UL Solutions Inc

1. Significant Accounting Policies

Description of Business

UL Solutions Inc. (together with its consolidated subsidiaries, “UL Solutions” and the “Company”) is a global safety science leader that provides independent third-party testing, inspection and certification services and related software and advisory offerings. ULSE Inc. (“UL Standards & Engagement”) controls the majority of the voting power of the Company’s common stock. Underwriters Laboratories Inc. (“UL Research Institutes”) is the sole member of UL Standards & Engagement.

Initial Public Offering

On April 16, 2024, after the quarter end, the Company completed its initial public offering of an aggregate of 38,870,000 shares of Class A common stock (the “IPO”) by UL Standards & Engagement at a price to the public of $28.00 per share. The Company did not receive any proceeds from the IPO. Refer to Note 18 for further information.

Basis of Presentation

The condensed consolidated financial statements are unaudited and have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023 included in the Company’s final prospectus for its initial public offering filed with the SEC on April 15, 2024. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair statement of the Company’s results of operations, financial position and cash flows. Results of operations for any interim period are not necessarily indicative of future or annual results. The Company has reclassified certain amounts in prior period financial statements to conform to the current period’s presentation.

On November 20, 2023, the Company effected a 2-for-1 forward split of the Company’s Class A common stock. All share and per share information presented in the accompanying condensed consolidated financial statements and notes thereto has been retrospectively adjusted to reflect the stock split for all periods presented. The authorized shares and the par value of the Class A common stock were not adjusted as a result of the stock split.

Recently Issued Accounting Standards - Not Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments will be applied retrospectively. The ASU will result in additional segment information disclosures within the Company’s financial statements, but is not expected to impact the Company’s financial condition, results of operations or cash flows.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the rate reconciliation and disaggregation by jurisdiction of income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. The ASU will result in additional income tax disclosures within the Company’s financial statements, but is not expected to impact the Company’s financial condition, results of operations or cash flows.

2. Earnings Per Share

Basic and diluted earnings per share were calculated as follows:

3. Revenue

The table below summarizes the major service categories from which the Company derives its revenues:

(a)The Company has reclassified revenue transactions related to advisory services that were previously included within the Software and Advisory service category (now known as Software) to the Non-certification Testing and Other Services category (previously known as Non-certification Testing, Inspections and Audit) for the three months ended March 31, 2023 to conform to the current period’s presentation.

Contract Balances

The revenue recognized during the three months ended March 31, 2024, which was included in contract liabilities at December 31, 2023, amounted to $30 million. The revenue recognized during the three months ended March 31, 2023, which was included in contract liabilities at December 31, 2022, amounted to $36 million.

Remaining Performance Obligations

At March 31, 2024, the Company estimates that$152 million in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The Company expects to recognize approximately 70% of its unsatisfied (or partially unsatisfied) performance obligations as revenue in the subsequent 12 months, with the remaining balance to be recognized thereafter.

Remaining consideration from contracts with customers is included in the amount presented above and includes contracts with multiple performance obligations and multi-year maintenance agreements, which are typically recognized as the performance obligation is satisfied.

4. Acquisitions and Divestitures

Acquisitions

In August 2023, the Company acquired 100% of the outstanding stock of Certification Entity for Renewable Energies, S.L. (“CERE”) for approximately $14 million in cash consideration (as adjusted for customary post-closing adjustments). CERE is a Spain-based grid code compliance testing, simulation and certification company, focused on renewable energy and electric vehicle adoption. Goodwill of $11 million, subject to finalization of the purchase price allocation and valuation of intangible assets, includes expected synergies with the Company’s existing business and has been included within the Company’s Industrial segment. Goodwill related to this acquisition is not deductible for income tax purposes.

In July 2023, the Company acquired 100% of the outstanding stock of HBI Compliance Limited (together with its operating subsidiaries, “Healthy Buildings International”) for approximately $6 million in cash consideration (as adjusted for customary post-closing adjustments). Healthy Buildings International is a United Kingdom-based health, safety and compliance company and its results of operations have been included in the Software and Advisory segment since the date of acquisition.

Aggregate acquisition-related costs associated with business combinations are not material for the three months ended March 31, 2024 and 2023, and are included in selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Operations as incurred.

Divestiture

In December 2023, the Company entered an agreement with an affiliate of Gallant Capital Partners, a California-based private equity firm, to sell the assets and liabilities of its payments testing business in the Industrial segment that performs Software and Non-certification Testing and Other Services for a base price of $30 million in cash, subject to customary post-closing adjustments, with the potential for additional cash consideration if certain earn-out provisions are met. In connection with the approval of the sale by the Company’s board of directors, the Company reclassified all assets and liabilities of the business as held for sale. As the expected sale proceeds exceed the carrying amount of the disposal group, no impairment was recognized. At March 31, 2024, the assets and liabilities classified as held for sale included $10 million of other current assets, primarily consisting of accounts receivable, $4 million of other assets and $12 million of other current liabilities, primarily consisting of contract liabilities. At December 31, 2023, the assets and liabilities classified as held for sale included $9 million of other current assets, primarily consisting of accounts receivable, $3 million of other assets and $10 million of other current liabilities, primarily consisting of contract liabilities.

