UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2022

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38617

________________________________________________

Frontdoor, Inc.

(Exact name of registrant as specified in its charter)


Delaware		82-3871179
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

150 Peabody Place, Memphis, Tennessee 38103

(Address of principal executive offices) (Zip Code)

901-701-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common stock, par value $0.01 per share	FTDR	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of the registrant’s common stock outstanding as of ~~April~~July 29, 2022: ~~82,257,974~~81,489,619 shares of common stock, par value $0.01 per share.

Frontdoor, Inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

In order to aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:



Term/Abbreviation	Definition
2021 Form 10-K	Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2021
2026 Notes	6.750% senior notes in the aggregate principal amount of $350 million
AOCI	Accumulated other comprehensive income or loss
ASC	FASB Accounting Standards Codification
ASC 740	ASC Topic 740, Income Taxes
Credit Agreement	The agreements governing the Credit Facilities
Credit Facilities	The Term Loan Facilities together with the Revolving Credit Facility
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	U.S. Financial Accounting Standards Board
HVAC	Heating, ventilation and air conditioning
IRS	Internal Revenue Service
Omnibus Plan	Frontdoor, Inc. 2018 Omnibus Incentive Plan
Prior Term Loan Facility	$650 million senior secured term loan facility in place prior to the effectiveness of the Term Loan Facilities
ProConnect	Our membership-based home services business, which includes on-demand home services offerings, marketed under the American Home Shield ProConnect brand name and other names
Revolving Credit Facility	$250 million revolving credit facility effective June 17, 2021
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Spin-off	Terminix’s separation and distribution of the ownership and operations of the businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names into Frontdoor, Inc., which was completed on October 1, 2018
Streem	Streem, LLC, our technology business that uses augmented reality, computer vision and machine learning to provide services
Term Loan A	$260 million term loan A facility effective June 17, 2021
Term Loan B	$380 million term loan B facility effective June 17, 2021
Term Loan Facilities	The Term Loan A together with the Term Loan B
Terminix	Terminix Global Holdings, Inc. (formerly known as ServiceMaster Global Holdings, Inc.), a Delaware corporation, and its consolidated subsidiaries
U.S. or United States	United States of America
U.S. GAAP	Accounting principles generally accepted in the United States of America

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Frontdoor,” “we,” “our,” or “us,” and the “company” refer to Frontdoor, Inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee. Effective June 25, 2021, we changed our name from frontdoor, inc. to Frontdoor, Inc.

We hold various service marks, trademarks and trade names, such as Frontdoor®, American Home Shield®, HSA™, OneGuard®, Landmark Home Warranty®, ProConnect®, Streem® and the Frontdoor logo. Solely for convenience, the service marks, trademarks and trade names referred to in this Quarterly Report on Form 10-Q are presented without the SM, ®, and TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these service marks, trademarks and trade names. All service marks, trademarks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Certain amounts presented in the tables in this report are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

TABLE OF CONTENTS

	Page ‎No.
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations and Comprehensive Income	4

Condensed Consolidated Statements of Financial Position	5

Condensed Consolidated Statements of Changes in Equity (Deficit)	6

Condensed Consolidated Statements of Cash Flows	7

Notes to Condensed Consolidated Financial Statements	8

Cautionary Statement Concerning Forward-Looking Statements	1718

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2932

Item 4. Controls and Procedures	2932

Part II. Other Information	3033

Item 1. Legal Proceedings	3033

Item 1A. Risk Factors	3033

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3033

Item 6. Exhibits	3134

Signature	3235

‎

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2022		2021		2022		2021		2022		2021
Revenue	$	351	$	329	$	487	$	462	$	838	$	791
Cost of services rendered		207		181		276		221		483		402
Gross Profit		144		148		211		242		355		390
Selling and administrative expenses		125		118		140		136		266		254
Depreciation and amortization expense		8		9		8		9		17		19
Restructuring charges		0		1		12		1		12		2
Interest expense		7		13		7		12		14		25
Interest and net investment income						—		—		—		(1)
Loss on extinguishment of debt		0		1		—		30		—		31
Income before Income Taxes		3		5		43		54		46		60
Provision for income taxes		2		1		10		14		12		15
Net Income	$	2	$	5	$	33	$	40	$	35	$	45
Other Comprehensive Income, Net of Income Taxes:
Net unrealized gain on derivative instruments		13		7		4		—		17		7
Total Comprehensive Income	$	15	$	12	$	37	$	41	$	52	$	53
Earnings per Share:
Basic	$	0.02	$	0.06	$	0.40	$	0.47	$	0.42	$	0.53
Diluted	$	0.02	$	0.06	$	0.40	$	0.47	$	0.42	$	0.53
Weighted-average Common Shares Outstanding:
Basic		82.3		85.4		82.1		85.5		82.2		85.5
Diluted		82.6		86.0		82.2		86.0		82.4		86.0

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)



	As of				As of
	March 31,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Assets:
Current Assets:
Cash and cash equivalents	$	255	$	262	$	269	$	262
Receivables, less allowance of $3 and $2, respectively		5		7		6		7
Contract asset						12		—
Prepaid expenses and other assets		22		25		24		25
Total Current Assets		282		295		310		295
Other Assets:
Property and equipment, net		68		66		66		66
Goodwill		512		512		512		512
Intangible assets, net		157		159		155		159
Operating lease right-of-use assets		16		17		10		17
Deferred customer acquisition costs		18		16		18		16
Other assets		5		5		4		5
Total Assets	$	1,058	$	1,069	$	1,076	$	1,069
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable	$	73	$	66	$	96	$	66
Accrued liabilities:
Payroll and related expenses		17		24		18		24
Home service plan claims		81		88		124		88
Other		23		28		23		28
Deferred revenue		190		155		126		155
Current portion of long-term debt		17		17		17		17
Total Current Liabilities		402		378		404		378
Long-Term Debt		604		608		600		608
Other Long-Term Liabilities:
Deferred taxes		45		41		40		41
Operating lease liabilities		18		19		17		19
Other long-term obligations		9		21		9		21
Total Other Long-Term Liabilities		72		81		66		81
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 85,980,791 shares issued and 82,303,166 shares outstanding at March 31, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021		1		1
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 86,048,827 shares issued and 81,487,995 shares outstanding at June 30, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021						1		1
Additional paid-in capital		73		70		80		70
Retained earnings		55		53		88		53
Accumulated other comprehensive loss		(5)		(18)		(1)		(18)
Less common stock held in treasury, at cost; 3,677,625 shares at March 31, 2022 and 2,566,284 shares as of December 31, 2021		(143)		(103)
Total (Deficit) Equity		(20)		2
Less common stock held in treasury, at cost; 4,560,832 shares at June 30, 2022 and 2,566,284 shares as of December 31, 2021						(162)		(103)
Total Equity						6		2
Total Liabilities and Shareholders' Equity	$	1,058	$	1,069	$	1,076	$	1,069

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Changes in ~~Deficit~~Equity (Unaudited)

(In millions)



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2022		2021		2022		2021		2022		2021
Common Stock
Balance at beginning of period	$	1	$	1	$	1	$	1	$	1	$	1
Balance at end of period		1		1		1		1		1		1
Additional Paid-in Capital
Balance at beginning of period		70		46		73		49		70		46
Exercise of stock options		—		1		—		—		—		2
Issuance of common stock						1		1		1		1
Taxes paid related to net share settlement of equity awards		(3)		(4)		—		—		(3)		(4)
Stock-based employee compensation		6		6		6		8		12		13
Balance at end of period		73		49		80		57		80		57
Retained Earnings (Accumulated Deficit)
Balance at beginning of period		53		(75)		55		(70)		53		(75)
Net income		2		5		33		40		35		45
Balance at end of period		55		(70)		88		(30)		88		(30)
Accumulated Other Comprehensive Loss
Balance at beginning of period		(18)		(33)		(5)		(26)		(18)		(33)
Other comprehensive income (loss), net of tax		13		7		4		—		17		7
Balance at end of period		(5)		(26)		(1)		(26)		(1)		(26)
Common Stock Held in Treasury
Balance at beginning of period		(103)		—		(143)		—		(103)		—
Repurchase of common stock		(40)		—		(19)		—		(59)		—
Balance at end of period		(143)		—		(162)		—		(162)		—
Total Deficit	$	(20)	$	(46)
Total Equity					$	6	$	3	$	6	$	3

