UL Solutions (ULS) 10-Q2024 Q1 Quarterly report

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.

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.

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.

Basic and diluted earnings per share were calculated as follows:

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

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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 did not 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 expire ten 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 a three-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 a three-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 a three-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 a three-year vesting period.

References to “UL Solutions” and the “Company” refer to UL Solutions Inc. and its consolidated subsidiaries as a whole, unless the context otherwise requires.

UL Solutions is a global safety science leader that provides independent third-party testing, inspection and certification (“TIC”) services and related software and advisory (“S&A”) offerings.

UL Solutions manages the company and reports its financial results through the Company’s two businesses, TIC and S&A, and three segments: Industrial, Consumer and Software and Advisory.

On April 16, 2024, the Company completed its IPO of an aggregate of 38,870,000 shares of Class A common stock by ULSE Inc. (“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 did not receive any proceeds from the IPO.

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 UL Solutions Inc. 2024 Long-Term Incentive Plan. These awards consisted of 2,074,299 nonqualified stock options, which are subject to continued employment through a three-year vesting period, and 22,486 restricted stock units, which are subject to continued employment through a three-year ratable vesting period. In addition, similar to prior long-term company compensation programs, 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, which are subject to continued employment through a three-year ratable vesting period, and 382,455 performance share units with an aggregate value of $13 million, which are subject to continued employment through a three-year vesting period.

The Company conducts its operations across four major service categories: (1) Certification Testing of products, components and systems according to standards and regulatory requirements and other design and performance specifications; (2) Ongoing Certification Services to validate the continued compliance of previously certified products, components and systems; (3) Non-certification Testing and Other Services, which includes performance testing for customer or other requirements that may not be required by any regulation and may not result in a certification, as well as other services, including advisory and technical services; and (4) Software, comprising software as a service and license-based software solutions, including implementation and training services related to software.

The Company uses Organic, Acquisition and FX to explain the change in revenue from period to period. Revenue change is calculated as the percentage change in revenue in one period relative to the prior period’s revenue and is a key financial measure that the Company uses to manage its business. The Company defines these components of revenue as follows:

“Organic” reflects revenue change in a given period excluding Acquisition and FX in that same year, expressed in dollars or as a percentage of revenue in the prior period.

“Acquisition” is calculated as revenue change in a given period related to acquisitions or disposals of businesses using prior period exchange rates, expressed in dollars or as a percentage of revenue in the prior period. Revenues from an acquisition or disposal are measured as Acquisition for the initial twelve month period following the acquisition or disposal date. Subsequently, the revenue impact from the acquired or disposed business is measured as Organic.

“FX” reflects the impact that foreign currency exchange rates have on revenue in a given period, expressed in dollars or as a percentage of revenue in the prior period. The Company uses constant currency to calculate the FX impact on revenue in a given period by translating current period revenues at prior period exchange rates, expressed as a percentage of revenue in the prior period.

Cost of revenue includes personnel related expenses consisting of salaries, incentives, stock-based compensation and fringe benefits for employees directly attributable to revenue generation across each of the Company’s four major service categories. In addition, cost of revenue includes facility related costs for laboratories and other buildings where testing and inspection services are performed, depreciation on equipment used in testing, amortization of capitalized software, customer-related travel costs, expenses related to third party contractors or third party facilities and consumable materials and supplies used in testing and inspection and other costs associated with generating revenue.

Selling, general and administrative expenses include personnel related expenses consisting of salaries, incentives, stock-based compensation and fringe benefits for indirect administrative functions such as executive, finance, legal, human resources and information technology, not included within cost of revenue. Additionally, selling, general and administrative expenses include third party consultancy costs, facility costs, depreciation and amortization, internal research and development costs as well as legal and accounting fees, travel, marketing, bad debt and non-chargeable materials and supplies. The Company expects selling, general and administrative expenses will be impacted by costs associated with being a publicly traded company.

Operating income is calculated as revenue less cost of revenue and selling, general and administrative expenses. Operating income margin is calculated as operating income as a percentage of revenue.

