Before I joined the world of B2B software, I spent eight years in the testing and certification business. (Of food products). We built a great little business on the Southside of Chicago that eventually became part of a global leader in food testing and certification. However, the product testing and certification giant was on the North Side of Chicago. That would be one you know by its famous mark, Underwriter’s Laboratory, aka UL Solutions. UL Solutions has filed to go public, so UL itself will be listed as the logo promises!
I’ll cover a few interesting aspects of the UL Solutions story:
- The origin story.
- The numbers.
- The business segments.
- Ownership structure.
The UL Solutions Origin Story
Origin stories don’t get better than this. At the turn of the 20th Century, electrification is sweeping the nation–and causing a fair number of fires! William Henry Merrill moves to Chicago to work for the local fire underwriter’s association to inspect early fire alarm systems and the Palace of Electricity at the 1893 World’s Fair. (Devil and the White City, anyone?).
According to Wikipedia:
In order to determine and mitigate risk in his role as an electrical inspector, Merrill found it necessary to conduct tests on building materials and electrical components. Upon seeing a growing potential in this field, Merrill stayed in Chicago to found Underwriters Laboratories. He received initial funding from the Chicago Fire Underwriters’ Association and the Western Insurance Union, a local insurance organization. With $350 of equipment, he opened a small laboratory on the third floor of a local fire insurance patrol station, signing UL’s first test report on March 24, 1894.[11
Merrill started a non-profit to test and develop standards for fire extinguishers, fire doors, wiring, and eventually appliances (when invented). To this day, the company is engaged in these same activities–testing and certification, but for many more products and hazards than just fire. Interestingly, though, as electrification is sweeping the auto industry, UL is investing in EV and battery testing, hoping lightning will strike twice (lousy pun intended).
UL Solutions By the Numbers
As you can see from the chart of UL Solutions’ revenue growth, it’s a steady but not flashy grower. For the nine months ended September 2023, growth was 5.4%. The company is profitable. In 2022, net income was about 12% of revenue, and adjusted EBITDA was 21.7%. The company’s free cash flow is tempered by investments necessary to build and refurbish labs. Capex has exceeded $100 million each of the last three years.
UL Solutions’ Segments
UL Solutions reports its revenue by product type, service line, and geography. Sixty percent of revenue comes from the testing of products and then ongoing certification services, presumably often related to that testing. Thirty percent of revenue comes from non-certification testing. (I suspect this is testing a retailer might require a manufacturer to do, for instance.) Finally, eleven percent of the revenue, or about $250 million, comes from software. That’s a decent chunk of revenue in the pretty hot markets of regulatory compliance, sustainability, and supply chain transparency. However, we don’t get much data on that segment, so it’s hard to know if any treasures are buried there.
The geographic segmentation shows that twenty-four percent of UL’s revenue comes from China, where UL Solutions has a joint venture with a Chinese state-owned enterprise. This enterprise conducts 36% of UL Solutions’ global inspections, so there is a lot of exposure to the Chinese market.
UL Solutions’ Ownership
Remember that non-profit corporation that William Merrill started in the 1890s? That non-profit still owns the company. Yep, the IPO will issue a new (lower-voting rights) class of stock in the for-profit subsidiary of the non-profit, which will still control the subsidiary. It will look something like this:
If I understand correctly, the IPO proceeds will go to the non-profit subsidiary to support its research and standards development activities.
Besides UL, several leading standards development organizations have formed for-profit subsidiaries (e.g., NSF). These firms follow a pattern of starting with standards, perhaps adding inspections and certification and often software. It’s an interesting topic for another blog post someday.
UL Solutions has a great brand. (I’d love to see a ranking of the awareness of their mark versus other famous logos.) It’s a scaled, global testing and certification organization exposed to rapidly electrifying products and industries. It’s got a not-insubstantial software company buried in there. There’s a lot to like. However, moving from a non-profit all these years to a public company will likely require new cost discipline and initiative.
The IPO seems to be delayed a bit, so there is no pricing yet, but it will be relatively easy to find comparables when pricing is available. Bureau Veritas, SGS Group, Intertek, and Eurofins are public comparables. They all sell for about 1.5-2.5x revenues, so this overly simplistic approach would put the valuation around $5 billion. In 2021, Intertek also bought a similar business called SAI Global Assurance. The company profitability was similar, and Intertek paid 3.5x revenue. Though that price presumably included a control premium. Stay tuned.