Industry Spotlight > Mergers and Acquisitions

2010 Q4 Earnings: Morningstar Profits Rise on Acquisitions

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Morningstar Inc. reported fourth-quarter and full-year earnings on Thursday, posting revenue of more than $151 million for the fourth quarter, representing a 23.2% increase over the fourth quarter of 2009. Consolidated operating income increased 33% to over $32 million, and net income was $27 million, or $0.54 per diluted share.

Results for the fourth quarter include $13.5 million in revenue from acquisitions. Foreign currency translations had a "slightly favorable" effect, according to Morningstar.

Revenue increased nearly 16% to $555 million for all of 2010, including nearly $48 million from acquisitions and $4.4 million from foreign currency translations. Consolidated operating income fell, however, dropping nearly 3% to $121 million. Net income was $86 million, or $1.70 per diluted share, up slightly from $82 million in 2009.

Morningstar noted that operating expense rose faster than revenue in 2010, which led to a 4.2 percentage point drop in operating margin.

In the investment information segment, revenue increased almost 29% in the fourth quarter to $120 million, including $12 million from acquisitions. Operating income increased slightly, rising from $31.2 million in the fourth quarter of 2009 to $31.6 million in the fourth quarter of 2010. Operating expense rose over 34% to nearly $23 million, primarily due to increased costs from acquisitions. Acquisitions did not have a significant impact on operating margin, which fell to 26% on higher compensation, bonus, commission, and benefits expenses.

Revenue for the information management segment grew 21% to nearly $31 million, including $1.4 million in acquisitions. Retirement advice, investment consulting and Morningstar managed portfolios were the primary growth drivers for this segment. Total assets under management increased nearly three-quarters for investment consulting to over $107 billion. For retirement advice, assets under management increased to nearly $20 billion, while managed portfolios were relatively stable, rising from $2.1 billion at the end of 2009 to $2.7 billion in 2010.

Operating income in the information management segment increased 15% to $15.7 million, while expenses increased to $15.1 million. As such, operating margin was 50.9%.

International operations garnered $44.5 million in revenue in the fourth quarter, up 24% from the same period a year ago. Revenue included $4 million from acquisitions.

Operating expenses rose $20.5 million, largely on incremental operating expenses related to the company's acquisitions in 2009 and 2010. The company paid over $102 million on acquisitions in 2010. Furthermore, 45% of growth in expenses was related to increases in salaries and staff. Bonuses and employee benefit costs also contributed to increased expenses.

Operating margin was 21.4% in the fourth quarter, up from 19.8% for the same period one year ago. For 2010, operating margin fell from 26% in 2009, to below 22%. The decline is due to "higher compensation, bonuses, sales commissions, and employee benefits as a percentage of revenue."

The effective tax rate for the fourth quarter fell 22 percentage points from the fourth quarter of 2009 to 17%. The lower tax rate reflects the reversal of nearly $4 million of expenses, and the "positive impact of certain income tax benefits."

Free cash flow for the fourth quarter topped $36 million, and was nearly $109 million for 2010. As of Dec. 31, 2010, the company had cash, cash equivalents, and investments of $365 million, up from $343 million at the end of 2009.

In 2011, Morningstar expects cash expenditures on leasehold improvements to be between $14 million and $17 million. In the first quarter of 2011, the company expects to make annual bonus payments of $38 million. Separation agreements with two former executives will cost the company over $4 million.

Read about Morningstar's third-quarter earnings.

Read AdvisorOne's 2010 Q4 earnings calendar for the financial sector for release dates and links to earnings stories.