UL Solutions Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. UL Solutions provides independent testing, inspection and certification services, plus software and advisory offerings, through its Industrial, Consumer, and Software and Advisory segments. Results are unaudited and compared with Q1 2023 unless otherwise noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $670 million | $629 million | +6.5% |
| Operating income | $91 million | $75 million | +21.3% |
| Operating margin | 13.6% | 11.9% | +1.7 percentage points |
| Net income | $60 million | $58 million | +$2 million |
| Net income attributable to UL Solutions stockholder | $56 million | $55 million | +$1 million |
| Diluted EPS | $0.28 | $0.28 | Unchanged |
| Adjusted EBITDA (non-GAAP) | $131 million | $111 million | +18.0% |
| Adjusted EBITDA margin (non-GAAP) | 19.6% | 17.6% | +2.0 percentage points |
| Operating cash flow | $141 million | $161 million | -$20 million |
| Free cash flow (non-GAAP) | $84 million | $98 million | -$14 million |
Revenue rose $41 million: organic growth contributed $47 million (7.5%), acquisitions contributed $1 million, and foreign exchange reduced revenue by $7 million. Growth was reported in every segment. Industrial revenue increased 9.3% to $295 million; Consumer rose 4.0% to $286 million; and Software and Advisory rose 6.0% to $89 million. Consumer operating income improved to $17 million from $3 million; Industrial operating income was $75 million versus $72 million; Software and Advisory recorded a $1 million operating loss versus break-even.
Cost of revenue increased 4.8%, slower than revenue growth, and declined to 52.4% of revenue from 53.3%. SG&A increased 4.1% to $228 million, including higher professional fees, IPO-related costs and bad debt expense; lower CSAR compensation expense partly offset these increases. Interest expense rose to $15 million from $8 million, primarily reflecting senior notes issued in 2023. Other expense was $3 million, compared with $5 million of other income in Q1 2023, largely due to foreign-exchange losses. Effective tax rate was 17.8%, down from 19.4%.
Financial position and liquidity
- At March 31, 2024, cash and cash equivalents were $344 million, up from $315 million at year-end 2023. Total current assets were $1.051 billion and current liabilities were $829 million.
- Total debt before unamortized issuance costs was $885 million, down from $910 million at December 31, 2023; debt net of issuance costs was $879 million. Debt included $500 million of term loans, $85 million drawn on the revolving facility, and $300 million of 6.5% senior notes due 2028.
- The company reported $659 million of unused credit-facility availability and stated that cash, operating cash flows, borrowing availability and capital-market access were expected to provide sufficient liquidity for the next 12 months and foreseeable future. It was in compliance with credit-facility covenants.
- Operating cash flow decreased mainly due to higher receivables and the timing of incentive payments, partly offset by increased contract liabilities and customer prepayments. Capital expenditures were $57 million versus $63 million; free cash flow was $84 million versus $98 million.
Material changes, outlook and notable items
- Management cited broad-based organic revenue growth, led by Industrial certification testing and ongoing certification services. Industrial benefited from demand in electrical products and renewable energy, new laboratory capacity and price increases. Consumer growth included stronger automotive and consumer-electronics testing and improved retail demand.
- No specific revenue, earnings or cash-flow guidance for future periods is provided in the supplied filing text. Management said it expects liquidity to be sufficient for the foreseeable future. Historical interim results are not necessarily indicative of future results.
- After quarter-end, UL Standards & Engagement completed a secondary IPO on April 16, 2024, selling 38.87 million Class A shares at $28 per share. UL Solutions received no proceeds. UL Standards & Engagement retained 80.6% of outstanding capital stock and 97.6% of voting power, making the company a controlled company under NYSE rules.
- The payments testing business was sold on May 1, 2024 for a $30 million base cash price, subject to adjustments. The company expects to record an approximately $25 million pretax gain in Q2 2024.
- Following the IPO, about $18 million of cash-settled stock appreciation rights were expected to be paid in Q2, and conversion of other awards was expected to result in approximately $9 million of additional pretax compensation expense. The company also expects a roughly $5 million reduction in deferred tax assets and related tax expense in Q2 due to Section 162(m) limitations.
- The company raised its regular quarterly dividend to $0.125 per share beginning in Q1 2024; it gave no assurance of future dividend amounts. Its credit facility is expected to transition from BSBY to SOFR-based pricing on or before November 15, 2024. A hypothetical 100-basis-point increase in rates on credit-facility borrowings would increase annual interest expense by approximately $6 million.
- Ordinary-course claims, litigation, audits and investigations were described as not material; management does not expect their resolution to materially affect financial position, results or cash flows. Key risks include cybersecurity and the disclosed 2021 ransomware incident, foreign-exchange exposure, China-related regulatory and joint-venture risks, competition and AI disruption, regulatory changes affecting certification demand, and the impact of controlling-stockholder rights.
Important facts for investors to verify
- Whether organic growth and margin improvement persist, particularly in Consumer and Industrial, and how foreign exchange affects reported results.
- Whether operating cash conversion improves as receivables and incentive-payment timing normalize; monitor contract liabilities and capital spending.
- Debt-service capacity and exposure to variable rates, including the BSBY-to-SOFR transition and covenant headroom.
- The realized proceeds and gain from the payments testing business sale, and the Q2 cash, compensation and tax impacts disclosed for CSARs and the IPO.
- The implications of UL Standards & Engagement’s 97.6% voting control, potential future share sales, and the company’s controlled-company governance status.
Non-GAAP measures, including Adjusted EBITDA and free cash flow, are company-defined and should be considered alongside their GAAP comparators.