe Mansueto, chairman and chief executive officer of Morningstar, said, "Our organic revenue declined about 10% year over year, which was in line with the second quarter. The two biggest drivers of the revenue decline were Investment Consulting and the end of the Global Analyst Research Settlement period. We had about $1.5 million in GARS-related revenue during the quarter versus $5.5 million in the same period last year. Foreign currency translations also negatively impacted revenue, but to a lesser extent than in previous quarters. Still, we're pleased with our relative performance considering the tough business environment this year."

Mansueto added, "During the quarter, we added several important enhancements to our latest edition of Morningstar Direct. This is our flagship investment research platform for institutions, a product that is experiencing healthy growth. Our fund research team also introduced target-date fund series ratings and research. This supports one of our key growth strategies, which is to continue building thought leadership in independent investment research. International revenue continues to increase as a percentage of our consolidated revenue, rising about 13%, including about $8.0 million from acquisitions. Operating margin rose slightly in the third quarter, mainly because of cost-savings initiatives implemented earlier this year. We generated free cash flow of $32.5 million during the quarter, ending the period with $362.2 million in cash and investments and no bank debt."

Key Business Drivers
Morningstar has two operating segments: Investment Information and Investment Management. The Investment Information segment includes all of the company's data, software, and research products and services. These products and services are typically sold through subscriptions or license agreements. The Investment Management segment includes all of the company's asset management operations, which operate as registered investment advisors and earn more than half of their revenue from asset-based fees.

Revenue: In the third quarter of 2009, revenue in the Investment Information segment was $95.4 million, a decline of 1.7% compared with the third quarter of 2008; approximately $7.6 million of this revenue came from acquisitions. Revenue in the Investment Management segment was down 13.2% to $24.7 million, with approximately $1.7 million from acquisitions. Investment Consulting was the main factor behind the decrease, primarily because, as previously disclosed, two clients did not renew their contracts in the fall of 2008 and May 2009, respectively. Assets under advisement declined to $68.2 billion as of Sept. 30, 2009 from $85.2 billion as of Sept. 30, 2008.

Revenue from international operations was $34.5 million in the third quarter of 2009, an increase of 12.9% from the same period a year ago. International revenue included $7.9 million from acquisitions, which was slightly offset by a $2.0 million negative impact from foreign currency translations. Excluding acquisitions and foreign currency translations, international revenue declined 6.4% in the third quarter.

For the first nine months of 2009, international revenue was $93.4 million, including $16.7 million in revenue from acquisitions. Foreign currency translations had an unfavorable impact of $12.7 million. Excluding acquisitions and foreign currency translations, international revenue declined 4.5% from the same period a year ago. 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 $33.7 million in the third quarter of 2009, a 1.4% decrease from the same period in 2008. Operating expense declined $4.9 million, or 5.4%, in the third quarter of 2009 as the positive impact of cost-savings initiatives was partially offset by incremental expense from recent acquisitions.

Bonus expense decreased $8.0 million in the quarter because Morningstar made changes to its 2009 bonus plan as part of its efforts to better align its cost structure with revenue in the challenging business environment. The significant reduction in bonus expense also reflects a slowdown in 2009 financial performance compared with 2008. Earlier this year, the company suspended matching contributions to its 401(k) plan in the United States, further reducing operating expense by approximately $1.3 million. Morningstar had approximately 2,490 employees worldwide as of Sept. 30, 2009, compared with 2,510 as of June 30, 2009, and 2,250 as of Sept. 30, 2008. Headcount grew year over year because the company added approximately 170 employees through acquisitions and also continued hiring for its development center in China.

The company also reduced discretionary spending in travel, advertising, marketing, and data purchases to align costs with the lower revenue. In addition, the company revised the preliminary purchase price allocations related to recent acquisitions during the quarter, resulting in a $1.7 million reduction of previously recorded intangible amortization expense. Partially offsetting these reductions were additional costs related to acquisitions. Morningstar completed five acquisitions in the second half of 2008 and four acquisitions in the first nine months of 2009. Because of the timing of these acquisitions, third-quarter 2009 results include operating expense that did not exist in the third quarter of 2008. In addition, Morningstar recorded an expense of $2.4 million to increase its liability for vacant office space, primarily for the former Ibbotson headquarters. The company is anticipating lower sublease income and expects it will take more time to find a tenant than previously estimated.

