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, 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 14 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.

Stock-based Compensation

The Company maintains long-term incentive plans under which equity awards are available to be issued to certain employees, officers and directors. Stock-based compensation expense, measured as the fair value of an award on the date of grant, is recognized ratably over the requisite service period, which is generally equal to the vesting period of the respective award, however may be impacted by certain factors including the employee’s death, disability or retirement. Compensation expense related to performance share units is adjusted each reporting period based on the probable outcome of the performance conditions applicable to each grant.

The fair value of restricted stock units and performance share units is determined using the closing price of the Company’s stock on the date of grant. The fair value of each stock option is measured on the date of grant using a Black-Scholes-Merton option-pricing model that uses various assumptions including expected stock price volatility, expected dividend yield, the risk-free interest rate, and expected term of the award.

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. 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. The amendments will be applied prospectively. 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:

Contract Balances

The revenue recognized during the three and six months ended June 30, 2024, which was included in contract liabilities at December 31, 2023, amounted to $49 million and $79 million, respectively. The revenue recognized during the three and six months ended June 30, 2023, which was included in contract liabilities at December 31, 2022, amounted to $44 million and $80 million.

Remaining Performance Obligations

At June 30, 2024, the Company estimates that$159 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 67% 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 May 2024, the Company acquired 100% of the outstanding stock of Batterielngenieure GmbH (together with its subsidiaries, “Batterielngenieure”) for approximately $11 million in cash consideration (subject to customary post-closing adjustments). Batterielngenieure is a Germany-based battery testing company that is in the process of building a laboratory in Aachen, Germany to replace the leased facility it is currently using and add testing and simulation capacity. The Company is still in the process of identifying acquired assets and assumed liabilities, which may also result in adjustment of the provisional amounts recorded. The subsequent adjustments of the provisional amounts are not expected to be material. Batterielngenieure is included in the Industrial segment.

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 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 and six months ended June 30, 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 May 2024, the Company completed the sale of its payments testing business in the Industrial segment to an affiliate of Gallant Capital Partners, a California-based private equity firm, 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. The divestiture resulted in a pre-tax gain on sale of approximately $25 million, which was recorded within other income, net in the Company’s Condensed Consolidated Statements of Operations.

Held for Sale

In May 2024, the Company signed a non-binding letter of intent with a prospective buyer to purchase one of its facilities, but has not entered into a definitive agreement to dispose of the facility. As a result, the Company classified the related assets as held for sale. The facility is a testing laboratory, used in the Company’s Industrial and Consumer segments. At June 30, 2024, the carrying amount of the building and related improvements classified as held for sale was $11 million, which was included within other assets on the Condensed Consolidated Balance Sheet. The sale is expected to be completed before the end of 2024, subject to both parties reaching agreement on the terms of the sale and the satisfaction of any closing conditions set forth in such terms.

5. Other Income, net

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

(a)The Company has reclassified the amounts presented for the three and six months ended June 30, 2023 to conform to the current period’s presentation.

(b)See Note 4.

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. Other Current Assets

The components of other current assets are as follows:

8. 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 June 30, 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 $154 million and $178 million and liabilities of $79 million and $82 million, inclusive of intercompany eliminations, were included in the Company’s Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023, respectively.

9. Goodwill

Changes in the carrying amount of goodwill for the six months ended June 30, 2024 were as follows:

(a)Net of accumulated impairment losses of $137 million as of June 30, 2024 and $166 million as of December 31, 2023.

10. Intangible Assets

The following tables summarize intangible assets:

Intangible asset amortization expense for the three and six months ended June 30, 2024, reported within the Condensed Consolidated Statements of Operations, was $3 million and $6 million, respectively. Intangible asset amortization expense for the three and six months ended June 30, 2023, reported within the Condensed Consolidated Statements of Operations, was $4 million and $8 million, respectively.

11. Pension

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

For the three and six months ended June 30, 2024, the Company’s contributions to various defined contribution savings plans were $13 million and $25 million, respectively. For the three and six months ended June 30, 2023, the Company’s contributions to various defined contribution savings plans were $12 million and $23 million, respectively.

