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 June 30, 20222023
or
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,3400 Players Club Parkway, Memphis, Tennessee 3810338125
(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 numberAs of July 28, 2023, there were 80,337,939shares outstanding of the registrant’s common stock outstanding as of July 29, 2022: 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 toTo aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:
| Definition |
| Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, |
|
|
AOCI | Accumulated other comprehensive income or loss |
ASC | FASB Accounting Standards Codification |
|
|
ASU 2020-04 | ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
ASU 2022-06 | ASU 2022-06, Reference Rate Reform (Topic 848); Deferral of the Sunset Date of Topic |
| Internal Revenue Code of 1986, as amended |
Credit Agreement | The agreements governing the Credit Facilities |
Credit Facilities | The Term Loan Facilities together with the Revolving Credit Facility |
ESPP | Frontdoor, Inc. 2019 Employee Stock Purchase Plan |
Exchange Act | The Securities Exchange Act of 1934, as amended |
FASB | U.S. Financial Accounting Standards Board |
HVAC | Heating, ventilation and air conditioning |
IRS | Internal Revenue Service |
LIBOR | London Inter-bank Offered Rate |
NASDAQ | Nasdaq Global Select Market |
Omnibus Plan | Frontdoor, Inc. 2018 Omnibus Incentive Plan |
|
|
|
|
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 |
|
|
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 |
|
|
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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Frontdoor, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In millions, except per share data)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||
Revenue | $ | 487 | $ | 462 | $ | 838 | $ | 791 | $ | 523 | $ | 487 | $ | 890 | $ | 838 | ||||||||
Cost of services rendered | 276 | 221 | 483 | 402 | 253 | 276 | 449 | 483 | ||||||||||||||||
Gross Profit | 211 | 242 | 355 | 390 | 270 | 211 | 440 | 355 | ||||||||||||||||
Selling and administrative expenses | 140 | 136 | 266 | 254 | 162 | 140 | 287 | 266 | ||||||||||||||||
Depreciation and amortization expense | 8 | 9 | 17 | 19 | 9 | 8 | 18 | 17 | ||||||||||||||||
Restructuring charges | 12 | 1 | 12 | 2 | — | 12 | 1 | 12 | ||||||||||||||||
Interest expense | 7 | 12 | 14 | 25 | 10 | 7 | 20 | 14 | ||||||||||||||||
Interest and net investment income | — | — | — | (1) | (4) | — | (8) | — | ||||||||||||||||
Loss on extinguishment of debt | — | 30 | — | 31 | ||||||||||||||||||||
Income before Income Taxes | 43 | 54 | 46 | 60 | 93 | 43 | 122 | 46 | ||||||||||||||||
Provision for income taxes | 10 | 14 | 12 | 15 | 23 | 10 | 30 | 12 | ||||||||||||||||
Net Income | $ | 33 | $ | 40 | $ | 35 | $ | 45 | $ | 70 | $ | 33 | $ | 91 | $ | 35 | ||||||||
Other Comprehensive Income, Net of Income Taxes: | ||||||||||||||||||||||||
Net unrealized gain on derivative instruments | 4 | — | 17 | 7 | ||||||||||||||||||||
Total Comprehensive Income | $ | 37 | $ | 41 | $ | 52 | $ | 53 | ||||||||||||||||
Unrealized gain on derivative instruments, net of income taxes | 3 | 4 | 1 | 17 | ||||||||||||||||||||
Total Other Comprehensive Income, Net of Income Taxes | 3 | 4 | 1 | 17 | ||||||||||||||||||||
Comprehensive Income | $ | 73 | $ | 37 | $ | 93 | $ | 52 | ||||||||||||||||
Earnings per Share: | | | | | | | | | | | | | | | | |||||||||
Basic | | $ | 0.40 | $ | 0.47 | $ | 0.42 | $ | 0.53 | | $ | 0.86 | $ | 0.40 | $ | 1.12 | $ | 0.42 | ||||||
Diluted | | $ | 0.40 | $ | 0.47 | $ | 0.42 | $ | 0.53 | | $ | 0.85 | $ | 0.40 | $ | 1.12 | $ | 0.42 | ||||||
Weighted-average Common Shares Outstanding: | ||||||||||||||||||||||||
Basic | 82.1 | 85.5 | 82.2 | 85.5 | 81.4 | 82.1 | 81.5 | 82.2 | ||||||||||||||||
Diluted | 82.2 | 86.0 | 82.4 | 86.0 | 81.8 | 82.2 | 81.8 | 82.4 |
See the accompanying Notes to the unaudited Condensed Consolidated Financial Statements.Statements (Unaudited).
Frontdoor, Inc.