The company's operating margin was 28.0% in the third quarter of 2009, compared with 27.2% in the same period in 2008. Operating margin rose slightly in the third quarter, primarily because of the favorable impact of cost-savings initiatives.

In the first nine months of 2009, operating margin was 28.3%, compared with 28.8% in the first nine months of 2008. The margin decline is the result of a $3.5 million operating expense recorded in the second quarter of 2009 for estimated penalties related to the timing of deposits for taxes withheld on stock option exercises, partially offset by cost-savings initiatives.

Effective Tax Rate: Morningstar's effective tax rate was approximately 35% in the quarter and year-to-date periods, a decrease of 2.4 percentage points and 1.2 percentage points, respectively, compared with the prior-year periods. The lower effective tax rate reflects the use of $2.1 million in tax credits from previous years, favorably impacting the tax rate by approximately 6 percentage points in the quarter and 2 percentage points year to date. The 2009 year-to-date effective tax rate also reflects the favorable effect of reversing approximately $2.2 million in reserves for uncertain tax positions, of which $1.4 million occurred in the first quarter. These items were partially offset by the impact of the non-deductible deposit penalty expense, which increased the year-to-date effective tax rate by approximately 1.3 percentage points, and the impact of foreign taxes.

Free Cash Flow: Morningstar generated free cash flow of $32.5 million in the third quarter of 2009, reflecting cash provided by operating activities of $36.1 million and $3.5 million of capital expenditures. Cash flow from operating activities decreased $13.1 million in the third quarter of 2009, compared with the prior-year period. A lower cash flow benefit from accrued compensation and income taxes contributed to the decline in operating cash flow. In the third quarter of 2008, operating cash flow included a $2.1 million benefit from tenant improvement allowances related to the construction of the company's new corporate headquarters. This benefit did not recur in the third quarter of 2009. These items were partially offset by the impact of excess tax benefits. Excess tax benefits have a positive impact on cash provided by financing activities with an equal, but offsetting, impact on cash from operations. Excess tax benefits declined $3.5 million in the quarter, primarily reflecting lower average stock prices when employees exercised stock options and a reduction in the number of options exercised.

Capital expenditures decreased $8.4 million for the quarter and $19.0 million for the first nine months of the year. Capital expenditures were higher in 2008 mainly because of the timing of payments for construction of Morningstar's new corporate headquarters.

In the first nine months of 2009, Morningstar generated free cash flow of $57.0 million, reflecting cash provided by operating activities of $67.3 million and capital expenditures of $10.3 million. Cash flow from operations in the first nine months of 2009 decreased $31.1 million from the prior-year period, reflecting lower cash flow benefits from accrued compensation and income taxes, a reduction in tenant improvement allowances of $11.8 million, and a $9.6 million increase in bonuses paid in the first quarter of 2009. These items were partially offset by the impact of excess tax benefits, which declined $16.3 million in the year-to-date period.

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 Sept. 30, 2009, Morningstar had cash, cash equivalents, and investments of $362.2 million, compared with $309.6 million as of Sept. 30, 2008, and $297.6 million as of Dec. 31, 2008.

Business Segment Performance
Investment Information Segment: The largest products and services in this segment based on revenue are Morningstar® Licensed Data; Morningstar® Advisor Workstation(SM); Morningstar.com®, including Premium memberships and Internet advertising sales; and Morningstar Direct(SM).

• Revenue was $95.4 million in the third quarter of 2009, down 1.7% from $97.1 million in the third quarter of 2008. Acquisitions contributed revenue of $7.6 million to the Investment Information segment in the third quarter of 2009, offsetting the revenue decline by 7.9 percentage points.
• The Global Analyst Research Settlement (GARS) expired in late July 2009. Revenue associated with GARS was $1.5 million in the third quarter of 2009, compared with $5.5 million in the same period a year ago. Morningstar has entered into new equity research contracts with two of the banks that were clients under GARS; however, these contracts only represent about 10% of the previous annual GARS revenue. The company is also continuing to provide broad equity coverage to individual investors, financial advisors, and institutions through a variety of other channels.
• The U.S. version of Morningstar.com, which includes Internet advertising sales and Premium membership subscriptions, was the second largest factor behind the revenue decline in this segment. Premium subscriptions for Morningstar.com in the United States fell 13% to 155,200. Lower revenue from Principia also contributed to the decline, with subscriptions down about 14% to 37,365. These declines were partially offset by revenue growth for Morningstar Direct, with licenses increasing 17% to 3,329. Advisor Workstation licenses were essentially flat year over year at 153,603.
• Operating income was $33.3 million in the third quarter of 2009, compared with $33.6 million in the same period in 2008. Operating expense in this segment decreased $1.4 million, or 2.2%, primarily because of the bonus expense reduction, partially offset by additional costs from acquisitions.
• Operating margin was 34.9% in the third quarter of 2009, compared with 34.6% in the prior-year period, as the impact of lower bonus expense as a percentage of revenue was offset by additional expense from recent acquisitions.
  