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Three Months Ended				Six Months Ended
	March 31,				June 30,
	2022		2021		2022		2021
Cash and Cash Equivalents at Beginning of Period	$	262	$	597	$	262	$	597
Cash Flows from Operating Activities:
Net Income		2		5		35		45
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense		8		9		17		19
Deferred income tax provision						(6)		—
Stock-based compensation expense		6		6		12		13
Restructuring charges		—		1		12		2
Payments for restructuring charges		—		(1)		(1)		(1)
Loss on extinguishment of debt		—		1		—		31
Other		(2)		—		(1)		3
Change in working capital, net of acquisitions:
Receivables		2		1		1		—
Prepaid expenses and other current assets		1		1		(13)		(4)
Accounts payable		7		11		30		27
Deferred revenue		35		40		(30)		(25)
Accrued liabilities		(13)		(8)		29		14
Accrued interest payable		—		(6)		—		(9)
Current income taxes		1		(8)		9		5
Net Cash Provided from Operating Activities		47		52		94		119
Cash Flows from Investing Activities:
Purchases of property and equipment		(9)		(7)		(19)		(15)
Net Cash Used for Investing Activities		(8)		(7)		(19)		(15)
Cash Flows from Financing Activities:
Borrowings of debt, net of discount						—		638
Payments of debt and finance lease obligations		(4)		(102)		(8)		(985)
Debt issuance cost paid						—		(8)
Call premium paid on retired debt						—		(21)
Repurchase of common stock		(40)		—		(59)		—
Other financing activities		(3)		(3)		(2)		(2)
Net Cash Used for Financing Activities		(47)		(105)		(69)		(378)
Cash Decrease During the Period		(8)		(59)
Cash Increase (Decrease) During the Period						6		(274)
Cash and Cash Equivalents at End of Period	$	255	$	538	$	269	$	323

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

Frontdoor, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates under the American Home Shield, HSA, OneGuard and Landmark brands. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our home service plan customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than 20 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps. Our operations also include our ProConnect on-demand home services business and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, help home service professionals more quickly and accurately diagnose breakdowns and complete repairs. At ~~March 31,~~June 30, 2022, we had 2.2 million active home service plans across all 50 states and the District of Columbia.

We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2021 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.

Macroeconomic Conditions

Changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability, may reduce demand for our services, increase our costs and adversely impact our business. While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the risk of poor economic conditions in any particular region of the United States.

During the first ~~three~~six months of 2022, our financial condition and results of operations were adversely impacted by the following:

The challenging home seller’s market, driven, in part, by extremely low home inventory levels, continued to constrain demand for home service plans in the first-year real estate channel.

Our contractors continued to be impacted by inflation, including higher labor, fuel and parts and equipment costs. We continue to take actions to mitigate these impacts, including increasing the share of parts and equipment our contractors source through us, increasing the percent of service requests completed by lower-cost preferred contractors and accelerating contractor recruitment efforts.

Industry-wide parts availability challenges continued to drive elevated appliance replacement levels due to lack of parts availability, further contributing to increased costs and adversely impacting the customer experience, which was reflected in our customer retention rate.

Due to labor availability challenges, we continued to experience workforce retention issues, including difficulties in hiring and retaining employees in customer service operations and throughout our business, and we believe our contractors are experiencing similar workforce challenges.

The COVID-19 Pandemic

The implications of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. ~~In response to~~Given the emergence of COVID-19 ~~pandemic, we have taken~~variants and surges in COVID-19 cases, a significant number of ~~steps to protect the well-being of our employees, customers and contractors, and we~~people may continue to ~~respond~~spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs. We also expect that industry-wide supply chain challenges may continue to contribute to increased costs and impact the ~~real-time needs of our business. The~~customer experience, which may affect customer retention. Accordingly, the COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

It remains difficult to predict the overall continuing impact the COVID-19 pandemic will have on our business.

‎

Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2021 Form 10-K. There have been no material changes to the significant accounting policies for the ~~three~~six months ended ~~March 31,~~June 30, 2022.

Note 3. Revenue

The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Our home service plan agreements have one performance obligation, which is to provide for the repair or replacement of essential home systems and appliances, as applicable per the contract. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer. As the costs to fulfill the obligations of the home service plans are incurred on an other-than-straight-line basis, we utilize historical evidence to estimate the expected claims expense and related timing of such costs. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract balances” below. We regularly review our estimates of claims costs and adjust our estimates when appropriate. We derive substantially all of our revenue from customers in the United States.

We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenue by major customer acquisition channel is as follows:



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
(In millions)	2022		2021		2022		2021		2022		2021
Renewals	$	247	$	224	$	347	$	316	$	593	$	539
Real estate⁽¹⁾		45		57		57		77		102		134
Direct-to-consumer⁽¹⁾		46		41		66		57		112		98
Other		13		8		18		13		31		20
Total	$	351	$	329	$	487	$	462	$	838	$	791

_____________________________

(1)First-year revenue only.

Renewals

Revenue from all customer renewals, whether initiated via the real estate or direct-to-consumer channel, are classified as renewals above. Customer payments for renewals are received either at the commencement of the renewal period or in installments over the contract period.

Real estate

Real estate home service plans are sold through annual contracts in connection with a real estate sale, and payments are typically paid in full at closing. First-year revenue from the real estate channel is classified as real estate above.

Direct-to-consumer

Direct-to-consumer home service plans are sold through annual contracts when customers request a service plan in response to marketing efforts or when third-party resellers make a sale. Customer payments are received either at the commencement of the contract or in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above.

Other

Other revenue includes revenue generated by ProConnect and Streem, as well as administrative fees and ancillary services attributable to our home service plan agreements.

Costs to obtain a contract with a customer

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $18 million and $16 million as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. Amortization of these deferred acquisition costs was $4$6 million for each of the three months ended ~~March 31,~~June 30, 2022 and 2021 and $10 million for each of the six months ended June 30, 2022 and 2021. There were 0 impairment losses in relation to these capitalized costs.

Contract balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers, including contracts resulting from customer renewals, are generally for a period of one year. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivable are recorded within Receivables, less allowances, in the accompanying condensed consolidated statements of financial position. We invoice our monthly-pay customers on a straight-line basis over the contract term. As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed. As of June 30, 2022, a contract asset of $12 million was recorded related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. Deferred revenue was ~~$190~~$126 million and $155 million as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively, and, as of March 31, 2022, included a net contract liability of $45 million related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.respectively.

Changes in deferred revenue for the ~~three~~six months ended ~~March 31,~~June 30, 2022 were as follows:



(In millions)	Deferred Revenue
Balance as of December 31, 2021	$	155
Deferral of revenue		~~106~~136
Recognition of deferred revenue		~~(72)~~(166)
Balance as of ~~March 31,~~June 30, 2022	$	~~190~~126

There was approximately ~~$60~~$62 million and $122 million of revenue recognized in the three and six months ended ~~March 31,~~June 30, 2022, respectively, that was included in the deferred revenue balance as of December 31, 2021. Deferred revenue ~~increased~~decreased during the ~~three~~six months ended ~~March 31,~~June 30, 2022, reflecting ~~the net contract liability discussed above, offset, in part, by~~ a decline in the number of first-year real estate home service plans.

Note 4. Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis or more frequently if circumstances indicate a potential impairment. An assessment for impairment is performed on October 1 of every year. The balance of goodwill was $512 million as of ~~March 31,~~June 30, 2022 and December 31, 2021. There were 0 goodwill or trade name impairment charges recorded in the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021. There were 0 accumulated impairment losses recorded as of ~~March 31,~~June 30, 2022 and December 31, 2021.