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions, except share data)
As of | As of | |||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||
2022 | 2021 | 2023 | 2022 | |||||||||
Assets: | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 269 | $ | 262 | $ | 344 | $ | 292 | ||||
Receivables, less allowance of $3 and $2, respectively | 6 | 7 | ||||||||||
Receivables, less allowance of $4 and $4, respectively | 6 | 5 | ||||||||||
Prepaid expenses and other current assets | 27 | 33 | ||||||||||
Contract asset | 12 | — | 14 | — | ||||||||
Prepaid expenses and other assets | 24 | 25 | ||||||||||
Total Current Assets | 310 | 295 | 391 | 330 | ||||||||
Other Assets: | ||||||||||||
Property and equipment, net | 66 | 66 | 66 | 66 | ||||||||
Goodwill | 512 | 512 | 503 | 503 | ||||||||
Intangible assets, net | 155 | 159 | 145 | 148 | ||||||||
Operating lease right-of-use assets | 10 | 17 | 9 | 11 | ||||||||
Deferred customer acquisition costs | 18 | 16 | 14 | 16 | ||||||||
Other assets | 4 | 5 | 8 | 8 | ||||||||
Total Assets | $ | 1,076 | $ | 1,069 | $ | 1,136 | $ | 1,082 | ||||
Liabilities and Shareholders' Equity: | ||||||||||||
Current Liabilities: | ||||||||||||
Accounts payable | $ | 96 | $ | 66 | $ | 78 | $ | 80 | ||||
Accrued liabilities: | ||||||||||||
Payroll and related expenses | 18 | 24 | 20 | 22 | ||||||||
Home service plan claims | 124 | 88 | 108 | 103 | ||||||||
Other | 23 | 28 | 34 | 21 | ||||||||
Deferred revenue | 126 | 155 | 107 | 121 | ||||||||
Current portion of long-term debt | 17 | 17 | 17 | 17 | ||||||||
Total Current Liabilities | 404 | 378 | 365 | 364 | ||||||||
Long-Term Debt | 600 | 608 | 584 | 592 | ||||||||
Other Long-Term Liabilities: | ||||||||||||
Deferred taxes | 40 | 41 | ||||||||||
Deferred tax liabilities, net | 31 | 39 | ||||||||||
Operating lease liabilities | 17 | 19 | 16 | 18 | ||||||||
Other long-term obligations | 9 | 21 | ||||||||||
Other long-term liabilities | 8 | 8 | ||||||||||
Total Other Long-Term Liabilities | 66 | 81 | 56 | 65 | ||||||||
Commitments and Contingencies (Note 7) |
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| ||||||||||
Commitments and Contingencies (Note 8) |
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Shareholders' Equity: | ||||||||||||
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 | ||||||||||
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 86,437,468 shares issued and 80,793,358 shares outstanding as of June 30, 2023 and 86,079,773 shares issued and 81,517,243 shares outstanding as of December 31, 2022 | 1 | 1 | ||||||||||
Additional paid-in capital | 80 | 70 | 101 | 90 | ||||||||
Retained earnings | 88 | 53 | 216 | 124 | ||||||||
Accumulated other comprehensive loss | (1) | (18) | ||||||||||
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 | ||||||||||
Accumulated other comprehensive income | 9 | 8 | ||||||||||
Less treasury stock, at cost; 5,644,110 shares as of June 30, 2023 and 4,562,530 shares as of December 31, 2022 | (196) | (162) | ||||||||||
Total Shareholders' Equity | 131 | 61 | ||||||||||
Total Liabilities and Shareholders' Equity | $ | 1,076 | $ | 1,069 | $ | 1,136 | $ | 1,082 |
See the accompanying Notes to the unaudited Condensed Consolidated Financial Statements.Statements (Unaudited).
Frontdoor, Inc.
Condensed Consolidated Statement of Changes in Equity (Unaudited)
(In millions)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||
Common Stock | ||||||||||||||||||||||||
Common Stock: | ||||||||||||||||||||||||
Balance at beginning of period | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||
Balance at end of period | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | ||||||||||||||||
Additional Paid-in Capital | ||||||||||||||||||||||||
Additional Paid-in Capital: | ||||||||||||||||||||||||
Balance at beginning of period | 73 | 49 | 70 | 46 | 92 | 73 | 90 | 70 | ||||||||||||||||
Stock-based compensation expense | 8 | 6 | 13 | 12 | ||||||||||||||||||||
Exercise of stock options | — | — | — | 2 | 1 | — | 1 | — | ||||||||||||||||
Issuance of common stock | 1 | 1 | 1 | 1 | ||||||||||||||||||||
Issuance of common stock related to ESPP | — | 1 | — | 1 | ||||||||||||||||||||
Taxes paid related to net share settlement of equity awards | — | — | (3) | (4) | (1) | — | (4) | (3) | ||||||||||||||||
Stock-based employee compensation | 6 | 8 | 12 | 13 | ||||||||||||||||||||
Balance at end of period | 80 | 57 | 80 | 57 | 101 | 80 | 101 | 80 | ||||||||||||||||
Retained Earnings (Accumulated Deficit) | ||||||||||||||||||||||||
Retained Earnings: | ||||||||||||||||||||||||
Balance at beginning of period | 55 | (70) | 53 | (75) | 146 | 55 | 124 | 53 | ||||||||||||||||
Net income | 33 | 40 | 35 | 45 | 70 | 33 | 91 | 35 | ||||||||||||||||
Balance at end of period | 88 | (30) | 88 | (30) | 216 | 88 | 216 | 88 | ||||||||||||||||
Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||
Accumulated Other Comprehensive Income (Loss): | ||||||||||||||||||||||||
Balance at beginning of period | (5) | (26) | (18) | (33) | 6 | (5) | 8 | (18) | ||||||||||||||||
Other comprehensive income (loss), net of tax | 4 | — | 17 | 7 | ||||||||||||||||||||
Other comprehensive income, net of tax | 3 | 4 | 1 | 17 | ||||||||||||||||||||
Balance at end of period | (1) | (26) | (1) | (26) | 9 | (1) | 9 | (1) | ||||||||||||||||
Common Stock Held in Treasury | ||||||||||||||||||||||||
Treasury Stock: | ||||||||||||||||||||||||
Balance at beginning of period | (143) | — | (103) | — | (162) | (143) | (162) | (103) | ||||||||||||||||
Repurchase of common stock | (19) | — | (59) | — | (34) | (19) | (34) | (59) | ||||||||||||||||
Balance at end of period | (162) | — | (162) | — | (196) | (162) | (196) | (162) | ||||||||||||||||
Total Equity | $ | 6 | $ | 3 | $ | 6 | $ | 3 | ||||||||||||||||
Total Shareholders' Equity | $ | 131 | $ | 6 | $ | 131 | $ | 6 |
See the accompanying Notes to the unaudited Condensed Consolidated Financial Statements.Statements (Unaudited).