Investment Management Segment: The largest products in this segment based on revenue are Investment Consulting; Retirement Advice, including Advice by Ibbotson® and Morningstar® Retirement Manager(SM); and Morningstar® Managed Portfolios(SM).

• Revenue was $24.7 million in the third quarter of 2009, a 13.2% decrease from $28.4 million in the same period in 2008. The Intech acquisition in Australia contributed revenue of $1.7 million to this segment in the third quarter of 2009. The majority of the revenue decline was driven by Investment Consulting, which suffered because one client did not renew its contract when it expired in the fourth quarter of 2008 and another client did not renew its contract in May 2009.
• Assets under advisement for Investment Consulting declined to $68.2 billion as of Sept. 30, 2009, compared with $85.2 billion as of Sept. 30, 2008. The majority of the asset decline reflects the two client non-renewals, partially offset by net inflows and new client wins for Ibbotson Associates, as well as positive market performance in 2009. Assets under management for Retirement Advice were $14.6 billion as of Sept. 30, 2009, compared with $13.5 billion as of Sept. 30, 2008. Assets under management for Morningstar® Managed Portfolios(SM) were $1.9 billion as of Sept. 30, 2009, unchanged from Sept. 30, 2008.
• Operating income was $14.4 million in the third quarter of 2009, a decrease of 10.9% compared with the third quarter of 2008. Operating expense in the segment decreased $2.0 million, or 16.2%, primarily because of lower bonus expense. These expense reductions were partially offset by additional operating expense from the Intech acquisition.
• Operating margin was 58.3% in the third quarter of 2009, compared with 56.8% in the prior-year period. Lower bonus expense as a percentage of revenue was the primary reason for the margin improvement, but was partially offset by the Intech acquisition.
  

Intangible Amortization and Corporate Depreciation Expense: Morningstar does not allocate expense for intangible amortization related to acquisitions or corporate depreciation to its operating segments. Intangible amortization and corporate depreciation expense was $5.0 million in the third quarter of 2009 and reflects a $1.7 million reduction of previously recorded intangible amortization expense. Intangible amortization and depreciation expense for corporate departments in the first nine months of 2009 was $19.4 million, an increase of $4.0 million, or 25.6%, compared with the prior-year period.

Corporate Unallocated: This category of expense includes the costs related to the company's corporate functions, including general management, information technology used to support corporate systems, legal, finance, human resources, marketing, and corporate communications. Costs in this category for the third quarter of 2009 were $9.0 million, a decrease of $1.4 million, or 13.8%, compared with the prior-year period, primarily reflecting lower bonus and other compensation-related expense, partially offset by the $2.4 million expense for vacant office space. Corporate unallocated costs for the first nine months of 2009 were $26.3 million, a decrease of $2.3 million, or 8.2%, compared with the first nine months of 2008. The decrease primarily reflects lower bonus and other compensation-related expense, partially offset by the expense for vacant office space recorded in the third quarter and a $3.5 million operating expense related to the estimated deposit penalty recorded in the second quarter.

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 Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 325,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 20 countries and minority ownership positions in companies based in two other 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 the global financial crisis that began in 2007; 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; 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, 2008. 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 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 the performance of its business. Free cash flow should not be considered an alternative to any measure of performance as promulgated 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.

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.

©2009 Morningstar, Inc. All rights reserved.