5. Other (Expense) Income, net

The components of other (expense) income, net are as follows:

6. Fair Value of Financial Instruments

The carrying amount and fair value of the Company’s debt was as follows:

The fair value of the Company’s term loans and revolving credit facility reflects current market conditions and is primarily determined using broker quotes, which are Level 2 inputs in the fair value hierarchy. The fair value of the Company’s senior notes is estimated based on prevailing interest rates and trading activity, which are Level 2 inputs in the fair value hierarchy.

7. Investments in Equity Securities

The Company holds investments in equity securities of various companies, certain of which comprise less than 10% of the applicable company’s outstanding equity securities and are included within other assets in the Company’s Condensed Consolidated Balance Sheets. The Company accounts for these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The carrying amount of these investments was $42 million for both periods ended March 31, 2024 and December 31, 2023.

The Company owns 70% of the issued and outstanding equity interests of UL-CCIC Company Limited (“UL-CCIC”), an entity formed under the laws of the People’s Republic of China. The Company determined that it is the primary beneficiary of UL-CCIC and assets of $144 million and $178 million and liabilities of $87 million and $82 million, inclusive of intercompany eliminations, were included in the Company’s Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, respectively.

8. Goodwill

Changes in the carrying amount of goodwill for the three months ended March 31, 2024 were as follows:

(a)Net of accumulated impairment lossesof $166 million.

9. Intangible Assets

The following tables summarize intangible assets:

Intangible asset amortization expense for the three months ended March 31, 2024 and 2023, reported within the Condensed Consolidated Statements of Operations, was $3 million and $4 million, respectively.

10. Pension

The components of net periodic benefit cost for the Company’s U.S. defined benefit pension plan were as follows:

For the three months ended March 31, 2024 and 2023, the Company’s contributions to various defined contribution savings plans were $12 million and $11 million, respectively.

11. Income Taxes

The effective tax rate for the three months ended March 31, 2024 and 2023 was 17.8% and 19.4%, respectively, which differed from the U.S. statutory tax rate of 21% primarily due to earnings subject to lower tax rates in foreign jurisdictions, partially offset by U.S. tax on Global Intangible Low Taxed Income net of related foreign tax credits.

12. Long-Term Debt

The Company’s outstanding debt consisted of the following:

In October 2023, the Company issued $300 million in aggregate principal amount of senior notes due 2028 (the “notes”). The notes are senior unsecured obligations of UL Solutions Inc. and are unconditionally guaranteed by UL LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“UL LLC”). Borrowings under the notes bear a fixed interest rate of 6.500% per annum.

In January 2022, the Company entered into a credit agreement with Bank of America, N.A. and certain other lenders, which provides for senior unsecured credit facilities in an aggregate principal amount of $1,250 million (collectively, the “Credit Facility”), consisting of term loans and revolving loan commitments. UL LLC is the named borrower under the Credit Facility and, together with other affiliates, the Company provides a guaranty of the obligations thereunder. As of March 31, 2024, the Company was in compliance with all covenants under the Credit Facility. The interest rate on the term loans was 6.35% as of March 31, 2024 and 6.46% as of December 31, 2023 and the weighted average interest rate on the revolving credit facility was 6.36% as of March 31, 2024 and 6.45% as of December 31, 2023.

13. Accumulated Other Comprehensive Loss

The following tables summarize the changes in accumulated other comprehensive loss.

14. Stock-based and Other Incentive Compensation

Cash-settled Stock Appreciation Rights (“CSARs”)

CSAR activity during the three months ended March 31, 2024, was as follows:

As of March 31, 2024, there was $2 million of compensation expense that has yet to be recognized related to non-vested CSAR awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 21 months.

The following table summarizes the assumptions used in the Black-Scholes-Merton model, which the Company uses to estimate the fair value of the CSARs:

Compensation expense (benefit) related to CSAR awards was as follows:

The Company had a short-term liability of $36 million and $37 million recorded within accrued compensation and benefits in the Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, respectively. The Company had a long-term liability of $2 million and $2 million recorded within other liabilities in the Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, respectively.

Performance Cash Awards

Compensation expense related to Performance Cash Awards was as follows:

The Company had a short-term liability of $1 million and $16 million recorded within accrued compensation and benefits in the Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, respectively. The Company had a long-term liability of $17 million and $13 million recorded within other liabilities in the Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023 respectively.

15. Commitments and Contingencies

The Company is party in the ordinary course of business to certain claims, litigation, audits and investigations. The Company will record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable and that may be incurred in connection with any such currently pending or threatened matter, none of which are material. In the Company’s opinion, the settlement of any such currently pending or threatened matter is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

16. Related Party Transactions

In each of the three month periods ended March 31, 2024 and 2023, the Company incurred expenses of $5 million to access the library of standards owned and maintained by UL Standards & Engagement.