Frontdoor, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Six Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||
Cash and Cash Equivalents at Beginning of Period | $ | 262 | $ | 597 | $ | 292 | $ | 262 | ||||
Cash Flows from Operating Activities: | ||||||||||||
Net Income | 35 | 45 | 91 | 35 | ||||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||
Depreciation and amortization expense | 17 | 19 | 18 | 17 | ||||||||
Deferred income tax provision | (6) | — | ||||||||||
Deferred income tax benefit | (8) | (6) | ||||||||||
Stock-based compensation expense | 12 | 13 | 13 | 12 | ||||||||
Restructuring charges | 12 | 2 | 1 | 12 | ||||||||
Payments for restructuring charges | (1) | (1) | (2) | (1) | ||||||||
Loss on extinguishment of debt | — | 31 | ||||||||||
Other | (1) | 3 | 3 | (1) | ||||||||
Change in working capital, net of acquisitions: | ||||||||||||
Changes in working capital: | ||||||||||||
Receivables | 1 | — | (1) | 1 | ||||||||
Prepaid expenses and other current assets | (13) | (4) | (9) | (13) | ||||||||
Accounts payable | 30 | 27 | (2) | 30 | ||||||||
Deferred revenue | (30) | (25) | (13) | (30) | ||||||||
Accrued liabilities | 29 | 14 | 5 | 29 | ||||||||
Accrued interest payable | — | (9) | ||||||||||
Current income taxes | 9 | 5 | 15 | 9 | ||||||||
Net Cash Provided from Operating Activities | 94 | 119 | 112 | 94 | ||||||||
Cash Flows from Investing Activities: | ||||||||||||
Purchases of property and equipment | (19) | (15) | (15) | (19) | ||||||||
Net Cash Used for Investing Activities | (19) | (15) | (15) | (19) | ||||||||
Cash Flows from Financing Activities: | ||||||||||||
Borrowings of debt, net of discount | — | 638 | ||||||||||
Payments of debt and finance lease obligations | (8) | (985) | ||||||||||
Debt issuance cost paid | — | (8) | ||||||||||
Call premium paid on retired debt | — | (21) | ||||||||||
Repayments of debt | (8) | (8) | ||||||||||
Repurchase of common stock | (59) | — | (34) | (59) | ||||||||
Other financing activities | (2) | (2) | (2) | (2) | ||||||||
Net Cash Used for Financing Activities | (69) | (378) | (44) | (69) | ||||||||
Cash Increase (Decrease) During the Period | 6 | (274) | ||||||||||
Cash Increase During the Period | 52 | 6 | ||||||||||
Cash and Cash Equivalents at End of Period | $ | 269 | $ | 323 | $ | 344 | $ | 269 |
See the accompanying Notes to the unaudited Condensed Consolidated Financial Statements.Statements (Unaudited).
Frontdoor, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to the Condensed Consolidated Financial Statements
(UNAUDITED)(Unaudited)
Note 1. BasisDescription of PresentationBusiness
Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates primarily under the American Home Shield HSA, OneGuard and Landmark brands.brand. 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 operationsFrontdoor also includeprovides a one-stop app for home repair and maintenance. Enabled by our ProConnect on-demand home services businessStreem technology, the app empowers homeowners by connecting them in real time through video chat with pre-qualified experts to diagnose and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, helpsolve their problems. Additionally, Frontdoor now offers home service professionals more quickly and accurately diagnose breakdowns and complete repairs. Atplans under the Frontdoor brand. As of June 30, 2022,2023, we had 2.22.1 million active home service plans across all 50 states and the District of Columbia.
We recommend that the accompanying condensed consolidated financial statements be readbrands 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 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. Given the emergence of COVID-19 variants and surges in COVID-19 cases, a significant number of people 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 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.
f
Note 2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 20212022 Form 10-K. There have been no material changes to theour significant accounting policies forduring the six months ended June 30, 2022.2023.
Basis of Presentation
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 2022 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 our financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results that might be achieved for the respective full year.
Newly Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This standard is currently effective and upon adoption may be applied prospectively to contract modifications. In March 2021, the FASB issued ASU 2020-06, which extended the sunset date for the required transition to December 31, 2024. In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement. We adopted ASU 2020-04 in connection with this transition of the benchmark rate under our Credit Agreement. This transition did not have a material impact on our consolidated financial statements and related disclosures.
Note 3. Revenue
The majority of our revenue is generated from annual home service plan agreementscontracts entered into with our customers. 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 | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2023 | 2022 | 2023 | 2022 | ||||||||
Renewals | $ | 398 | $ | 347 | $ | 677 | $ | 593 | ||||
Real estate(1) | 42 | 57 | 75 | 102 | ||||||||
Direct-to-consumer(1) | 58 | 66 | 103 | 112 | ||||||||
Other | 24 | 18 | 35 | 31 | ||||||||
Total | $ | 523 | $ | 487 | $ | 890 | $ | 838 |
_____________________________
(1)First-year revenue only.
Our home service plan agreementscontracts 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 fair value of the services 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.costs and make a corresponding adjustment each period to the timing of our related revenue recognition. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract balances”Assets and Liabilities” below. We regularly review our estimates of claims costs and adjust ourthese 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 | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2022 | 2021 | 2022 | 2021 | ||||||||
Renewals | $ | 347 | $ | 316 | $ | 593 | $ | 539 | ||||
Real estate(1) | 57 | 77 | 102 | 134 | ||||||||
Direct-to-consumer(1) | 66 | 57 | 112 | 98 | ||||||||
Other | 18 | 13 | 31 | 20 | ||||||||
Total | $ | 487 | $ | 462 | $ | 838 | $ | 791 |
_____________________________
(1)First-year revenue only.
Renewals
Revenue from all customer renewals whetherof home service plan contracts, which were previously initiated viain the real estate or direct-to-consumer channel are classified as renewals above. Renewals relate to consecutive contract periods and take place at the end of the first year of a real estate or direct-to-consumer home service plan contract. Customer payments for renewals are typically received either at the commencement of the renewal period or in installments over the new contract period.
Real estate
Real estate home service plans are sold through annual contracts which occur in connection with a real estate sale, and paymentssale. These plans are typically paid in full at closing.closing on the real estate transaction. First-year revenue from the real estate channel is classified as real estate above. At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described above.
Direct-to-consumer
Direct-to-consumer home service plans are sold through annual contracts when customers request a service planwhich occur in response to our marketing efforts or when third-party resellers make a sale.efforts. Customer payments for direct-to-consumer sales are typically 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. At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described above.
Other
Other revenue primarily includes revenue generated by ProConnecton-demand home services and Streem, as well as administrative fees and ancillary services attributable to our home service plan agreements.contracts.
Deferred Customer Acquisition 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 related 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$14 million and $16 million as of June 30, 20222023 and December 31, 2021,2022, respectively. Amortization of these deferred customer acquisition costs was $5 million and $6 million for each of the three months ended June 30, 2023 and 2022, respectively, and 2021$8 million and $10 million for each of the six months ended June 30, 2023 and 2022, and 2021.respectively. There were 0no impairment losses in relationrelated to these capitalized costs.costs during the three months ended June 30, 2023 and 2022.