MORN-E

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

                            Three months ended           Nine months ended
                               September 30                September 30
    (in thousands,
     except per share
     amounts)             2009      2008  change      2009      2008   change
    -----------------     ----      ----  ------      ----      ----   ------

    Revenue           $120,088  $125,505   (4.3%) $356,353  $383,186   (7.0%)
    Operating
     Expense(1):
      Cost of
       goods sold       31,954    32,828   (2.7%)   92,900    98,930   (6.1%)
      Development        9,447    10,271   (8.0%)   28,185    30,187   (6.6%)
      Sales and
       marketing        17,730    19,457   (8.9%)   53,276    62,547  (14.8%)
      General and
       administrative   20,643    22,507   (8.3%)   57,649    62,392   (7.6%)
      Depreciation
       and
       amortization      6,631     6,266    5.8%    23,347    18,699   24.9%
                         -----     -----           ------    ------
         Total
          operating
          expense       86,405    91,329   (5.4%)  255,357   272,755   (6.4%)
                        ------    ------          -------   -------
    Operating income    33,683    34,176   (1.4%)  100,996   110,431   (8.5%)
    Operating margin     28.0%     27.2%    0.8pp    28.3%     28.8%   (0.5)pp

    Non-operating
     income
     (expense):
      Interest
       income,
       net                 572     1,568   (63.5%)    2,314     4,468  (48.2%)
      Other income
       (expense), net      221      (241)    NMF        985      (203)   NMF
                           ---      ----                ---      ----
           Non-
            operating
            income, net    793     1,327   (40.2%)    3,299     4,265  (22.6%)
                           ---     -----              -----     -----

    Income before
     income taxes and
     equity in net
     income of
     unconsolidated
     entities           34,476    35,503    (2.9%)  104,295   114,696   (9.1%)
    Income tax
     expense            12,407    13,547    (8.4%)   37,099    42,127  (11.9%)
    Equity in net
     income of
     unconsolidated
     entities              429       268    60.1%       790     1,065  (25.8%)
                           ---       ---                ---     -----
    Consolidated net
     income             22,498    22,224     1.2%    67,986    73,634   (7.7%)
    Net (income) loss
     attributable to
     noncontrolling
     interests              22       (37)    NMF         40      (372)   NMF
                           ---       ---                ---      ----
    Net income
     attributable to
     Morningstar,
     Inc.              $22,520   $22,187     1.5%   $68,026   $73,262   (7.1%)
                       =======   =======            =======   =======

    Net income per
     share
     attributable
     to
     Morningstar,
     Inc:
      Basic              $0.46     $0.48    (4.2%)    $1.42     $1.60  (11.3%)
      Diluted            $0.45     $0.45        -     $1.37     $1.49   (8.1%)
    Weighted average
     common shares
     outstanding:
      Basic             48,457    46,499             47,930    45,883
      Diluted           50,048    49,421             49,623    49,221

                         Three months ended           Nine months ended
                           September 30                 September 30
                          2009      2008               2009      2008
                          ----      ----               ----      ----
    (1) Includes
     stock-based
     compensation
     expense of:
      Cost of
       goods sold         $690      $547             $1,954    $1,511
      Development          410       359              1,177     1,047
      Sales and
       marketing           407       366              1,185     1,090
      General and
       administrative    1,356     1,546              4,340     4,883
                         -----     -----             -----     -----
         Total stock-
          based
          compensation
          expense        $2,863    $2,818             $8,656    $8,531
                         ======    ======             ======    ======

    NMF - Not meaningful, pp - percentage points



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

                                Three months ended       Nine months ended
                                   September 30             September 30
                               2009    2008   change    2009    2008   change
                               ----    ----   ------    ----    ----   ------

    Revenue                  100.0%  100.0%        -  100.0%  100.0%        -
    Operating expense(1):
      Cost of goods sold      26.6%   26.2%    0.4pp   26.1%   25.8%    0.3pp
      Development              7.9%    8.2%  (0.3)pp    7.9%    7.9%        -
      Sales and marketing     14.8%   15.5%  (0.7)pp   15.0%   16.3%  (1.3)pp
      General and
       administrative         17.2%   17.9%  (0.7)pp   16.2%   16.3%  (0.1)pp
      Depreciation and
       amortization            5.5%    5.0%    0.5pp    6.6%    4.9%    1.7pp
                               ---     ---              ---     ---
         Total operating
          expense(2)          72.0%   72.8%  (0.8)pp   71.7%   71.2%    0.5pp
                              ----    ----             ----    ----
    Operating margin          28.0%   27.2%    0.8pp   28.3%   28.8%  (0.5)pp
                              ====    ====             ====    ====