The table below summarizes the other intangible asset balances:



	As of March 31, 2022						As of December 31, 2021						As of June 30, 2022						As of December 31, 2021
(In millions)	Gross		Accumulated ‎Amortization		Net		Gross		Accumulated ‎Amortization		Net		Gross		Accumulated ‎Amortization		Net		Gross		Accumulated ‎Amortization		Net
Trade names⁽¹⁾	$	141	$	—	$	141	$	141	$	—	$	141	$	141	$	—	$	141	$	141	$	—	$	141
Customer relationships		173		(172)		—		173		(172)		—		173		(172)		—		173		(172)		—
Developed technology		25		(14)		12		25		(12)		13		25		(15)		10		25		(12)		13
Other		37		(32)		5		37		(32)		5		37		(33)		4		37		(32)		5
Total	$	375	$	(218)	$	157	$	375	$	(216)	$	159	$	375	$	(220)	$	155	$	375	$	(216)	$	159

_____________________________

(1)Not subject to amortization.

Amortization expense was $2 million and $3 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $4 million and $6 million for the six months ended June 30, 2022 and 2021, respectively. The following table outlines expected amortization expense for existing intangible assets for the remainder of 2022 and the next five years:



(In millions)
2022 (remainder)	$	6	$	4
2023		6		6
2024		4		4
2025		—		—
2026		—		—
2027		—		—
Total	$	17	$	15

Note 5. Leases

We have operating leases primarily for our corporate offices, customer service centers and engineering and technology campuses. Our leases have remaining lease terms of less than one year to 13 years, some of which include options to extend the leases for up to five years. Renewal options that are reasonably certain to be exercised are included in the lease term. An incremental borrowing rate is used in determining the present value of lease payments unless an implicit rate is readily determinable. Incremental borrowing rates are determined based on our secured borrowing rating and the lease term.

The weighted-average remaining lease term and weighted-average discount rate related to operating leases is as follows:



	As of				As of
	March 31,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Weighted-average remaining lease term (years)	8		9		8		9
Weighted-average discount rate	5.6	%	5.6	%	5.6	%	5.6	%

We recognized operating lease expense of $1 million for each of the three months ended ~~March 31,~~June 30, 2022 and ~~2021.~~2021 and $2 million for each of the six months ended June 30, 2022 and 2021. These expenses are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

Supplemental cash flow information related to operating leases is as follows:



	Three Months Ended				Six Months Ended
	March 31,				June 30,
(In millions)	2022		2021		2022		2021
Cash paid for amounts included in the measurement of lease liabilities	$	1	$	1	$	3	$	2
Leased assets obtained in exchange for new lease liabilities		—		6		—		6

Supplemental balance sheet information related to operating leases is as follows:



	As of				As of
	March 31,		December 31,		June 30,		December 31,
(In millions)	2022		2021		2022		2021
Operating lease right-of-use assets	$	21	$	22	$	15	$	22
Less lease incentives		(5)		(5)		(5)		(5)
Operating lease right-of-use assets, net	$	16	$	17	$	10	$	17

Other accrued liabilities	$	4	$	4	$	4	$	4
Operating lease liabilities		18		19		17		19
Total operating lease liabilities	$	22	$	23	$	21	$	23

The following table presents maturities of our operating lease liabilities as of ~~March 31,~~June 30, 2022.



(In millions)
2022 (remainder)	$	4	$	3
2023		5		5
2024		3		3
2025		2		2
2026		2		2
2027		2		2
Thereafter		10		10
Total lease payments		28		27
Less imputed interest		(6)		(6)
Total	$	22	$	21

Sublease of Company Headquarters

It is the intent of the company to sublease our corporate headquarters facility in Memphis, Tennessee. As a result of us exiting the facility on June 27, 2022, with intent to sublease, we incurred a non-cash impairment charge of $11 million for the three and six months ended June 30, 2022.

Note 6. Income Taxes

As required by ASC 740, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740. The effective tax rate on income was ~~51.1~~23.2 percent and ~~9.8~~26.0 percent for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and 25.1 percent and 24.5 percent for six months ended June 30, 2022 and 2021, respectively. The ~~increase~~decrease in the effective tax rate for the three months ended ~~March 31,~~June 30, 2022 compared to 2021 is primarily due to share-based awards and income tax credits, offset, in part, by ~~a reduction~~an increase in state income taxes. The increase in the effective tax rate for the six months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and state income taxes, ~~and~~offset, in part, by an increase in income tax credits.

We are subject to taxation in the United States, various states and foreign jurisdictions. Pursuant to the terms of the tax matters agreement entered into with Terminix in connection with the Spin-off, we are not subject to federal examination by the IRS or examination by state taxing authorities where a unitary or combined state income tax return is filed for the years prior to 2018. We are not subject to state and local income tax examinations by tax authorities in jurisdictions where separate income tax returns are filed for the years prior to 2017. Substantially all of our income before income taxes for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021 was generated in the United States.

Note 7. Restructuring Charges

We incurred restructuring charges of $12 million ($9 million, net of tax) and $1 million (less than $1 million, net of tax) for the three months ended June 30, 2022 and 2021, respectively, and $12 million ($9 million, net of tax) and $2 million ($1 million, net of tax) for the six months ended June 30, 2022 and 2021, respectively.

For the three and six months ended June 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our Memphis headquarters facility operating lease right-of-use asset and leasehold improvements and $1 million of severance and other costs. The impairment was the result of vacating the facility with the intent to sublease.

For the three months ended June 30, 2021, restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

For the six months ended June 30, 2021, restructuring charges comprised $1 million of accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities and $1 million of severance and other costs.

The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying consolidated statements of operations and comprehensive income.

As of December 31, 2021, there were less than $1 million of restructuring charges accrued, which were paid or otherwise settled during the six months ended June 30, 2022. As of June 30, 2022, there were $1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

Note 7.8. Commitments and Contingencies

Accruals for home service plan claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home service plan claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these judgmental accruals.

We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.

Due to the nature of our business activities, we are also at times subject to pending and threatened legal and regulatory actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected, individually or in the aggregate, to have a material adverse effect on our business, financial position, results of operations or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our business, financial position, results of operations or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.

Note 8.9. Stock-Based Compensation

We recognized stock-based compensation expense of $6 million ($64 million, net of tax) and $6$8 million ($46 million, net of tax) for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively,.and $12 million ($10 million, net of tax) and $13 million ($10 million, net of tax) for the six months ended June 30, 2022 and 2021, respectively. These charges are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

A summary of awards granted under the Omnibus Plan during the ~~three~~six months ended ~~March 31,~~June 30, 2022 is presented below:




	Number of	Weighted Avg.		Weighted Avg.		Weighted Avg.	Number of	Weighted Avg.		Weighted Avg.		Weighted Avg.
	Awards	Exercise		Grant Date		Vesting	Awards	Exercise		Grant Date		Vesting
	Granted	Price		Fair Value		Period	Granted	Price		Fair Value		Period
Stock options	534,340	$	28.82	$	14.62	4.00	568,623	$	28.64	$	14.54	4.00
Performance options⁽¹⁾							272,503		24.74		11.50	4.00
Restricted stock units	924,062				28.85	3.00	1,186,002				27.97	3.00
Performance shares⁽¹⁾	230,223				28.82	3.00
Performance shares⁽²⁾							285,801				28.03	3.00

_____________________________

(1)The number of performance options granted during the six months ended June 30, 2022 represents the target value of the awards. The performance options contain a market condition that is based on our share price target, and the ultimate number of performance options to be earned depends on the achievement of this market condition.

(2)The number of performance shares granted during the ~~three~~six months ended ~~March 31,~~June 30, 2022 represents the target value of the awards. The performance shares contain a performance condition that is based on our revenue target, and the ultimate number of performance shares to be earned depends on the achievement of this performance condition.