Contract balancesReceivables, Less Allowance
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 servicesdue from customers once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivableprovided and anticipate the collection of amounts due to us. Contracts for home service plans may be invoiced upfront or monthly in straight-line installment payments over the contract period. The payment terms are recorded within Receivables, less allowances,determined prior to the execution of the contract.
Contract Assets and Liabilities
Contract assets arise when we recognize revenue for our home service plan contracts prior to a customer being invoiced. These timing differences are created when the recognition of revenue in proportion to the accompanying condensed consolidated statementscosts expected to be incurred in performing the services under the contract are accelerated as compared to the recognition of financial position. We invoice our monthly-pay customersrevenue 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. Asperiod. Contract assets were $14 million 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.2023.
DeferredOur contract liabilities consist of deferred revenue represents a contract liability andwhich 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 $126 million and $155 million as of June 30, 2022 and December 31, 2021, respectively.
ChangesA summary of the changes in deferred revenue for the six months ended June 30, 2022 were2023 is as follows:
(In millions) |
| ||
Balance | $ |
| |
Deferral of revenue |
| ||
Recognition of deferred revenue |
| ||
Balance | $ |
|
There was approximately $62$47 million and $122$94 million of revenue recognized induring the three and six months ended June 30, 2022,2023, respectively, that was included in the deferred revenue balance as of December 31, 2021. 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.2022.
Note 4. Goodwill and Intangible Assets
Goodwill and indefinite-livedThe following table provides a summary of the components of our 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 June 30, 2022 and December 31, 2021. There were 0 goodwill or trade name impairment charges recorded in the six months ended June 30, 2022 and 2021. There were 0 accumulated impairment losses recorded as of June 30, 2022 and December 31, 2021.
The table below summarizes the other intangible asset balances:assets:
As of June 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||||||||||||||
As of June 30, 2022 | As of December 31, 2021 | Accumulated | Accumulated | |||||||||||||||||||||||||||||||||
(In millions) | Gross | Accumulated | Net | Gross | Accumulated | Net | Gross | Amortization | Net | Gross | Amortization | Net | ||||||||||||||||||||||||
Trade names(1) | $ | 141 | $ | — | $ | 141 | $ | 141 | $ | — | $ | 141 | $ | 141 | $ | — | $ | 141 | $ | 141 | $ | — | $ | 141 | ||||||||||||
Customer relationships | 173 | (172) | — | 173 | (172) | — | 173 | (173) | — | 173 | (172) | — | ||||||||||||||||||||||||
Developed technology | 25 | (15) | 10 | 25 | (12) | 13 | 19 | (15) | 4 | 19 | (13) | 5 | ||||||||||||||||||||||||
Other | 37 | (33) | 4 | 37 | (32) | 5 | 32 | (32) | 1 | 32 | (31) | 1 | ||||||||||||||||||||||||
Total | $ | 375 | $ | (220) | $ | 155 | $ | 375 | $ | (216) | $ | 159 | $ | 365 | $ | (219) | $ | 145 | $ | 365 | $ | (217) | $ | 148 |
_____________________________
(1)Not subject to amortization.
Amortization expense was $2$1 million and $3$2 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $4$2 million and $6$4 million for the six months ended June 30, 2023 and 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) | $ | 4 | |
2023 | 6 | ||
2024 | 4 | ||
2025 | — | ||
2026 | — | ||
2027 | — | ||
Total | $ | 15 |
There were no impairment charges in these periods.
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 ofranging from less than one year to 1312 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 our operating leases isare as follows:
As of | As of | |||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||
2022 | 2021 | 2023 | 2022 | |||||||||
Weighted-average remaining lease term (years) | 8 | 9 | 9 | 9 | ||||||||
Weighted-average discount rate | 5.6 | % | 5.6 | % | 6.4 | % | 6.3 | % |
We recognized operating lease expense of $1 $1 million for each of the three months ended June 30, 20222023 and 20212022 and $2 million for each of the six months ended June 30, 20222023 and 2021.2022. These expenses are included in Sellingselling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.
Supplemental balance sheet information related to our operating lease liabilities is as follows:
As of | ||||||
June 30, | December 31, | |||||
(In millions) | 2023 | 2022 | ||||
Other accrued liabilities | $ | 3 | $ | 3 | ||
Operating lease liabilities | 16 | 18 | ||||
Total operating lease liabilities | $ | 20 | $ | 21 |
Supplemental cash flow information related to our operating leases is as follows:
Six Months Ended | ||||||
June 30, | ||||||
(In millions) | 2022 | 2021 | ||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 3 | $ | 2 | ||
Leased assets obtained in exchange for new lease liabilities | — | 6 |
Six Months Ended | ||||||
June 30, | ||||||
(In millions) | 2023 | 2022 | ||||
Cash paid on operating lease liabilities | $ | 2 | $ | 3 |
Supplemental balance sheet information related to operating leases is as follows:
As of | ||||||
June 30, | December 31, | |||||
(In millions) | 2022 | 2021 | ||||
Operating lease right-of-use assets | $ | 15 | $ | 22 | ||
Less lease incentives | (5) | (5) | ||||
Operating lease right-of-use assets, net | $ | 10 | $ | 17 | ||
Other accrued liabilities | $ | 4 | $ | 4 | ||
Operating lease liabilities | 17 | 19 | ||||
Total operating lease liabilities | $ | 21 | $ | 23 |
The following table presents the maturities of our operating lease liabilities as of June 30, 2022.2023:
(In millions) | |||
2022 (remainder) | $ | 3 | |
2023 | 5 | ||
2024 | 3 | ||
2025 | 2 | ||
2026 | 2 | ||
2027 | 2 | ||
Thereafter | 10 | ||
Total lease payments | 27 | ||
Less imputed interest | (6) | ||
Total | $ | 21 |
(In millions) | |||
2023 (remainder)(1) | $ | 2 | |
2024(1) | 2 | ||
2025(1) | 2 | ||
2026(1) | 2 | ||
2027 | 3 | ||
2028 | 2 | ||
Thereafter | 10 | ||
Total future minimum lease payments(1) | 22 | ||
Less imputed interest | (6) | ||
Total operating lease liabilities(1) | $ | 16 |
_____________________________
(1)Amount is presented net of future sublease income totaling $3 million, which relates to the remainder of the year ending December 31, 2023 and the years ending December 31, 2024 through December 31, 2026.