12. Income Taxes

The effective tax rate for the three and six months ended June 30, 2024 was 20.9% and 19.8%, respectively, which differed from the U.S. statutory rate of 21% primarily due to earnings subject to lower tax rates in foreign jurisdictions and a discrete tax benefit for the release of valuation allowances. This was offset by a discrete tax expense for the reduction to previously established deferred tax assets of approximately $5 million due to the Company becoming subject to Section 162(m) of the Internal Revenue Code in the U.S., which limits compensation expenses of certain executive officers that were previously deductible as a private company, as well as Section 162(m) limitations on current year deductions and U.S. tax on Global Intangible Low Taxed Income (“GILTI”) net of related foreign tax credits.

The effective tax rate for the three and six months ended June 30, 2023 was 17.5% and 18.2%, 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 GILTI net of related foreign tax credits.

13. Long-Term Debt

The Company’s outstanding debt consisted of the following:

Credit Facility

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. As of June 30, 2024, the Company was in compliance with all covenants under the Credit Facility.

The interest rate on the term loans was 6.52% as of June 30, 2024 and 6.46% as of December 31, 2023 and the interest rate on the revolving credit facility was 6.48% as of June 30, 2024 and 6.45% as of December 31, 2023.

Since entering the agreement in January 2022, borrowings under the Credit Facility bore interest at a rate per annum equal to, at the Company’s option, (a) in the case of U.S. dollar loans, the Bloomberg Short-term Bank Yield (“BSBY”) rate plus a margin, and for all other currencies, a specified benchmark rate for the applicable currency plus, in certain instances, a specified spread adjustment plus a margin (loans with a rate based on this clause (a), “benchmark rate loans”) or (b) for U.S. dollar loans only, the base rate plus a margin (loans with a rate based on this clause (b), “base rate loans”). In addition, the Credit Facility included a provision that replaces BSBY with the Secured Overnight Financing Rate (“SOFR”) plus certain specified credit spread adjustments in the event that BSBY ceases to be available as a reference rate. In November 2023, the Bloomberg Index Services Limited announced that the permanent cessation of BSBY and all of its tenors will be effective on November 15, 2024. Accordingly, on June 28, 2024, the Company entered into an amendment (the “First Credit Facility Amendment”) to the Credit Facility with Bank of America, N.A. and certain other lenders. The First Credit Facility Amendment provided, among other things, for (i) the replacement of BSBY with Term SOFR plus a SOFR adjustment of 0.10% as a benchmark rate for interest periods commencing subsequent to June 28, 2024; (ii) UL Solutions Inc., which was previously the guarantor of the facility, became the named borrower, and UL LLC, which was previously the named borrower, became the guarantor. The foregoing summary of certain provisions of the First Credit Facility Amendment is qualified in its entirety by reference to the amendment filed as exhibit 10.1 hereto.

Senior Notes

In October 2023, the Company issued $300 million in aggregate principal amount of 6.500% 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.

14. Common Stock

As of June 30, 2024 the Company was authorized to issue 1,000,000,000 shares of Class A common stock, par value $0.001 per share,500,000,000 shares of Class B common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2023 the Company was authorized to issue 200,000,000 shares of Class A common stock, par value $0.001 per share and 200,000,000 shares of Class B common stock, par value $0.001 per share. Class A and Class B common stock each convey the same rights and privileges to their respective holders, except that Class A common stock entitles its holders to 1 vote per share in respect of matters on which shareholders are entitled to vote and Class B common stock entitles its holders to 10 votes per share.

UL Standards & Engagement is the sole holder of UL Solutions’ outstanding Class B common stock, resulting in beneficial ownership of 80.6% and voting power of 97.6% of the Company’s outstanding common stock as of June 30, 2024. As a result, UL Standards & Engagement has the ability to control the outcome of matters submitted to the Company’s stockholders for approval, including the election of directors and the approval of any change of control transaction. The Company meets the definition of a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange.