As of ~~March 31,~~June 30, 2022, there was ~~$73~~$57 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards (“RSAs”). These remaining costs are expected to be recognized over a weighted-average period of ~~2.58~~2.48 years.

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Note 9.10. Long-Term Debt

Long-term debt is summarized in the following table:



	As of				As of
	March 31,		December 31,		June 30,		December 31,
(In millions)	2022		2021		2022		2021
Term Loan A maturing in 2026⁽¹⁾	$	248	$	252	$	245	$	252
Term Loan B maturing in 2028⁽²⁾		372		373		371		373
Revolving Credit Facility maturing in 2026		—		—		—		—
Less current portion		(17)		(17)		(17)		(17)
Total long-term debt	$	604	$	608	$	600	$	608

___________________________________

(1)As of ~~March 31,~~June 30, 2022, and December 31, 2021, each presented net of $2 million in unamortized debt issuance costs.

(2)As of ~~March 31,~~June 30, 2022, and December 31, 2021, each presented net of $3 million in unamortized debt issuance costs and $2 million in unamortized original issue discount.

Scheduled Long-term Debt Payments

As of ~~March 31,~~June 30, 2022, future scheduled long-term debt payments are ~~$13~~$8 million for the remainder of 2022, $17 million for each of the years ending December 31, 2023 through 2025, $205 million for the year ending December 31, 2026 and $4 million for the year ending December 31, 2027.

Note ~~10.~~11. Supplemental Cash Flow Information

Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table:



	Three Months Ended				Six Months Ended
	March 31,				June 30,
(In millions)	2022		2021		2022		2021
Cash paid for (received from):
Interest expense	$	6	$	18	$	13	$	33
Income tax payments, net of refunds		—		8		9		10

Note ~~11.~~12. Comprehensive Income (Loss)

Comprehensive income (loss), which includes net income (loss) and unrealized gain (loss) on derivative instruments, is disclosed in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity.

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The following tables summarize the activity in AOCI, net of the related tax effects.





	Unrealized				Unrealized
	Loss				Loss
(In millions)	on Derivatives		Total		on Derivatives		Total
Balance as of December 31, 2021	$	(18)	$	(18)	$	(18)	$	(18)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		15		15		18		18
Tax provision (benefit)		3		3		4		4
After-tax amount		11		11		14		14
Amounts reclassified from accumulated ‎ other comprehensive income (loss)⁽¹⁾		2		2		4		4
Net current period other comprehensive income (loss)		13		13		17		17
Balance as of March 31, 2022	$	(5)	$	(5)
Balance as of June 30, 2022					$	(1)	$	(1)

Balance as of December 31, 2020	$	(33)	$	(33)	$	(33)	$	(33)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		7		7		5		5
Tax provision (benefit)		2		2		1		1
After-tax amount		5		5		4		4
Amounts reclassified from accumulated ‎ other comprehensive income (loss)⁽¹⁾		2		2		4		4
Net current period other comprehensive income (loss)		7		7		7		7
Balance as of March 31, 2021	$	(26)	$	(26)
Balance as of June 30, 2021					$	(26)	$	(26)

___________________________________

(1)Amounts are net of tax. See reclassifications out of AOCI below for further details.

Reclassifications out of AOCI included the following components.



	Amounts Reclassified from Accumulated					Amounts Reclassified from Accumulated
	Other Comprehensive Income (Loss)					Other Comprehensive Income (Loss)
	Three Months Ended					Six Months Ended
	March 31,				Condensed Consolidated Statements of	June 30,				Condensed Consolidated Statements of
(In millions)	2022		2021		Operations and Comprehensive Income Location	2022		2021		Operations and Comprehensive Income Location
Loss on interest rate swap contract	$	(3)	$	(3)	Interest expense	$	(5)	$	(5)	Interest expense
Impact of income taxes		1		1	Provision for income taxes		1		1	Provision for income taxes
Total reclassifications related to derivatives	$	(2)	$	(2)		$	(4)	$	(4)
Total reclassifications for the period	$	(2)	$	(2)		$	(4)	$	(4)

Note ~~12.~~13. Derivative Financial Instruments

We currently use a derivative financial instrument to manage risks associated with changes in interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected cash flows of the associated forecasted transaction.

We hedge the interest payments on a portion of our variable rate debt through the use of an interest rate swap agreement. Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded in the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with changes in fair value recorded in AOCI. Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows.

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The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 13 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and for the amounts reclassified out of AOCI and into earnings. As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $3less than 1 million, net of tax, as of ~~March 31,~~June 30, 2022. The amounts that are ultimately reclassified into earnings will be based on actual interest rates at the time the positions are settled and may differ materially from the amount noted above.

Note ~~13.~~14. Fair Value Measurements

We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that the business categorizes using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1"); direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets ("Level 2"); and unobservable inputs that require significant judgment for which there is little or no market data ("Level 3"). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement, even though we may have also utilized significant inputs that are more readily observable.

The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amount of total debt was ~~$621~~$617 million and $625 million, and the estimated fair value was ~~$626~~$613 million and $630 million as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of ~~March 31,~~June 30, 2022 and December 31, 2021.

We value our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contract.

We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the ~~three~~six months ended ~~March 31,~~June 30, 2022. Transfers between levels, if any, are recognized at the end of the reporting period. There were no transfers between levels during the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021.

The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis are as follows:



				Estimated Fair Value Measurements									Estimated Fair Value Measurements
(In millions)	Statement of Financial ‎Position Location	Carrying ‎Value		Quoted ‎Prices ‎In Active ‎Markets ‎(Level 1)		Significant ‎Other ‎Observable ‎Inputs ‎(Level 2)		Significant ‎Unobservable ‎Inputs ‎(Level 3)		Statement of Financial ‎Position Location	Carrying ‎Value		Quoted ‎Prices ‎In Active ‎Markets ‎(Level 1)		Significant ‎Other ‎Observable ‎Inputs ‎(Level 2)		Significant ‎Unobservable ‎Inputs ‎(Level 3)
As of March 31, 2022:
As of June 30, 2022:
Financial Liabilities:
Interest rate swap contract	Other accrued liabilities	$	5	$	0	$	5	$	0	Other accrued liabilities	$	—	$	—	$	—	$	—
	Other long-term obligations		2		0		2		0	Other long-term obligations		1		—		1		—
Total financial liabilities		$	7	$	0	$	7	$	0		$	1	$	—	$	1	$	—

As of December 31, 2021:
Financial Liabilities:
Interest rate swap contract	Other accrued liabilities	$	9	$	0	$	9	$	0	Other accrued liabilities	$	9	$	—	$	9	$	—
	Other long-term obligations		15		0		15		0	Other long-term obligations		15		—		15		—
Total financial liabilities		$	24	$	0	$	24	$	0		$	24	$	—	$	24	$	—

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Note ~~14.~~15. Share Repurchase Program

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024.

Purchases of outstanding shares are as follows:



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
(In millions, except per share data)	2022		2021		2022		2021		2022		2021
Number of shares purchased		1.1		—		0.8		—		1.9	$	—
Average price paid per share⁽¹⁾	$	36.95	$	—	$	22.16	$	—	$	30.51		—
Cost of shares purchased	$	40	$	—	$	19		—	$	59		—

________________________________

(1)The average price paid per share is calculated on a trade date basis and excludes commissions.

Note ~~15.~~16. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had ~~potential~~potentially dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs, performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

Basic and diluted earnings per share are calculated as follows:



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
(In millions, except per share data)	2022		2021		2022		2021		2022		2021
Net Income	$	2	$	5	$	33	$	40	$	35	$	45
Weighted-average common shares outstanding		82.3		85.4		82.1		85.5		82.2		85.5
Effect of dilutive securities:
RSUs⁽¹⁾		0.3		0.4		—		0.2		—		0.3
Stock options⁽²⁾		—		0.2		0.1		0.2		0.2		0.2
Weighted-average common shares outstanding - assuming dilution		82.6		86.0		82.2		86.0		82.4		86.0
Basic earnings per share	$	0.02	$	0.06	$	0.40	$	0.47	$	0.42	$	0.53
Diluted earnings per share	$	0.02	$	0.06	$	0.40	$	0.47	$	0.42	$	0.53

___________________________________

(1)RSUs of ~~0.4~~1.0 million and 0.2 million shares for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and 0.9 million and 0.1 million shares for the six months ended June 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. ~~There were 0 such anti-dilutive RSUs for the three months ended March 31, 2021.~~

(2)Options to purchase ~~1.2~~1.6 million and 0.2 million shares for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and 1.4 million and 0.1 million shares for the six months ended June 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. ~~There were 0 such anti-dilutive options for the three months ended March 31, 2021.~~

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control.