                                Three months ended      Nine months ended
                                   September 30            September 30
                               2009    2008   change   2009    2008    change
                               ----    ----   ------   ----    ----    ------
    (1) Includes stock-based
     compensation
     expense of:
      Cost of goods sold       0.6%    0.4%    0.2pp    0.5%    0.4%    0.1pp
      Development              0.3%    0.3%        -    0.3%    0.3%        -
      Sales and marketing      0.3%    0.3%        -    0.3%    0.3%        -
      General and
       administrative          1.1%    1.2%  (0.1)pp    1.2%    1.3%  (0.1)pp
                               ---     ---              ---     ---
         Total stock-based
          compensation
             expense(2)        2.4%    2.2%    0.2pp    2.4%    2.2%    0.2pp
                               ===     ===              ===     ===

    (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   Nine months ended
                                           September 30        September 30
    ($000)                                2009      2008      2009      2008
    -----                                 ----      ----      ----      ----

    Operating activities
    Consolidated net income            $22,498   $22,224   $67,986   $73,634
    Adjustments to reconcile net
     income to net cash flows
    from operating activities:
       Depreciation and
        amortization                     6,631     6,266    23,347    18,699
       Deferred income tax
        expense (benefit)                  109    (1,637)     (847)    1,282
       Stock-based
        compensation
        expense                          2,863     2,818     8,656     8,531
       Equity in net
        income of
        unconsolidated
        entities                          (429)     (268)     (790)   (1,065)
       Excess tax benefits
        from stock option
        exercises
        and vesting of
        restricted
        stock units                     (1,180)   (4,700)   (5,724)  (22,043)
       Other, net                          (61)      319      (626)     (791)
    Changes in operating assets and
     liabilities, net of
     effects of acquisitions:
       Accounts receivable               4,209     3,043    13,521      (179)
       Other assets                      1,865    (1,614)    2,206    (3,460)
       Accounts
        payable and
        accrued
        liabilities                      4,005       431    (2,007)    1,428
       Accrued
        compensation                     3,637    14,369   (41,794)  (14,521)
       Deferred revenue                 (9,780)   (8,407)   (8,974)   (1,635)
       Income taxes -
        current                          2,603    14,003    12,999    27,107
       Deferred rent                       (67)    2,093      (353)   11,399
       Other liabilities                  (837)      305      (267)      (22)
                                          ----       ---      ----       ---
                 Cash provided
                  by operating
                  activities            36,066    49,245    67,333    98,364
    Investing activities
    Purchases of investments           (61,330)  (24,915) (111,603)  (71,861)
    Proceeds from sale of
     investments                        26,351    13,580    64,479    95,793
    Capital expenditures                (3,518)  (11,936)  (10,286)  (29,290)
    Acquisitions, net of cash
     acquired                             (744)   (4,964)  (19,315)  (55,981)
    Other, net                              (6)        -       623         -
                                           ---       ---       ---       ---
               Cash used for
                investing
                activities             (39,247)  (28,235)  (76,102)  (61,339)
    Financing activities
    Proceeds from stock option
     exercises                           2,725     4,687    14,378    17,282
    Excess tax benefits from stock
     option exercises
      and vesting of
       restricted stock units            1,180     4,700     5,724    22,043
    Other, net                            (127)        1      (305)       (3)
                                          ----       ---      ----       ---
              Cash provided
               by financing
               activities                3,778     9,388    19,797    39,322
    Effect of exchange rate changes
     on cash and cash equivalents        1,704    (3,660)    4,481    (2,308)
                                         -----    ------     -----    ------
    Net increase in cash and
     cash equivalents                    2,301    26,738    15,509    74,039
    Cash and cash equivalents -
     Beginning of period               187,099   206,877   173,891   159,576
                                       -------   -------   -------   -------
    Cash and cash equivalents -
     End of period                    $189,400  $233,615  $189,400  $233,615
                                      ========  ========  ========  ========

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

                                        Three months ended   Nine months ended
                                           September 30        September 30
       ($000)                             2009      2008      2009      2008
       -----                              ----      ----      ----      ----

    Cash provided by operating
     activities                        $36,066   $49,245   $67,333   $98,364
    Less: Capital expenditures          (3,518)  (11,936)  (10,286)  (29,290)
                                        ------   -------   -------   -------
    Free cash flow                     $32,548   $37,309   $57,047   $69,074
                                       =======   =======   =======   =======



    Morningstar, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Balance Sheets

                                                     September 30  December 31
    ($000)                                                   2009         2008
    -----                                                    ----         ----