Sublease of CompanyPrior Corporate Headquarters
It is the intent of the company to subleaseOn August 10, 2022, we subleased our prior 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, weWe are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the three months ended June 30, 2023 and 2022 was generated in the United States.
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. OurAs a result, our estimated tax rate is adjusted each quarter in accordance with ASC 740.quarter. The effective tax rate on income before income taxes was 23.224.8 percent and 26.023.2 percent for the three months ended June 30, 2023 and 2022, respectively, and 2021, respectively,24.9 percent and 25.1 percent and 24.5 percent for the six months ended June 30, 20222023 and 2021,2022, respectively. The decreaseincrease in the effective tax rate for the three months ended June 30, 20222023 compared to 2021 is2022 was primarily due to the impacts of share-based awards and a decrease in income tax credits, partially offset in part, by 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, offset, in part, by an increase in income tax credits.
We are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the six months ended June 30, 2022 and 2021 was generated in the United States.
Note 7. Restructuring Charges
We incurred restructuring charges of $12less than $1 million ($9(less than $1 million, net of tax) and $1$12 million (less than $1($9 million, net of tax) for the three months ended June 30, 20222023 and 2021,2022, respectively, and $12$1 million ($91 million, net of tax) and $2$12 million ($19 million, net of tax) for the six months ended June 30, 2023 and 2022, respectively.
For the three and 2021, respectively.six months ended June 30, 2023, restructuring charges primarily include severance costs.
For the three and six months ended June 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our Memphisprior corporate 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, 2021,2022, there were less than $1$2 million of restructuring charges accrued, of which $1 million were paid or otherwise settled during the six months ended June 30, 2022.2023. As of June 30, 2022,2023, there were $1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.
Note 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 ofthat utilizing actuarial methods in our estimation process 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 9. Stock-Based Compensation
We recognized stock-based compensation expense of $68 million ($47 million, net of tax) and $8$6 million ($64 million, net of tax) for the three months ended June 30, 2023 and 2022, respectively, and $13 and 2021, respectively,and $12 million ($1011 million, net of tax) and $13$12 million ($10 million, net of tax) for the six months ended June 30, 20222023 and 2021,2022, respectively. These chargescosts are included in Sellingselling 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 six months ended June 30, 20222023 is presented below:as follows:
Weighted- | Weighted- | Weighted- | ||||||||||||||||
Number of | Weighted Avg. | Weighted Avg. | Weighted Avg. | Number of | Average | Average | Average | |||||||||||
Awards | Exercise | Grant Date | Vesting | Awards | Exercise | Grant Date | Vesting | |||||||||||
Granted | Price | Fair Value | Period | Granted | Price | Fair Value | Period | |||||||||||
Stock options | 568,623 | $ | 28.64 | $ | 14.54 | 4.00 | 661,231 | 26.67 | 12.49 | 4.0 | ||||||||
Performance options(1) | 272,503 | 24.74 | 11.50 | 4.00 | 652,004 | 26.42 | 10.40 | 4.0 | ||||||||||
Restricted stock units | 1,186,002 | 27.97 | 3.00 | 916,422 | 26.58 | 3.0 | ||||||||||||
Performance shares(2) | 285,801 | 28.03 | 3.00 |
_____________________________
(1)The number ofinformation related to performance options granted during the six months ended June 30, 2022 represents the target valueabove assumes 100% of the awards.performance target is met. The performance options contain a market condition that is based on oura per share price target for our common stock, and the ultimate number of performance options tothat may be earned depends on the achievement of this market condition.
(2)The number of performance shares granted during the six months ended 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 June 30, 2022,2023, there was $57$49 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, performance 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 2.482.95 years.
Note 10. Long-Term Debt
Long-termA summary of our debt is summarized in the following table:as follows:
As of | ||||||
June 30, | December 31, | |||||
(In millions) | 2023 | 2022 | ||||
Term Loan A maturing in 2026(1) | $ | 233 | $ | 239 | ||
Term Loan B maturing in 2028(2) | 368 | 370 | ||||
Revolving Credit Facility maturing in 2026 | — | — | ||||
Total debt | 601 | 609 | ||||
Less current portion | (17) | (17) | ||||
Total long-term debt | $ | 584 | $ | 592 |
_______________________________
(1)Term Loan A is presented net of unamortized debt issuance costs of $1 million and $2 million as of June 30, 2023 and December 31, 2022, respectively.
(2)Term Loan B is presented net of unamortized debt issuance costs of $3 million and unamortized discount of $1 million as of June 30, 2023 and December 31, 2022.
As of | ||||||
June 30, | December 31, | |||||
(In millions) | 2022 | 2021 | ||||
Term Loan A maturing in 2026(1) | $ | 245 | $ | 252 | ||
Term Loan B maturing in 2028(2) | 371 | 373 | ||||
Revolving Credit Facility maturing in 2026 | — | — | ||||
Less current portion | (17) | (17) | ||||
Total long-term debt | $ | 600 | $ | 608 |
___________________________________
(1)AsIn March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement. This change was effective in March 2023 for the Term Loan A and the Revolving Credit Facility and in June 30, 2022, and December 31, 2021, each presented net of $2 million in unamortized debt issuance costs.
(2)As of 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 Payments2023 for the Term Loan B.
As of June 30, 2022,2023, we had $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and the available borrowing capacity under the Revolving Credit Facility was $248 million. As of June 30, 2023, we were in compliance with the covenants under the Credit Agreement.
Scheduled Debt Payments
The following table presents future scheduled long-term debt payments are $8 million for the remainderas 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.June 30, 2023:
(In millions) | |||
2023 (remainder) | $ | 8 | |
2024 | 17 | ||
2025 | 17 | ||
2026 | 205 | ||
2027 | 4 | ||
2028 | 355 | ||
Total future scheduled debt payments | 606 | ||
Less unamortized debt issuance costs | (4) | ||
Less unamortized discount | (1) | ||
Total debt | $ | 601 |
Note 11. Supplemental Cash Flow Information
Supplemental information relating to theour accompanying condensed consolidated statements of cash flows is presented in the following table:as follows:
Six Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2022 | 2021 | 2023 | 2022 | ||||||||
Cash paid for (received from): | ||||||||||||
Interest expense | $ | 13 | $ | 33 | $ | 19 | $ | 13 | ||||
Interest income | (8) | — | ||||||||||
Income tax payments, net of refunds | 9 | 10 | 23 | 9 |
Note 12. Comprehensive Income (Loss)
Comprehensive income (loss), which includes consists of net income (loss) and the unrealized gaingains (losses) on our derivative instrument. We disclose comprehensive income (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.