You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K.

SUMMARY OF MATERIAL RISKS

Factors, risks, trends and uncertainties that make an investment in us speculative or risky and that could cause actual results or events to differ materially from those anticipated in our forward-looking statements include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report as well as Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:

changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability;

increases in parts, appliance and home system prices, and other operating costs;

risks related to the COVID-19 pandemic;

changes in the source and intensity of competition in our market;

our ability to successfully implement our business strategies;

our ability to attract, retain and maintain positive relations with third-party contractors and vendors;

~~increases in parts, appliance and home system prices, and other operating costs;~~

physical effects of climate change, adverse weather conditions and Acts of God, along with the increased focus on sustainability;

failure of our marketing efforts to be successful or cost-effective;

our dependence on our real estate customer acquisition channel;

our ability to attract and retain qualified key employees and labor availability in our customer service operations;

our dependence on third-party vendors, including business process outsourcers, and third-party component suppliers;

compliance with, or violation of, laws and regulations, including consumer protection laws, increasing our legal and regulatory expenses;

increases in tariffs or changes to import/export regulations;

cybersecurity breaches, disruptions or failures in our technology systems and our failure to protect the security of personal information about our customers;

our ability to protect our intellectual property and other material proprietary rights;

negative reputational and financial impacts resulting from acquisitions or strategic transactions;

requirement to recognize impairment charges;

third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;

1718

inappropriate use of social media by us or other parties to harm our reputation;

special risks applicable to operations outside the United States by us or our business process outsource providers;

tax liabilities and potential indemnification of Terminix for material taxes if the distribution fails to qualify as tax-free;

the effects of our significant indebtedness and the limitations contained in the agreements governing such indebtedness;

increases in interest rates increasing the cost of servicing our indebtedness;

increased borrowing costs due to lowering or withdrawal of the credit ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;

our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations; and

other factors described in this report and from time to time in documents that we file with the SEC.

Available Information

Our website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained on our website to be part of this Quarterly Report on Form 10-Q.

1819

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto included in our 2021 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K.

Overview

For the three months ended ~~March 31,~~June 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of ~~$351~~$487 million, $2$33 million and ~~$25~~$77 million, respectively, and ~~$329~~$462 million, $5$40 million and ~~$36~~$114 million, respectively. For the six months ended June 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of $838 million, $35 million and $102 million, respectively, and $791 million, $45 million and $150 million, respectively.

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, our total operating revenue included 7071 percent of revenue derived from existing customer renewals, while 1312 percent and 13 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

For the ~~three~~six months ended ~~March 31,~~June 30, 2021, our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 17 percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and ~~two~~three percent was derived from other revenue channels.

New CEO Appointment

On May 20, 2022, we announced the appointment of William Cobb, Chairman of the Board of Directors of the Company, as Chief Executive Officer of the Company, effective June 1, 2022. Mr. Cobb has served as Chairman of the Board since October 2018 and continues to hold that office.

Key Factors and Trends Affecting Our Results of Operations

Macroeconomic Conditions

1920

During the first ~~three~~six months of 2022, our financial condition and results of operations were adversely impacted by the following:

The challenging home seller’s market, driven, in part, by extremely low home inventory levels, continued to constrain demand for home service plans in the first-year real estate channel.

The COVID-19 Pandemic

The implications of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. ~~In response to the COVID-19 pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors.~~

~~Although the economy has improved since the initial outbreak of the pandemic, we are unable to predict the time required for a widespread sustainable economic recovery to take hold.~~ Given ~~the wide disparities in vaccination rates driven by continued vaccine hesitancy, combined with~~ the emergence of COVID-19 variants and surges in COVID-19 cases, ~~we expect that~~ a significant number of people ~~will~~may continue to spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs. We also expect that industry-wide supply chain challenges ~~will~~may continue to contribute to increased costs and impact the customer experience, which may affect customer retention. Accordingly, the COVID-19 situation remains very fluid, and we continue to adjust our response in real time. It remains difficult to predict the overall continuing impact the COVID-19 pandemic will have on our business.

Seasonality

Our business is subject to seasonal fluctuations, which drives variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of central HVAC work orders in the summer months. In 2021, we continued to experience additional variations as the COVID-19 pandemic resulted in an elevated level of service requests in the appliance trade compared to pre-pandemic levels as our customers spent more time at home. In 2021, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 4 percent, 31 percent, 60 percent and 5 percent of our net income, and approximately 12 percent, 38 percent, 41 percent and 9 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

The demand for our services, and our results of operations, are affected by weather conditions. Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability. For example, contract claims costs were unfavorably impacted by the extremely hot weather across the country during the second quarter of 2022 as compared to 2021. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency. For example, unfavorable weather trends in the first quarter of 2021 as compared to 2020 negatively impacted contract claims costs, while favorable weather trends in the third quarter of 2021 as compared to 2020 favorably impacted contract claims costs.

While weather variations as described above may affect our business, major weather events and other similar Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service. Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to the home service plans that we offer.

Tariff and Import/Export Regulations

Changes in U.S. tariff and import/export regulations may impact the costs of parts, appliances and home systems. Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs. For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems.

Competition

We compete in the U.S. home service plan category and the broader U.S. home services industry. The home service plan category is highly competitive. The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals.

Acquisition Activity

We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions. Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so. We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry. We have also used acquisitions to enhance our technological capabilities and geographic presence. In 2019, we acquired Streem to support the service experience for our customers, reduce costs and create ~~potential~~potentially new revenue opportunities across a variety of channels. ~~We expect to use Streem’s services in our core home service plan business and in ProConnect’s on-demand business to deliver a superior service experience and reduce our costs.~~

Non-GAAP Financial Measures

To supplement our results presented in accordance with U.S. GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items. We present within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measures of Adjusted EBITDA and Free Cash Flow. See “Results of Operations — Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “Liquidity and Capital Resources — Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow. Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period. We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance. While we believe these non-GAAP financial measures are useful in evaluating our business, they should be considered as supplemental in nature and are not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies, limiting their usefulness as comparative measures.

Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include:

revenue,

operating expenses,

net income,

earnings per share,

Adjusted EBITDA,

Adjusted EBITDA margin,

net cash provided from operating activities,

Free Cash Flow,

growth in number of home service plans, and

customer retention rate.

Revenue. The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Home service plan contracts are typically one year in duration. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the United States.

Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as: salaries and wages, employee benefits and healthcare; contractor costs; parts, appliances and home systems costs; tariffs; insurance premiums; and various regulatory compliance costs.

Net Income and Earnings Per Share. The presentation of net income and basic and diluted earnings per share provides measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs, performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA margin. We evaluate performance based primarily on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; restructuring charges; provision for income taxes; non-cash stock-based compensation expense; interest expense; loss on extinguishment of debt; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.

Net Cash Provided from Operating Activities and Free Cash Flow. We focus on measures designed to monitor cash flow, including net cash provided from operating activities and Free Cash Flow, which is a financial measure not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions.

Growth in Number of Home Service Plans and Customer Retention Rate. We report our growth in number of home service plans and customer retention rate in order to track the performance of our business. Home service plans represent our recurring customer base, which includes customers with active contracts for recurring services. Our customer retention rate is calculated as the ratio of ending home service plans to the sum of beginning home service plans, new home service plan sales and acquired accounts for the applicable period. These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. There have been no material changes to our critical accounting policies for the ~~three~~six months ended ~~March 31,~~June 30, 2022, certain of which are described below.