    Assets
    Current assets:
       Cash and cash equivalents                         $189,400     $173,891
       Investments                                        172,835      123,686
       Accounts receivable, net                            80,428       89,537
       Deferred tax asset, net                              5,542        3,538
       Income tax receivable, net                           1,757        9,193
       Other                                               12,534       13,891
                                                           ------       ------
                 Total current assets                     462,496      413,736

    Property and equipment, net                            60,751       58,822
    Investments in unconsolidated entities                 20,266       20,404
    Goodwill                                              217,105      187,242
    Intangible assets, net                                113,612      119,812
    Other assets                                            4,748        3,924
                                                            -----        -----
       Total assets                                      $878,978     $803,940
                                                         ========     ========

    Liabilities and equity
    Current liabilities:
       Accounts payable and accrued liabilities           $30,517      $30,071
       Accrued compensation                                33,727       73,012
       Deferred revenue                                   125,504      130,270
       Other                                                    6           88
                                                              ---          ---
                 Total current liabilities                189,754      233,441

    Accrued compensation                                    4,551        3,611
    Deferred tax liability, net                             7,310        7,531
    Other long-term liabilities                            24,778       23,428
                                                           ------       ------
       Total liabilities                                  226,393      268,011
       Total equity                                       652,585      535,929
                                                          -------      -------
       Total liabilities and equity                      $878,978     $803,940
                                                         ========     ========



    Morningstar, Inc. and Subsidiaries
    Segment Information

                          Three months ended            Nine months ended
                             September 30                  September 30
     ($000)              2009      2008   change       2009      2008   change
     -----               ----      ----   ------       ----      ----   ------

    Revenue
       Investment
        Information   $95,410   $97,075   (1.7%) $289,389  $295,161    (2.0%)
       Investment
        Management     24,678    28,430  (13.2%)   66,964    88,025   (23.9%)
                       ------    ------            ------    ------
       Consolidated
        revenue      $120,088  $125,505   (4.3%) $356,353  $383,186    (7.0%)
                     ========  ========          ========  ========

       Revenue -
        U.S.          $85,548   $94,924   (9.9%) $262,982  $289,621    (9.2%)
       Revenue -
        International $34,540   $30,581   12.9%   $93,371   $93,565    (0.2%)

       Revenue-U.S.
        (percentage
        of
        consolidated
        revenue)         71.2%     75.6%  (4.4)pp    73.8%     75.6%   (1.8)pp
       Revenue-
        International
        (percentage
        of
        consolidated
         revenue)        28.8%     24.4%   4.4pp     26.2%     24.4%    1.8pp

    Operating
     income
     (loss)(1)
       Investment
        Information   $33,298   $33,595   (0.9%) $107,377  $105,580     1.7%
       Investment
        Management     14,391    16,149  (10.9%)   39,280    48,904   (19.7%)
       Intangible
        amortization
        and
        corporate
        depreciation
        expense        (5,022)   (5,144)  (2.4%)  (19,357)  (15,412)   25.6%
       Corporate
        unallocated    (8,984)  (10,424) (13.8%)  (26,304)  (28,641)   (8.2%)
                       ------   -------           -------   -------
       Consolidated
        operating
        income        $33,683   $34,176   (1.4%) $100,996  $110,431    (8.5%)
                      =======   =======          ========  ========

    Operating margin(1)
       Investment
        Information      34.9%     34.6%   0.3pp     37.1%     35.8%    1.3pp
       Investment
        Management       58.3%     56.8%   1.5pp     58.7%     55.6%    3.1pp
       Consolidated
        operating
        margin           28.0%     27.2%   0.8pp     28.3%     28.8%   (0.5)pp

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



    Morningstar, Inc. and Subsidiaries
    Supplemental Data

                                            As of September 30
                                              2009       2008    % change
    ---                                       ----       ----    --------
    Our employees
    Worldwide headcount (approximate)        2,490      2,250        10.7%
    Number of U.S. stock analysts               90        103       (12.6%)
    Number of worldwide stock analysts         111        133       (16.5%)
    Number of U.S. fund analysts                28         28            -
    Number of worldwide fund analysts           83         81         2.5%

    Our business
    Investment Information
    ----------------------
    Morningstar.com Premium
     subscriptions                         155,200    178,355       (13.0%)
    Registered users for
     Morningstar.com (U.S.)              6,131,977  5,590,862         9.7%
    U.S. Advisor Workstation licenses      153,603    153,398(1)      0.1%
    Principia subscriptions                 37,365     43,660       (14.4%)
    Morningstar Direct licenses              3,329      2,843        17.1%