The following tables summarize the activity in AOCI, net of the related tax effects.
Unrealized | ||||||
Loss | ||||||
(In millions) | on Derivatives | Total | ||||
Balance as of December 31, 2021 | $ | (18) | $ | (18) | ||
Other comprehensive income (loss) before reclassifications: | ||||||
Pre-tax amount | 18 | 18 | ||||
Tax provision (benefit) | 4 | 4 | ||||
After-tax amount | 14 | 14 | ||||
Amounts reclassified from accumulated | 4 | 4 | ||||
Net current period other comprehensive income (loss) | 17 | 17 | ||||
Balance as of June 30, 2022 | $ | (1) | $ | (1) | ||
Balance as of December 31, 2020 | $ | (33) | $ | (33) | ||
Other comprehensive income (loss) before reclassifications: | ||||||
Pre-tax amount | 5 | 5 | ||||
Tax provision (benefit) | 1 | 1 | ||||
After-tax amount | 4 | 4 | ||||
Amounts reclassified from accumulated | 4 | 4 | ||||
Net current period other comprehensive income (loss) | 7 | 7 | ||||
Balance as of June 30, 2021 | $ | (26) | $ | (26) |
Balance at beginning of period | $ | 8 | |
Other comprehensive income before reclassifications: | |||
Pre-tax amount | 5 | ||
Impact of income taxes | 1 | ||
After-tax amount | 4 | ||
Amounts reclassified from AOCI (1) | (2) | ||
Total other comprehensive income | 1 | ||
Balance at end of period | $ | 9 |
___________________________________
(1)Amounts are net of tax.income taxes. See the table below on reclassifications out of AOCI below for further details.additional information.
ReclassificationsA summary of reclassifications out of AOCI included the following components.
is as follows:
Amounts Reclassified from Accumulated | ||||||||
Other Comprehensive Income (Loss) | ||||||||
Six Months Ended | ||||||||
June 30, | Condensed Consolidated Statements of | |||||||
(In millions) | 2022 | 2021 | Operations and Comprehensive Income Location | |||||
Loss on interest rate swap contract | $ | (5) | $ | (5) | Interest expense | |||
Impact of income taxes | 1 | 1 | Provision for income taxes | |||||
Total reclassifications related to derivatives | $ | (4) | $ | (4) | ||||
Total reclassifications for the period | $ | (4) | $ | (4) |
Six Months Ended | ||||||
June 30, | ||||||
(In millions) | 2023 | 2022 | ||||
Gain (loss) on interest rate swap contract(1) | $ | 3 | $ | (5) | ||
Impact of income taxes (2) | (1) | 1 | ||||
Total reclassifications during the period | $ | 2 | $ | (4) |
___________________________________
(1)Included in interest expense in the accompanying condensed consolidated statements of income and comprehensive income.
(2)Included in provision for income taxes in the accompanying condensed consolidated statements of income and comprehensive income.
Note 13. Derivative Financial Instruments
We currently use a derivative financial instrument to manage risks associated with changes in interest rates.rates by hedging the interest payments on a portion of our variable rate debt through the use of an interest rate swap contract. 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.
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 1312 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.earnings during the periods presented. As the underlying forecasted transactions occur during the next 12 months, we estimate the unrealized hedging lossgain in AOCI expected to be recognized in earnings is less than 1$6 million, net of tax, as of June 30, 2022.2023. The amounts that are ultimately reclassified into earnings during the next 12 months will be determined based on the actual interest rates in effect at the time the positions are settled, and mayas a result, they could differ materially from the amountour estimate noted above.
Note 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 usingwe categorize into 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 their fair value because ofvalues due to the short maturityshort-term maturities of these financial instruments. TheAs of June 30, 2023 and December 31, 2022, the carrying amountamounts of our total debt was $617were $601 million and $625$609 million, respectively, and the estimated fair value wasvalues were $598 million and $613 million, and $630 million as of June 30, 2022 and December 31, 2021, respectively. The fair value of our debt iswas 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 arehierarchy and was based on information available to us as of June 30, 2022 and December 31, 2021.the respective period end dates.
We determine the fair value of 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 thethese 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 six months ended June 30, 2022.2023. Transfers between hierarchy levels, if any, are recognized at the end of the reporting period. There were no transfers between hierarchy levels during the six months ended June 30, 2022 and 2021.2023.
The carrying amount and estimated fair value ofOur interest rate swap contract is currently our only financial instruments that are recordedinstrument remeasured at fair value on a recurring basisbasis. A summary of the carrying value and fair value of this financial instrument are as follows:
Estimated Fair Value Measurements | ||||||||||||||
(In millions) | Statement of Financial | Carrying | Quoted | Significant | Significant | |||||||||
As of June 30, 2022: | ||||||||||||||
Financial Liabilities: | ||||||||||||||
Interest rate swap contract | Other accrued liabilities | $ | — | $ | — | $ | — | $ | — | |||||
Other long-term obligations | 1 | — | 1 | — | ||||||||||
Total financial liabilities |
| $ | 1 | $ | — | $ | 1 | $ | — | |||||
As of December 31, 2021: | ||||||||||||||
Financial Liabilities: | ||||||||||||||
Interest rate swap contract | Other accrued liabilities | $ | 9 | $ | — | $ | 9 | $ | — | |||||
Other long-term obligations | 15 | — | 15 | — | ||||||||||
Total financial liabilities |
| $ | 24 | $ | — | $ | 24 | $ | — |
Estimated Fair Value Measurements | ||||||||||||
Quoted | Significant | |||||||||||
Prices | Other | Significant | ||||||||||
in Active | Observable | Unobservable | ||||||||||
Carrying | Markets | Inputs | Inputs | |||||||||
(In millions) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||
As of June 30, 2023: | ||||||||||||
Prepaid expenses and other current assets | $ | 8 | $ | — | $ | 8 | $ | — | ||||
Other assets | 4 | — | 4 | — | ||||||||
Total assets | $ | 12 | $ | — | $ | 12 | $ | — | ||||
As of December 31, 2022: | ||||||||||||
Prepaid expenses and other current assets | $ | 6 | $ | — | $ | 6 | $ | — | ||||
Other assets | 4 | — | 4 | — | ||||||||
Total assets | $ | 10 | $ | — | $ | 10 | $ | — |
Note 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.As of June 30, 2023, we have repurchased a total of 5,552,053 outstanding shares at an aggregate cost of $195 million, which is included in treasury stock on the accompanying condensed consolidated statements of financial position, and had $205 million remaining available for future repurchases under this program.