In the three months ended March 31, 2024 and 2023, the Company declared and paid cash dividends to UL Standards & Engagement of $25 million and $20 million, respectively.

17. Segment Information

Revenue and operating income of the Company’s segments is as follows:

18. Subsequent Events

On April 11, 2024, the Company filed its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which, among other things, effected the authorization of 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, as well as the reclassification of all shares of the Company’s Class A common stock outstanding into shares of Class B common stock. The amended and restated certificate of incorporation, as well as the Company’s amended and restated bylaws, became effective upon such filing.

On April 16, 2024, the Company completed its initial public offering of an aggregate of 38,870,000 shares of Class A common stock by UL Standards & Engagement at a price to the public of $28.00 per share, which includes the exercise in full by the underwriters of their overallotment option to purchase an additional 5,070,000 shares of Class A common stock. The Company didnot receive any proceeds from the IPO. Upon completion of the IPO, UL Standards & Engagement beneficially owned 80.6% of UL Solutions’ outstanding capital stock and held 97.6% of the voting power of UL Solutions’ outstanding capital stock. As a result, the Company meets the definition of a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange.

In connection with the IPO, the Company adopted the UL Solutions Inc. 2024 Long-Term Incentive Plan (the “2024 LTIP”) and reserved for issuance 20,000,000 shares of Class A common stock pursuant to equity awards approved under the 2024 LTIP and the UL Solutions Inc. Long-Term Incentive Plan (formerly known as the UL Inc. Long-Term Incentive Plan) (the “Pre-IPO LTIP”). As of March 31, 2024,3,452,120 CSARs were outstanding. On April 1, 2024,1,334,640 CSARs reached the end of their contractual term, which will result in cash payments of approximately $18 million in the second quarter of 2024. Upon completion of the IPO on April 16 2024,1,978,761 CSARs were converted to the same number of stock-settled stock appreciation rights, and will result in a reclassification of approximately $25 million from accrued compensation and benefits to additional paid-in capital on the Company’s Condensed Consolidated Balance Sheet. The CSARs were remeasured to fair value at the conversion date, which will result in additional pre-tax compensation expense of approximately $9 million in the second quarter of 2024, primarily within selling, general and administrative expenses. As equity-settled awards, the fair value of the stock-settled stock appreciation rights was determined on the conversion date and, generally, will not be remeasured unless the awards are modified. Following these maturities and conversions, as well as forfeitures that occurred prior to the IPO,118,904 CSARs remained outstanding. As cash-settled awards, CSARs are remeasured to fair value at each reporting date.

The Pre-IPO LTIP permits settlement of outstanding Performance Cash awards in shares of the Company’s Class A common stock. As such, upon vesting the Performance Cash awards may be settled in a number of newly issued shares of the Company’s Class A common stock with a fair market value equal to the payout amount approved by the Human Capital and Compensation Committee of the board of directors for the applicable performance period.

As a result of the IPO, the Company is subject to Section 162(m) of the Internal Revenue Code in the U.S., which limits deductions related to compensation expenses of certain executive officers which were previously tax deductible as a private company. Accordingly, the Company’s annual effective tax rate will be impacted by the Section 162(m) limitations. In addition, in the second quarter of 2024 the Company will record a reduction to its previously established deferred tax assets of approximately $5 million, with a corresponding increase to income tax expense as a discrete item.

In connection with the IPO, the Human Capital and Compensation Committee granted equity awards with an aggregate value of $17 million to the Company’s executive team, including named executive officers, and other key employees under the 2024 LTIP. These awards consisted of 2,074,299 nonqualified stock options and 22,486 restricted stock units. The stock options, which expireten years from the grant date, represent the right to purchase shares of the Company’s Class A common stock and are subject to continued employment through athree-year vesting period. The restricted stock units represent the right to receive shares of the Company’s Class A common stock and are subject to continued employment through athree-year ratable vesting period.

Under the 2024 LTIP, similar to prior long-term company compensation programs, equity awards are available to be issued to certain directors, officers and employees in order to attract, motivate and retain talent and to maximize their contribution to the long-term success of the Company. On May 1, 2024, the Human Capital and Compensation Committee granted annual equity awards to eligible employees and officers, including named executive officers. These awards include 711,256 restricted stock units with an aggregate value of $25 million and 382,455 performance share units with an aggregate value of $13 million. The restricted stock units represent the right to receive shares of the Company’s Class A common stock and are subject to continued employment through athree-year ratable vesting period. The performance share units represent the right to earn shares of the Company’s Class A common stock based on the achievement of certain performance conditions and are subject to continued employment through athree-year vesting period.

On May 1, 2024, the Company completed the sale of its payments testing business to an affiliate of Gallant Capital Partners for a base price of $30 million in cash, subject to customary post-closing adjustments. The divestiture will result in a pre-tax gain on sale of approximately $25 million, which will be recorded within other (expense) income, netin the second quarter of 2024.