    Investment Management
    ---------------------
    Assets under management for
     Morningstar Managed Portfolios        $1.9 bil    $1.9 bil         -
    Assets under management for Intech(2)  $3.3 bil         -           -
    Assets under management for
     managed retirement accounts          $14.6 bil   $13.5 bil       8.1%
       Morningstar Associates              $1.4 bil    $1.2 bil      16.7%
       Ibbotson Associates                $13.2 bil   $12.3 bil       7.3%
    Assets under advisement for
     Investment Consulting                $68.2 bil   $85.2 bil     (20.0%)
       Morningstar Associates             $20.2 bil   $43.0 bil     (53.0%)
       Ibbotson Associates                $48.0 bil   $42.2 bil      13.7%

    ---
    (1) Revised to exclude Site Builder licenses. Beginning in 2009,
        Morningstar no longer includes the Site Builder product as part of
        Advisor Workstation. The number of Advisor Workstation licenses
        reported in 2008 has been adjusted to reflect this change.

    (2) Intech (Australia) was acquired on June 30, 2009

                                 Three months ended     Nine months ended
                                    September 30          September 30
    ($000)                         2009       2008       2009        2008
    -----                          ----       ----       ----        ----
    Effective tax rate
    Income before income
     taxes and equity in
     net income of
     unconsolidated entities    $34,476    $35,503   $104,295    $114,696
    Equity in net income of
     unconsolidated entities        429        268        790       1,065
    Net (income) loss
     attributable to
     noncontrolling interests        22        (37)        40        (372)
                                    ---        ---        ---        ----
       Total                    $34,927    $35,734   $105,125    $115,389
                                =======    =======   ========    ========
    Income tax expense          $12,407    $13,547    $37,099     $42,127
    Effective tax rate             35.5%      37.9%      35.3%       36.5%



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

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

                            Three months ended          Nine months ended
                               September 30                September 30
     ($000)                 2009    2008  % change    2009    2008   % change
    -----                  ----    ----  --------    ----    ----   ---------
    Consolidated
     revenue           $120,088  $125,505   (4.3%) $356,353  $383,186   (7.0%)
    Less:
     acquisitions        (9,342)        -    NMF    (22,002)        -    NMF
    Unfavorable
     impact of foreign
     currency             1,969         -    NMF     12,697         -    NMF
    Revenue excluding
     acquisitions and
     foreign currency --------  --------          --------  --------
     translations      $112,715  $125,505  (10.2%) $347,048  $383,186   (9.4%)
                       ========  ========          ========  ========


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

                            Three months ended          Nine months ended
                               September 30                September 30
    ($000)                 2009      2008 % change    2009    2008 % change
     -----                  ----      ---- --------    ----    ---- --------
    International
     revenue            $34,540   $30,581   12.9%   $93,371   $93,565   (0.2%)
    Less:
     acquisitions        (7,888)        -    NMF    (16,742)        -    NMF
    Unfavorable
     impact of foreign
     currency             1,969         -    NMF     12,697         -    NMF
    International
     revenue excluding
     acquisitions
     and foreign        -------   -------           -------   -------
     currency
     translations       $28,621   $30,581   (6.4%)  $89,326   $93,565   (4.5%)
                        =======   =======           =======   =======

    Morningstar includes an acquired operation as part of revenue from
    acquisitions for 12 months after we complete the acquisition. After that,
    we include it as part of our organic revenue. The table below shows the
    period in which we included each acquired operation in revenue from
    acquisitions:



    Acquisition                           2009 Revenue from Acquisitions
    -----------                           ------------------------------
    Hemscott data, media, and investor
     relations Web site businesses     January 1 through January 8, 2009
    Financial Computer Support, Inc.   January 1 through September 1, 2009
    Fundamental Data Limited           January 1 through September 30, 2009
    10-K Wizard Technology, LLC        January 1 through September 30, 2009
    Tenfore Systems Limited            January 1 through September 30, 2009
    InvestData (Proprietary) Limited   January 1 through September 30, 2009
    Global financial filings database
     business of Global Reports LLC    April 20 through September 30, 2009
    Equity research and data business
     of C.P.M.S. Computerized Portfolio
     Management Services Inc.          May 1 through September 30, 2009
    Andex Associates, Inc.             May 1 through September 30, 2009
    Intech Pty Ltd                     June 30 through September 30, 2009
    Morningstar Korea Co., Ltd.        September 10 through September 30, 2009