PurchasesA summary of repurchases of outstanding shares areis as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
(In millions, except per share data) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Number of shares purchased | 0.8 | — | 1.9 | $ | — | 1.1 | 0.8 | 1.1 | 1.9 | |||||||||||||||
Average price paid per share(1) | $ | 22.16 | $ | — | $ | 30.51 | — | $ | 31.43 | $ | 22.16 | $ | 31.43 | $ | 30.51 | |||||||||
Cost of shares purchased | $ | 19 | — | $ | 59 | — | $ | 34 | $ | 19 | $ | 34 | $ | 59 |
________________________________
(1)The average price paid per share is calculated on a trade date basis and excludes commissions.
Note 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 potentially dilutive shares of common stock been issued. The dilutive effect of stock options, performance options, RSUs, performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method.
Basic
A summary of the calculations of our basic and diluted earnings per share are calculatedis as follows:
Basic and diluted earnings per share are calculated as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
(In millions, except per share data) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Net Income | $ | 33 | $ | 40 | $ | 35 | $ | 45 | $ | 70 | $ | 33 | $ | 91 | $ | 35 | ||||||||
Weighted-average common shares outstanding | 82.1 | 85.5 | 82.2 | 85.5 | ||||||||||||||||||||
Weighted-average common shares outstanding: | 81.4 | 82.1 | 81.5 | 82.2 | ||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
RSUs(1) | — | 0.2 | — | 0.3 | 0.3 | — | 0.3 | — | ||||||||||||||||
Stock options(2) | 0.1 | 0.2 | 0.2 | 0.2 | — | 0.1 | — | 0.2 | ||||||||||||||||
Weighted-average common shares outstanding - assuming dilution | 82.2 | 86.0 | 82.4 | 86.0 | ||||||||||||||||||||
Weighted-average common shares outstanding - assuming dilution: | 81.8 | 82.2 | 81.8 | 82.4 | ||||||||||||||||||||
Basic earnings per share | $ | 0.40 | $ | 0.47 | $ | 0.42 | $ | 0.53 | $ | 0.86 | $ | 0.40 | $ | 1.12 | $ | 0.42 | ||||||||
Diluted earnings per share | $ | 0.40 | $ | 0.47 | $ | 0.42 | $ | 0.53 | $ | 0.85 | $ | 0.40 | $ | 1.12 | $ | 0.42 |
___________________________________
(1)RSUs of 1.0 million74,736 shares and 0.2 million1,009,556 shares for the three months ended June 30, 20222023 and 2021,2022, respectively, and 0.9 million719,660 shares and 0.1 million866,384 shares for the six months ended June 30, 20222023 and 2021,2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
(2)OptionsStock options to purchase 1.6 million1,489,773 shares and 0.2 million1,630,293 shares for the three months ended June 30, 20222023 and 2021,2022, respectively, and 1.4 million1,332,990 shares and 0.1 million1,416,344 shares for the six months ended June 30, 20222023 and 2021,2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. Performance options to purchase 785,119 shares and 89,836 shares for the three months ended June 30, 2023 and 2022, respectively, and 523,312 shares and 45,166 shares for the six months ended June 30, 2023 and 2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
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 20212022 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 on2022 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 instability in the persistencebanking system as a result of the COVID-19 pandemic,several recent regional bank failures, 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;
the ability of our marketing efforts to be successful or cost-effective;
our ability to attract, retain and maintain positive relations with third-party contractors and vendors;
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 first-year real estate customerand direct-to-consumer acquisition channels and our renewals 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;
cybersecurity breaches, disruptions or failures in our technology systems;
our ability to protect the security of personal information about our customers;
evolving corporate governance and disclosure regulations and expectations related to environmental, social and governance matters;
risks related to the COVID-19 pandemic;
compliance with, or violation of, laws and regulations, including consumer protection laws, or lawsuits or other claims by third parties, increasing our legal and regulatory expenses;
increases in tariffs or changes to import/export regulations;
cybersecurity breaches, disruptions or failures in our technology systemsphysical effects of climate change, adverse weather conditions and our failure to protectActs of God, along with the security of personal information about our customers;increased focus on sustainability;
our ability to protect our intellectual property and other material proprietary rights;
negative reputational and financial impacts resulting from acquisitions or strategic transactions;
a requirement to recognize impairment charges;
third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;
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 liabilitiesa return on investment in our common stock is dependent on appreciation in the price;
inclusion in our certificate of incorporation includes a forum selection clause that could discourage an acquisition of our company or litigation against us and potential indemnification of Terminix for material taxes if the distribution fails to qualify as tax-free;our directors and officers;
the effects of our significant indebtedness, our ability to incur additional debt and the limitations contained in the agreements governing such indebtedness;
increases in interest rates increasing the cost of servicing our indebtedness;indebtedness and counterparty credit risk due to instruments designed to minimize exposure to market risks;
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.www.frontdoor.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.
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 20212022 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20212022 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 20212022 Form 10-K.
Overview
Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates primarily under the American Home Shield HSA, OneGuard and Landmark brands.brand. 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 operationsFrontdoor also includeprovides a one-stop app for home repair and maintenance. Enabled by our ProConnect on-demand home services businessStreem technology, the app empowers homeowners by connecting them in real time through video chat with pre-qualified experts to diagnose and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, helpsolve their problems. Additionally, Frontdoor now offers home service professionals more quickly and accurately diagnose breakdowns and complete repairs. Atplans under the Frontdoor brand. As of June 30, 2022,2023, we had 2.22.1 million active home service plans across all 50 states andbrands in the District of Columbia.United States.