The following table shows the number of shares of common stock outstanding and changes in each class of share:

(a)On April 11, 2024, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which, among other things, reclassified 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.

(b)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 included 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 did not receive any proceeds from the initial public offering.

At June 30, 2024, and December 31, 2023, no shares of preferred stock were outstanding.

15. Accumulated Other Comprehensive Loss

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

16. Stock-based and Other Incentive Compensation

In April 2024, the UL Solutions Inc. 2024 Long-Term Incentive Plan (the “2024 LTIP”) became effective and the Company reserved for issuance 20,000,000 shares of Class A common stock in connection with the 2024 LTIP and the UL Solutions Inc. Long-Term Incentive Plan (the “Pre-IPO LTIP”), as well as 5,000,000 additional shares of Class A common stock reserved for issuance under the UL Solutions Inc. 2024 Employee Stock Purchase Plan (the “2024 ESPP”). Upon settlement of stock-based compensation awards, shares of Class A common stock are issued in respect of such awards. Equity awards that are granted and subsequently expire, are cancelled, forfeited, or are used to satisfy required withholding taxes are recycled back into the total number of shares available for issuance under the 2024 LTIP and the Pre-IPO LTIP. As of June 30, 2024,19,993,051 shares remain available for issuance under the 2024 LTIP and the Pre-IPO LTIP and 5,000,000 shares remain available for issuance under the 2024 ESPP.

Annual equity awards are issued to certain employees and officers, including named executive officers, in order to attract, motivate and retain talent and to maximize their contribution to the long-term success of the Company. Equity awards are also used as part of the compensation provided to the board of directors in the form of restricted stock units. Directors may also elect to defer receipt of some or all of their annual cash retainer amounts, which are converted into restricted stock units when and as such cash retainer amounts would have otherwise been paid, for either five years,10 years or until termination of service from the board.

In May 2024, the Company granted annual equity awards, comprised of restricted stock units and performance share units, to eligible employees, officers and directors. In addition, in connection with the IPO, the Company granted nonqualified stock options and restricted stock units to the Company’s executive team, including named executive officers, and other key employees under the 2024 LTIP.

The Company has outstanding awards under the Pre-IPO LTIP, the majority of which will be settled in shares of Class A common stock.

Stock-based compensation expense was as follows:

Restricted Stock Units

Restricted stock units (“RSUs”) represent the right to receive shares of Class A common stock and are generally subject to continued employment through athree-year ratable vesting period.

The following table summarizes the activity related to the Company’s RSUs during the six months ended June 30, 2024:

As of June 30, 2024, total unrecognized compensation expense related to RSUs was $24 million and is expected to be recognized over the remaining weighted-average vesting period of 2.3 years.

Performance Share Units

Performance share units (“PSUs”) represent the right to receive shares of Class A common stock based on the achievement of certain performance conditions and are generally subject to continued employment through athree-year cliff vesting period. The performance conditions are based on company-wide non-GAAP revenue and operating income metrics and the number of Class A common shares issued may range from 0% to a maximum potential value of 200% of the award’s target value based on the satisfaction of the applicable metrics over athree-year cumulative performance period.

The following table summarizes the activity related to the Company’s PSUs during the six months ended June 30, 2024:

As of June 30, 2024, total unrecognized compensation expense related to PSUs was $15 million and is expected to be recognized over the remaining weighted-average vesting period of 2.5 years.

Stock Options

Stock options represent the right to purchase shares of Class A common stock and are generally subject to continued employment through athree-year cliff vesting period. Stock options expireten years from the grant date.

The following table summarizes the activity related to the Company’s stock options during the six months ended June 30, 2024:

The weighted average grant date fair value per share of stock options granted was $7.48 for the period ended June 30, 2024.

The following table summarizes the assumptions used in the Black-Scholes-Merton option-pricing model that was used to estimate the fair value of the stock options at the grant date:

As of June 30, 2024, total unrecognized compensation expense related to stock options was $15 million and is expected to be recognized over the remaining weighted-average vesting period of 2.8 years.