Goodwill and Intangible Assets

In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis, or more frequently, if circumstances indicate a potential impairment. As of ~~March 31,~~June 30, 2022, we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets. We will continue to monitor the macroeconomic impacts on our business in our ongoing evaluation of potential impairments.

During the third quarter of 2022, we will continue our evaluation of the long-term plan for the Streem reporting unit. We will be more focused on integrating Streem’s technology into the core business and will be less focused on selling this technology platform to third-party customers; therefore, an impairment of goodwill and intangible assets at Streem is reasonably possible.

‎

2223

Results of Operations ~~for the~~

Three Months Ended ~~March 31,~~June 30, 2022 ~~and~~Compared to Three Months Ended June 30, 2021



	Three Months Ended				Increase						Three Months Ended				Increase
	March 31,				(Decrease)		% of Revenue				June 30,				(Decrease)		% of Revenue
(In millions)	2022		2021		2022 vs. 2021		2022		2021		2022		2021		2022 vs. 2021		2022		2021
Revenue	$	351	$	329	7	%	100	%	100	%	$	487	$	462	5	%	100	%	100	%
Cost of services rendered		207		181	14		59		55			276		221	25		57		48
Gross Profit		144		148	(3)		41		45			211		242	(13)		43		52
Selling and administrative expenses		125		118	6		36		36			140		136	4		29		29
Depreciation and amortization expense		8		9	(11)		2		3			8		9	(9)		2		2
Restructuring charges		—		1	*		—		—			12		1	*		2		—
Interest expense		7		13	(49)		2		4			7		12	(40)		1		3
Loss on extinguishment of debt		—		1	*		—		—			—		30	*		—		7
Income before Income Taxes		3		5	(42)		1		2			43		54	(21)		9		12
Provision for income taxes		2		1	202		—		—			10		14	(29)		2		3
Net Income	$	2	$	5	(69)	%	—	%	1	%	$	33	$	40	(18)	%	7	%	9	%

_______________________________

* not meaningful

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



	Six Months Ended				Increase
	June 30,				(Decrease)		% of Revenue
(In millions)	2022		2021		2022 vs. 2021		2022		2021
Revenue	$	838	$	791	6	%	100	%	100	%
Cost of services rendered		483		402	20		58		51
Gross Profit		355		390	(9)		42		49
Selling and administrative expenses		266		254	5		32		32
Depreciation and amortization expense		17		19	(10)		2		2
Restructuring charges		12		2	*		1		—
Interest expense		14		25	(45)		2		3
Interest and net investment (income) loss		—		(1)	*		—		—
Loss on extinguishment of debt		—		31	*		—		4
Income before Income Taxes		46		60	(23)		6		8
Provision for income taxes		12		15	(21)		1		2
Net Income	$	35	$	45	(23)	%	4	%	6	%

_______________________________

* not meaningful

‎

Revenue

We reported revenue of ~~$351~~$487 million and ~~$329~~$462 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $838 million and $791 million for the six months ended June 30, 2022 and 2021, respectively. Revenue by major customer acquisition channel is as follows:

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021



	Three Months Ended								Three Months Ended
	March 31,								June 30,
(In millions)	2022		2021		Increase (Decrease)				2022		2021		Increase (Decrease)
Renewals	$	247	$	224	$	23	10	%	$	347	$	316	$	31	10	%
Real estate⁽¹⁾		45		57		(11)	(20)			57		77		(20)	(26)
Direct-to-consumer⁽¹⁾		46		41		6	14			66		57		8	15
Other		13		8		5	65			18		13		5	43
Total revenue	$	351	$	329	$	22	7	%	$	487	$	462	$	25	5	%

________________________________

(1)First-year revenue only.

Revenue increased ~~seven~~five percent for the three months ended ~~March 31,~~June 30, 2022 compared to the three months ended ~~March 31,~~June 30, 2021, primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans. The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller’s ~~market, offset, in part, by improved price realization.~~market. The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products. The increase in other revenue was driven by growth in ~~ProConnect~~ProConnect.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



	Six Months Ended
	June 30,
(In millions)	2022		2021		Increase (Decrease)
Renewals	$	593	$	539	$	54	10	%
Real estate⁽¹⁾		102		134		(32)	(24)
Direct-to-consumer⁽¹⁾		112		98		14	14
Other		31		20		10	51
Total revenue	$	838	$	791	$	47	6	%

________________________________

(1)First-year revenue only.

Revenue increased six percent for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by higher renewal revenue due to improved price realization and ~~Streem.~~growth in the number of renewed home service plans. The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller’s market. The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products. The increase in other revenue was driven by growth in ProConnect.

Number of home service plans, growth in number of home service plans and customer retention rate are presented below.



	As of				As of
	March 31,				June 30,
(In millions)	2022		2021		2022		2021
Number of home service plans	2.19		2.25		2.17		2.24
(Reduction) growth in number of home service plans	(3)	%	4	%	(3)	%	3	%
Customer retention rate	74.1	%	75.1	%	74.4	%	74.9	%

The number of home service plans and customer retention rate as of ~~March 31,~~June 30, 2022 were negatively impacted by a decline in the number of first-year real estate home service plans, which was driven by a continuation of the challenging home seller’s market, as well as the impact on customer experience of industry-wide supply chain challenges.

2325

Cost of Services Rendered

We reported cost of services rendered of ~~$207~~$276 million and ~~$181~~$221 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $483 million and $402 million for the six months ended June 30, 2022 and 2021, respectively. The following ~~table provides~~tables provide a summary of changes in cost of services rendered:

(In millions)
Three Months Ended March 31, 2021
$
181
Impact of change in revenue
1
Contract claims costs
24
Other
1
Three Months Ended March 31, 2022
$
207



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
Contract claims cost	$	272	$	217	$	474	$	394
Bad debt expense		4		4		9		8
Total	$	276	$	221	$	483	$	402

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021



(In millions)
Three Months Ended June 30, 2021	$	221
Impact of change in revenue		2
Contract claims costs		53
Three Months Ended June 30, 2022	$	276

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising ~~contractor labor, fuel,~~contractor-related expenses and higher parts and equipment costs. Contract claims costs ~~and industry-wide parts and equipment availability challenges, offset, in part,~~were also unfavorably impacted by ~~a lower number of service requests and process improvement benefits. Industry-wide parts availability challenges continued to drive elevated appliance replacement levels, contributing to~~ the ~~increased cost pressures.~~extremely hot weather across the country during the second quarter. In addition, contract claims costs for the ~~first~~second quarter of 2022 include a $9$7 million unfavorable adjustment related to the adverse development of prior ~~year~~period claims.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



(In millions)
Six Months Ended June 30, 2021	$	402
Impact of change in revenue		3
Contract claims costs		77
Bad debt expense		2
Six Months Ended June 30, 2022	$	483

The increase in contract claims costs primarily ~~from~~reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the ~~fourth quarter~~extremely hot weather across the country during the second quarter. In addition, contract claims costs for the six months ended June 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of ~~2021.~~prior period claims.

Selling and Administrative Expenses

We reported selling and administrative expenses of $~~125~~140 million and ~~$118~~$136 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $266 million and $254 million for the six months ended June 30, 2022 and 2021, respectively. ~~For the three months ended~~ ~~March 31, 2022~~ ~~and 2021, selling and administrative expenses comprised~~ sales and marketing costs of $56 million and $53 million, respectively, customer service costs of $28 million and $28 million, respectively, and general and administrative expenses of $41 million and $37 million, respectively. The following ~~table provides~~tables provide a summary of changes in selling and administrative expenses:



			Three Months Ended				Six Months Ended
			June 30,				June 30,
(In millions)			2022		2021		2022		2021
Three Months Ended March 31, 2021	$	118
Sales and marketing costs		4	$	72	$	67	$	128	$	121
Customer service costs				30		30		58		57
General and administrative costs		3		38		39		80		76
Three Months Ended March 31, 2022	$	125
Total			$	140	$	136	$	266	$	254

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021



(In millions)
Three Months Ended June 30, 2021	$	136
Sales and marketing costs		6
Stock-based compensation expense		(2)
General and administrative costs		1
Three Months Ended June 30, 2022	$	140

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased ~~compared~~primarily due to ~~prior year~~increased professional fees.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



(In millions)
Six Months Ended June 30, 2021	$	254
Sales and marketing costs		10
Stock-based compensation expense		(1)
General and administrative costs		4
Six Months Ended June 30, 2022	$	266

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees ~~investments in technology~~ and higher personnel costs.