The Company uses Organic, Acquisition and FX to explain the change in operating income from period to period. Operating income change is calculated as the percentage change in operating income in one period relative to the prior period’s

operating income and is a key financial measure that the Company uses to manage its business. The Company defines these components of operating income as follows:

“Organic” reflects total operating income change in a given period excluding Acquisition and FX in that same period, expressed in dollars or as a percentage of operating income in the prior period.

“Acquisition” is calculated as operating income change in a given period related to acquisitions or disposals of businesses using prior period exchange rates, expressed in dollars or as a percentage of operating income in the prior period. Operating income change from an acquisition or disposal is measured as Acquisition for the initial twelve month period following the acquisition or disposal date. Subsequently, operating income impact from the acquired or disposed business is measured as Organic. Acquisition also includes the change in due diligence related costs for merger and acquisition and disposal activities.

“FX” reflects the impact that foreign currency exchange rates have on operating income in a given period expressed in dollars or as a percentage of operating income in the prior period. The Company uses constant currency to calculate the FX impact on operating income in a given period by translating current period operating income at prior period exchange rates, expressed as a percentage of operating income in the prior period.

Interest expense consists primarily of interest expense on the Company’s debt obligations.

Other (expense) income, net consists primarily of non-operating gains and losses, income and expenses related to the revaluation performed on designated balance sheet accounts, gains and losses on foreign currency transactions, investment income, equity in earnings of non-consolidated affiliates and non-operating pension and postretirement benefit expenses.

Income before income taxes is calculated as revenue less cost of revenue, selling, general and administrative expenses, interest expense and other (expense) income, net.

Income tax expense consists of current and deferred federal and state taxes for the Company’s U.S. and foreign jurisdictions.

Net income is calculated as revenue less cost of revenue, selling, general and administrative expenses, interest expense, other (expense) income, net and income tax expense. Net income margin is calculated as net income as a percentage of revenue.

The following table sets forth the Company’s condensed consolidated results of operations for the periods presented.

Cost of revenue increased by $16 million, or 4.8%, for the three months ended March 31, 2024, as compared to the same period in 2023, due to increased compensation expenses of $8 million, primarily due to higher healthcare costs and base salary increases. In addition, depreciation and amortization increased $7 million related to the completion of additional laboratory capacity and software placed in service. Cost of revenue improved to 52.4% of revenue for the three months ended March 31, 2024, compared to 53.3% for the same period in 2023.

Selling, general and administrative expenses increased by $9 million, or 4.1%, for the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to a $7 million increase in professional fees related to ongoing software projects, as well as higher costs related to the IPO, and a $7 million increase in bad debt expenses due to the impact of higher write-offs in 2024 compared to a benefit received in 2023 as a result of favorable historical loss experience. The increases in selling, general, and administrative expenses were partially offset by a decrease in compensation expenses of $6 million, primarily due to the change in estimated fair value of the Company’s outstanding Cash-settled Stock Appreciation Rights (“CSARs”) related to higher discount rates utilized in the discounted cash flow analysis.

Other (expense) income, net grew to $3 million expense from $5 million income for the three months ended March 31, 2024, as compared to the same period in 2023. The $8 million increase in expense was primarily driven by $6 million of higher unrealized foreign exchange currency losses on intercompany loans and higher realized losses on transaction settlements.

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.

Several countries in which the Company operates have adopted aspects of Pillar Two rules which impose a 15% corporate minimum tax into their local legislation effective January 1, 2024. In accordance with Financial Accounting Standards Board guidance which states that the Pillar Two minimum tax should be reflected as a period cost in the period the law is effective rather than enacted, the Company has reflected the impact of the Pillar Two rules that are effective January 1, 2024 in its financial results for the three months ended March 31, 2024, and the impact is immaterial. The Company is continuing to evaluate aspects of the legislation that will be effective January 1, 2025 and the potential impact on future periods as such changes could result in an increase in its effective tax rate in 2025 and/or other future periods.

The Industrial segment provides TIC services to help ensure customers' industrial products meet or exceed international standards for product safety, performance and sustainability. The Industrial segment provides services that address needs across a number of end markets, including energy, industrial automation, engineered materials (plastics and wire and cable) and built environment, and across a variety of stakeholders, including manufacturers, building owners, end users and regulators.