Stock Appreciation Rights

The Company has stock appreciation rights outstanding from its Pre-IPO LTIP, which represent the right to receive an amount based on the appreciation in the fair value of the Company’s Class A common stock from the grant date up to a specified date or dates. Prior to the IPO, all stock appreciation rights were Cash-settled Stock Appreciation Rights (“CSARs”). Upon completion of the IPO, the majority of outstanding CSARs were converted to the same number of Stock-settled Stock Appreciation Rights (“SSARs”), which will be settled in shares of Class A common stock under the pre-IPO LTIP. As equity-settled awards, the fair value of the SSARs was determined on the conversion date of April 16, 2024 and, generally, will not be remeasured unless the awards are modified.

The conversion of CSARs to SSARs at the completion of the IPO resulted in a reclassification of $26 million from accrued compensation and benefits and other liabilities 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 resulted in additional pre-tax compensation expense of $9 million in the second quarter of 2024, primarily within selling, general and administrative expenses. The pre-tax compensation expense reduced segment operating income by $4 million, $4 million and $1 million for the Industrial, Consumer and Software & Advisory segments, respectively.

The following table summarizes the activity related to the Company’s CSARs during the six months ended June 30, 2024:

As of June 30, 2024, total unrecognized compensation expense related to CSARs was immaterial. The weighted average grant date fair value per share of CSARs granted was $5.28 for the period ended June 30, 2024.

The Company had a short-term liability related to its CSARs of $3 million and $37 million recorded within accrued compensation and benefits in the Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023, respectively. The Company had a long-term liability of $0 and $2 million recorded within other liabilities in the Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023, respectively.

The following table summarizes the activity related to the Company’s SSARs during the six months ended June 30, 2024:

As of June 30, 2024, total unrecognized compensation expense related to SSARs was $4 million and is expected to be recognized over the remaining weighted-average vesting period of 1.5 years. The fair value of the Company’s vested SSAR awards was $21 million at June 30, 2024. The weighted average grant date fair value per share of SSARs granted was $6.15 for the period ended June 30, 2024.

The following table summarizes the assumptions used in the Black-Scholes-Merton option-pricing model that was used to estimate the fair value of the stock appreciation rights at the conversion date:

Performance Cash

The Company has Performance Cash awards outstanding from its previous compensation programs, which represent the right to receive an amount based on the achievement of certain performance conditions and are generally subject to continued employment through athree-year cliff vesting period. The amount may range from 0% to a maximum potential value of 200% of the award’s target value based on the satisfaction of the performance conditions over athree-year cumulative performance period. Prior to the IPO, all Performance Cash awards were settled in cash. Following the IPO, the majority of the outstanding Performance Cash awards will be settled in shares of Class A common stock under the Pre-IPO LTIP.

Compensation expense related to Performance Cash awards was as follows:

The Company had a short-term liability related to its Performance Cash awards of $14 million and $16 million recorded within accrued compensation and benefits in the Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023, respectively. The Company had a long-term liability of $14 million and $13 million recorded within other liabilities in the Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023 respectively.

17. 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.

18. Related Party Transactions

In the three and six month periods ended June 30, 2024, the Company incurred expenses of $5 million and $10 million, respectively, to access the library of standards owned and maintained by UL Standards & Engagement. In the three and six month periods ended June 30, 2023, the Company incurred expenses of $5 million and $10 million, respectively, to access the library of standards owned and maintained by UL Standards & Engagement.

In the three and six months ended June 30, 2024, the Company declared and paid regular cash dividends to stockholders, resulting in payments of $20 million and $45 million to UL Standards & Engagement, respectively. In the three and six months ended June 30, 2023, the Company declared and paid regular cash dividends to its then sole stockholder, UL Standards & Engagement, of $20 million and $40 million, respectively.

19. Segment Information

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

20. Subsequent Events

On July 8, 2024, the Company acquired 100% of the outstanding stock of TesTneT Engineering GmbH (together with its subsidiaries,“Testnet”) for approximately $19 million in cash consideration (subject to customary post-closing adjustments). Testnet is a Germany-based company that provides testing services for various hydrogen storage systems, refueling stations and their components.