Depreciation and Amortization Expense

Depreciation expense was $7 million and $6 million for ~~each of~~ the three months ended ~~March 31,~~June 30, 2022 and ~~2021.~~2021, respectively, and $13 million and $12 million for the six months ended June 30, 2022 and 2021, respectively. Amortization expense was $2 million and $3 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $4 million and $6 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in amortization expense was due to certain intangible assets becoming fully amortized during 2021.

Restructuring Charges

Restructuring charges were $12 million and $1 million for the three months ended June 30, 2022 and 2021, respectively,and $12 million and $2 million for the six months ended June 30, 2022 and 2021, respectively.

For the three months ended June 30, 2021, restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

Interest Expense

Interest expense was $7 million and ~~$13~~$12 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $14 million and $25 million for the six months ended June 30, 2022 and 2021, respectively. The decrease was driven by our debt reduction and refinancing activities in 2021.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $30 million and $31 million for the three and six months ended June 30, 2021, respectively. Amounts relate to our debt reduction and refinancing activities in 2021. There were no such charges for the three and six months ended June 30, 2022.

Provision for Income Taxes

The effective tax rate on income was ~~51.1~~23.2 percent and ~~9.8~~26.0 percent for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and 25.1 percent and 24.5 percent for the six months ended June 30, 2022 and 2021, respectively. The ~~increase~~decrease in the effective tax rate for the three months ended ~~March 31,~~June 30, 2022 compared to 2021 is primarily due to share-based awards and income tax credits, offset, in part, by ~~a reduction~~an increase in state income taxes. The increase in the effective tax rate for the six months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and state income taxes, ~~and~~offset, in part, by an increase in income tax credits.

Net Income

Net income was $2$33 million and $5$40 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $35 million and $45 million for the six months ended June 30, 2022 and 2021, respectively. For both the three and six months ended ~~March 31,~~June 30, 2022 compared to 2021, the decrease in net income ~~comprised~~was primarily driven by the ~~$2 million~~ decrease in the aforementioned operating results and the ~~$1 million~~ increase in restructuring charges, offset, in part, by the ~~provision for income taxes.~~decrease in interest expense and the impact of the prior year loss on extinguishment of debt.

Adjusted EBITDA

Adjusted EBITDA was ~~$25~~$77 million and ~~$36~~$114 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $102 million and $150 million for the six months ended June 30, 2022 and 2021, respectively. The following ~~table provides~~tables provide a summary of changes in our Adjusted EBITDA:

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021



(In millions)
Three Months Ended March 31, 2021	$	36
Three Months Ended June 30, 2021			$	114
Impact of change in revenue		21		23
Contract claims costs		(24)		(53)
Sales and marketing costs		(4)		(6)
General and administrative costs		(3)		(1)
Other		(2)
Three Months Ended March 31, 2022	$	25
Three Months Ended June 30, 2022			$	77

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



(In millions)
Six Months Ended June 30, 2021	$	150
Impact of change in revenue		44
Contract claims costs		(77)
Sales and marketing costs		(10)
General and administrative costs		(4)
Bad debt expense		(2)
Six Months Ended June 30, 2022	$	102

‎

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter. In addition, contract claims costs for the six months ended June 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of prior ~~year~~period claims.

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees ~~investments in technology~~ and higher personnel costs.

A reconciliation of Net Income to Adjusted EBITDA is presented below.



	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
(In millions)	2022		2021		2022		2021		2022		2021
Net Income	$	2	$	5	$	33	$	40	$	35	$	45
Depreciation and amortization expense		8		9		8		9		17		19
Restructuring charges⁽¹⁾		—		1		12		1		12		2
Provision for income taxes		2		1		10		14		12		15
Non-cash stock-based compensation expense⁽²⁾		6		6		6		8		12		13
Interest expense		7		13		7		12		14		25
Loss on extinguishment of debt⁽³⁾		—		1		—		30		—		31
Adjusted EBITDA	$	25	$	36	$	77	$	114	$	102	$	150

_________________________________

(1)We exclude restructuring charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(2)We exclude non-cash stock-based compensation expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

(3)We exclude loss on extinguishment of debt from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

Liquidity and Capital Resources

Liquidity

A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of ~~March 31,~~June 30, 2022, we were in compliance with the covenants under the agreements that were in effect on such date. Based on current conditions, we do not believe the COVID-19 pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement.

Cash and cash equivalents totaled ~~$255~~$269 million and $262 million as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. Our cash and cash equivalents include balances associated with regulatory requirements in our business. See “—Limitations on Distributions and Dividends by Subsidiaries.” As of ~~March 31,~~June 30, 2022, and December 31, 2021, the total net assets subject to these third-party restrictions was ~~$163~~$159 million and $175 million, respectively. As of ~~March 31,~~June 30, 2022, there were $2 million of letters of credit outstanding and $248 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate. Available liquidity was ~~$340~~$357 million at ~~March 31,~~June 30, 2022, consisting of ~~$92~~$109 million of cash not subject to third-party restrictions and $248 million of available borrowing capacity under the Revolving Credit Facility. We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at ~~March 31,~~June 30, 2022 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We closely monitor the performance of our investment portfolio. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles.

We may, from time to time, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, gross leverage, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, and the price of such repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash provided from operating activities. As of ~~March 31,~~June 30, 2022, we have purchased a total of ~~3,643,468~~4,478,194 outstanding shares at an aggregate cost of ~~$143~~$162 million under this program, which is included in treasury stock on the condensed consolidated statements of financial position. Purchases under the repurchase program may be made from time to time by the company in the open market at prevailing market prices (including through a Rule 10b5-1 Plan), in privately negotiated transactions, or through any combination of these methods, through September 3, 2024. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of the company’s stock, general market and economic conditions, the company’s liquidity requirements, applicable legal requirements and other business considerations. The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion.

Limitations on Distributions and Dividends by Subsidiaries

We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions.

Our subsidiaries are permitted under the terms of the Credit Agreement and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us.

Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to regulatory requirements. The payments of ordinary and extraordinary dividends by certain of our subsidiaries (through which we conduct our business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. We expect that such limitations will be in effect for the foreseeable future. In Texas, we are relieved of the obligation to post 75 percent of our otherwise required reserves because we operate a captive insurer approved by Texas regulators in order to satisfy such obligations. None of our subsidiaries are obligated to make funds available to us through the payment of dividends.

Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this report, are summarized in the following table.



	Three Months Ended				Six Months Ended
	March 31,				June 30,
(In millions)	2022		2021		2022		2021
Net cash provided from (used for):
Operating activities	$	47	$	52	$	94	$	119
Investing activities		(8)		(7)		(19)		(15)
Financing activities		(47)		(105)		(69)		(378)
Cash (decrease) increase during the period	$	(8)	$	(59)	$	6	$	(274)

Operating Activities

Net cash provided from operating activities was ~~$47~~$94 million and ~~$52~~$119 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively.

Net cash provided from operating activities in 2022 comprised ~~$14~~$68 million in earnings adjusted for non-cash charges and ~~$33~~$26 million in cash provided from working capital. Cash provided from working capital was primarily driven by seasonality.