The following table summarizes the change in Industrial’s revenue and operating income for the periods presented:

Revenue increased by $25 million, or 9.3%, for the three months ended March 31, 2024, as compared to the same period in 2023. On an organic basis, revenue increased $27 million or 10.0%, primarily due to growth in Certification Testing revenue of $12 million driven by continued demand for electrical product, renewable energy and component certification testing, as well as returns on new capacity provided by recent laboratory investments. Ongoing Certification Services revenue also had strong growth of $12 million across most industries due to early 2024 price increases. Non-Certification Testing and Other Services revenue grew $4 million due in part to increases in materials and building products.

Segment operating income increased by $3 million, or 4.2%, for the three months ended March 31, 2024, as compared to the same period in 2023 primarily due to the $27 million increase in organic revenue noted above partially offset by a $20 million increase in expenses. Expenses increased primarily due to increased compensation expenses of $8 million due to base salary increases, additional headcount and higher healthcare costs, partially offset by lower expenses associated with the change in estimated fair value of the Company’s outstanding CSARs. Additionally, professional fees increased $4 million primarily related to ongoing software projects.

The Consumer segment provides a variety of global product market acceptance and risk mitigation services for customers in the consumer products end market, including consumer electronics, medical devices, information technologies, appliances, HVAC, lighting, retail (softlines and hardlines) and emerging consumer applications, including new mobility, smart products and 5G. The primary services offered by this segment include safety certification testing, ongoing certification, global market access, testing for connectivity, performance and quality and critical systems advisory and training.

The following table summarizes the change in Consumer’s revenue and operating income for the periods presented:

The Software and Advisory segment provides complementary software and advisory solutions that extend the value proposition of TIC services the Company offers. The software and technical advisory offerings enable the Company’s customers to manage complex regulatory requirements, deliver supply chain transparency and operationalize sustainability.

The following table summarizes the change in Software and Advisory’s revenue and operating income for the periods presented:

Revenue increased by $5 million, or 6.0%, for the three months ended March 31, 2024, as compared to the same period in 2023. On an organic basis, revenue increased $4 million, or 4.8%, primarily due to increased advisory revenue in renewable energy generation.

Segment operating loss increased by $1 million for the three months ended March 31, 2024, as compared to the same period in 2023 due to offsetting increases in organic revenue and operating expenses. Expenses increased primarily due to increased compensation expenses due to base salary increases and higher healthcare costs, partially offset by a decrease in expenses associated with the change in estimated fair value of the Company’s outstanding CSARs.

In addition to financial measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company considers a variety of financial and operating measures in assessing the performance of the Company’s business. The key non-GAAP measures the Company uses are Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, Adjusted Net Income margin, Adjusted Diluted Earnings Per Share and Free Cash Flow, which management believes provide useful information to investors. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, operating income, diluted earnings per share, net cash provided by operating activities or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.

The Company uses Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, Adjusted Net Income margin and Adjusted Diluted Earnings Per Share to measure the operational strength and performance of its business and the Company believes these measures provide additional information to investors about certain non-cash items and unusual items that are not expected to continue at the same level in the future. Further, the Company believes these non-GAAP financial measures provide a meaningful measure of business performance and provide a basis for comparing its performance to that of other peer companies using similar measures. The Company uses Free Cash Flow as an additional liquidity measure and believes it

provides useful information to investors about the cash generated from its core operations that may be available to repay debt, make other investments and return cash to stockholders.

There are material limitations to using these non-GAAP financial measures. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest expense, other expense (income), income tax expense, stock-based compensation expense for equity-settled awards, material asset impairment charges and restructuring expenses which directly affect the Company’s net income, as applicable. Adjusted Net Income and Adjusted Diluted Earnings Per Share do not take into account certain significant items, including other expense (income), stock-based compensation expense for equity-settled awards, material asset impairment charges and restructuring expenses which directly affect the Company’s net income and diluted earnings per share, as applicable. Free Cash Flow adjusts for cash items that are ultimately within management’s discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure. Free Cash Flow is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted. These limitations are best addressed by considering the economic effects of the excluded items independently, and by considering these non-GAAP financial measures in conjunction with net income, operating income, diluted earnings per share and net cash provided by operating activities as calculated in accordance with GAAP.

The table below presents these non-GAAP measures with the most directly comparable GAAP measures.