Net cash provided from operating activities in 2021 comprised ~~$21~~$112 million in earnings adjusted for non-cash charges and ~~$31~~an $8 million decrease in cash ~~provided from~~required for working capital. ~~Cash provided from~~The decrease in cash required for working capital was ~~primarily~~ driven by ~~seasonality.~~seasonality and growth in our underlying business, offset, in part, by interest payments made in connection with the redemption of the 2026 Notes.

Investing Activities

Net cash used for investing activities was $8$19 million and $7$15 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively.

Capital expenditures were $9$19 million and $7$15 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and included recurring capital needs and technology projects. We expect capital expenditures for the full year 2022 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $40 million to $50 million. We have no additional material capital commitments at this time.

Financing Activities

Net cash used for financing activities was ~~$47~~$69 million and ~~$105~~$378 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively.

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, we made scheduled principal payments of debt and finance lease obligations of $4$8 million and purchased outstanding shares at an aggregate cost of ~~$40~~$59 million.

For the ~~three~~six months ended ~~March 31,~~June 30, 2021, ~~we made scheduled principal payments of debt and finance lease obligations of $2 million and,~~ as part of our debt reduction and refinancing activities in 2021, ~~made~~we borrowed $638 million, net of discount, under the Term Loan Facilities and redeemed the remaining outstanding principal amounts of $634 million of the Prior Term Loan Facility and $350 million of the 2026 Notes. In connection with the repayments, we paid a ~~$100~~“make-whole” redemption premium of $21 million on the 2026 Notes and debt ~~repayment.~~issuance costs of $8 million.

Free Cash Flow

The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable U.S. GAAP measure, to Free Cash Flow using data derived from our audited consolidated financial statements.



	Three Months Ended				Six Months Ended
(In millions)	March 31,				June 30,
	2022		2021		2022		2021
Net cash provided from operating activities	$	47	$	52	$	94	$	119
Property additions		(9)		(7)		(19)		(15)
Free Cash Flow	$	39	$	45	$	75	$	104

Contractual Obligations

Our 2021 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2021. We continue to make the contractually required payments, and, therefore, the 2022 obligations and commitments described in our 2021 Form 10-K have been reduced by the required payments.

Financial Position

The following discussion describes changes in our financial position from December 31, 2021 to ~~March 31,~~June 30, 2022:

~~Deferred revenue~~Contract asset increased during the ~~three~~six months ended ~~March 31,~~June 30, 2022, reflecting a net contract ~~liability~~asset related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost ~~recognition, offset, in part, by~~recognition.

Accounts payable increased during the six months ended June 30, 2022, reflecting the timing of trade payables due to the seasonality of our business.

Home service plan claims increased during the six months ended June 30, 2022, reflecting the seasonality of contract claims and inflation, which increased amounts due to contractors and suppliers.

Deferred revenue decreased during the six months ended June 30, 2022, reflecting a decline in the number of first-year real estate home service plans.

Other long-term liabilities decreased during the ~~three~~six months ended ~~March 31,~~June 30, 2022, primarily due to the change in the valuation of our interest rate swap.

Total shareholders’ equity was ~~a deficit of $20~~$6 million as of ~~March 31,~~June 30, 2022 compared to ~~a surplus of~~ $2 million as of December 31, 2021. The ~~decrease~~increase was primarily driven by ~~the repurchases of common stock, offset, in part, by~~net income and the change in valuation of our interest rate swap, ~~during~~offset, in part, by the ~~three months ended March 31, 2022.~~repurchases of common stock. See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this report for further information.

2832

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, and its impact on existing home sales, interest rates, consumer confidence, labor availability, insurance costs and medical costs could have a material adverse impact on future results of operations.

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing an interest rate swap. There have been no material changes to the market risk associated with debt obligations and other significant instruments from the risks described in Part II, Item 7A in our 2021 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act, occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
‎

2933

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required with respect to this Part II, Item 1 can be found under Note 8 to the condensed consolidated financial statements included in Part I, Item 1 of this report.

ITEM 1A. RISK FACTORS

For information regarding factors that could affect our business, financial condition or results of operations, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K. There have been no material changes to the risk factors disclosed in our 2021 Form 10-K. The risks described in our 2021 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period
Total number of shares purchased
Average price
‎paid per share(1)
Total number of
‎shares purchased as
‎part of publicly
‎announced plans or
‎programs
Maximum dollar value
‎of shares that may yet
‎be purchased under
‎the plans or programs
‎(in millions)
Jan. 1, 2022 through Jan. 31, 2022
531,123
$
37.66
531,123
$
277
Feb. 1, 2022 through Feb. 28, 2022
551,501
$
36.26
551,501
$
257
Mar. 1, 2022 through Mar. 31, 2022
—
$
—
—
$
257
Total
1,082,624
$
36.95
1,082,624
$
257



Period	Total number of shares purchased	Average price ‎paid per share⁽¹⁾		Total number of ‎shares purchased as ‎part of publicly ‎announced plans or ‎programs	Maximum dollar value ‎of shares that may yet ‎be purchased under ‎the plans or programs ‎(in millions)⁽²⁾
Apr. 1, 2022 through Apr. 30, 2022	—	$	—	—	$	257
May 1, 2022 through May 31, 2022	—		—	—		257
Jun. 1, 2022 through Jun. 30, 2022	834,726		22.16	834,726		239
Total	834,726	$	22.16	834,726	$	239

________________________________

(1)The average price paid per share is calculated on a trade date basis and excludes commission.

(2)On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024. As of ~~March 31,~~June 30, 2022, we have purchased a total of ~~3,643,468~~4,478,194 outstanding shares at an aggregate cost of ~~$143~~$162 million under this program. See Liquidity and Capital Resources – Liquidity in Part I, Item 2 of this report for more information.

‎

3034

ITEM 6. EXHIBITS

Exhibit ‎Number		Description
2.1	Separation and Distribution Agreement, dated as of September 28, 2018, by and between Terminix Global Holdings, Inc. (formerly ServiceMaster Global Holdings, Inc.) and Frontdoor, Inc. (incorporated by reference to Exhibit 2.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
3.1	Restated Certificate of Incorporation of Frontdoor, Inc. (incorporated by reference to Exhibit 3.1 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).
3.2	Amended and Restated Bylaws of Frontdoor, Inc. (incorporated by reference to Exhibit 3.2 to Frontdoor’s Current Report on Form 8-K filed on July 1, 2021).
10.1#*	Employment Agreement, dated May 19, 2022, between William C. Cobb and Frontdoor, Inc.
10.2#*	Form of Performance Non-Qualified Stock Option Award Agreement under the Frontdoor, Inc. Omnibus Plan, effective June 2022.
10.3#*	Form of Performance Shares Agreement under the Frontdoor, Inc. Omnibus Plan, effective March 2021.
10.4#*	Form of Restricted Stock Unit Agreement under the Frontdoor, Inc. Omnibus Plan, effective March 2021.
10.5#*	Form of Sign-On Restricted Stock Unit Agreement under the Frontdoor, Inc. Omnibus Plan, effective June 2022.
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*	Inline XBRL Taxonomy Extension Schema
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*	Inline XBRL Extension Presentation Linkbase
104*	Cover page formatted as Inline XBRL and included in Exhibit 101.

___________________________________

# Denotes management compensatory plans, contracts or arrangements.

* Filed herewith.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by Frontdoor in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

‎

3135

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~May 5,~~August 4, 2022

18
	Frontdoor, Inc.
	(Registrant)

	By:	/s/ Brian K. Turcotte
		Brian K. Turcotte
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

3236



Period	Total number of shares purchased	Average price ‎paid per share(1)		Total number of ‎shares purchased as ‎part of publicly ‎announced plans or ‎programs	Maximum dollar value ‎of shares that may yet ‎be purchased under ‎the plans or programs ‎(in millions)
Jan. 1, 2022 through Jan. 31, 2022	531,123	$	37.66	531,123	$	277
Feb. 1, 2022 through Feb. 28, 2022	551,501	$	36.26	551,501	$	257
Mar. 1, 2022 through Mar. 31, 2022	—	$	—	—	$	257
Total	1,082,624	$	36.95	1,082,624	$	257