For the three months ended June 30, 20222023 and 2021,2022, we generated revenue, net income and Adjusted EBITDA of $523 million, $70 million and $121 million, respectively, and $487 million, $33 million and $77 million, respectively, and $462 million, $40 million and $114 million, respectively. For the six months ended June 30, 20222023 and 2021,2022, we generated revenue, net income and Adjusted EBITDA of $890 million, $91 million and $174 million, respectively, and $838 million, $35 million and $102 million, respectively, and $791 million, $45 million and $150 million, respectively. For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations—Adjusted EBITDA.”
For the six months ended June 30, 2023, our total operating revenue included 76 percent of revenue derived from existing customer renewals, while eight 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 four percent was derived from other revenue channels. For the six months ended June 30, 2022, our total operating revenue included 71 percent of revenue derived from existing customer renewals, while 12 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 six months ended 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 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
Changes inEvolving macroeconomic conditions, including inflation, global supply chain challenges and instability in the persistencebanking system as a result of the COVID-19 pandemic,several recent regional bank failures, especially as they may affect existing home sales, interest rates, consumer confidence, consumer sentiment 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 riskimpact on us of poorunfavorable economic conditions in any particular region of the United States.
During the first six months of 2022,ended June 30, 2023, our financial condition and results of operations werecontinued to be adversely impacted by the following:
The challenging home seller’s market, driven, in part, by a decline in the number of home resale transactions combined with extremely low home inventory levels and rising interest rates, continued to constrain demand for home service plans in the first-year real estate channel.
Consumer sentiment remains pressured as higher inflation eroded real personal income. We believe this environment, combined with our higher prices for a home service plan, impacted our ability to add customers, especially in the direct-to-consumer channel.
Our contractors continued to be impacted by inflation, including higher labor, fuel and parts and equipment costs.costs and labor availability challenges. We continue to take actions to mitigate these impacts, including increasing the percent of service requests completed by lower-cost preferred contractors, increasing the share of parts and equipment our contractors source through us increasing the percent of service requests completed by lower-cost preferred contractorsat lower costs and accelerating contractor recruitment efforts.
Industry-wide parts and equipment availability challenges continuedhas returned to drive elevated appliance replacementpre-pandemic levels; however, inflation levels due to lack of parts availability, further contributing to increased costs and adversely impactingfor 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. Given the emergence of COVID-19 variants and surges in COVID-19 cases, a significant number of people 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 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.period remained high.
Seasonality
Our business is subject to seasonal fluctuations, which drivesdrive 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 2021,2022, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 4two percent, 3147 percent, 6039 percent and 512 percent of our net income, and approximately 12 percent, 3836 percent, 4137 percent and 915 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, typically in the winter and summer months, 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 byprofitability, while mild temperatures in 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 winterswinter or summers, whichsummer months can lead to lower home systems claim frequency.frequency, resulting in lower costs and higher profitability. For example, favorable weather trends in the first six months of 2023 as compared to the first six months of 2022 resulted in a lower number of service requests per customer, which favorably impacted contract claims costs.
While weather variations as described above may affect our business, major weather events and other similar Acts of God, or natural disasters such as typhoons, hurricanes, flooding and tornadoes or earthquakes, 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. While we have a broad range of competitors in each locality and region, we are the only home service plan company providing home service plans nationwide. The broader U.S. home services industry is also highly competitive. We compete against businesses providing on-demand home services directly and those offering leads to contractors seeking to provide on-demand home services. 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. We believe our nationwide network of approximately 15,000 pre-qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.
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. InFor example, in 2019, we acquired Streem to support theenable home service experience for ourprofessionals to more efficiently interact with customers reduce costs and create potentially new revenue opportunities acrosscomplete repairs, and, in 2020, we acquired a variety of channels.business to expand on-demand home services via its intellectual capital and know-how, technology platform capabilities and geographic presence.
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“—Results of Operations — Operations—Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “Liquidity“—Liquidity and Capital Resources — 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 agreementscontracts 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, if any, of stock options, RSUs,performance options (which are stock options that become exercisable 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), restricted stock units (“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 RSAsrestricted stock awards (“RSAs”) are reflected in diluted earnings per share by applying the treasury stock method.
Adjusted EBITDA and Adjusted EBITDA margin. We evaluate our operating and financial performance primarily 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; goodwill and intangibles impairment; 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. Free Cash Flow which is a financial measure that is 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 on our growth (reduction) in number of home service plans and customer retention rate in order to track the performanceas measurements 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.operating performance. These measuresmeasurements are presented on a rolling 12-month basis in order to avoid seasonal anomalies. The number of home service plans is representative of our recurring home service plan customer base and is measured as the number of customers with active contracts as of the respective period-end date. Our customer retention rate is calculated as the ratio of the number of end-of-period home service plan contracts to the sum of the number of beginning-of-period home service plan contracts and the number of new home service plan sales and acquired accounts during the respective period.
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 20212022 Form 10-K. There have been no material changes to our critical accounting policies for the six months ended June 30, 2022, certain of which are described below.2023.
Results of Operations
Three Months Ended June 30, 20222023 Compared to Three Months Ended June 30, 2021
2022
% of Revenue | ||||||||||||||||||||||||||||||
Three Months Ended | Increase | Three Months Ended | Increase | Three Months Ended | ||||||||||||||||||||||||||
June 30, | (Decrease) | % of Revenue | June 30, | (Decrease) | June 30, | |||||||||||||||||||||||||
(In millions) | 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2023 | 2022 | % | 2023 | 2022 | ||||||||||||||||||||
Revenue | $ | 487 | $ | 462 | 5 | % | 100 | % | 100 | % | $ | 523 | $ | 487 | 7 | % | 100 | % | 100 | % | ||||||||||
Cost of services rendered | 276 | 221 | 25 | 57 | 48 | 253 | 276 | (9) | 48 | 57 | ||||||||||||||||||||
Gross Profit | 211 | 242 | (13) | 43 | 52 | 270 | 211 | 28 | 52 | 43 | ||||||||||||||||||||
Selling and administrative expenses | 140 | 136 | 4 | 29 | 29 | 162 | 140 | 16 | 31 | 29 | ||||||||||||||||||||
Depreciation and amortization expense | 8 | 9 | (9) | 2 | 2 | 9 | 8 | 10 | 2 | 2 | ||||||||||||||||||||
Restructuring charges | 12 | 1 | * | 2 | — | — | 12 | (96) | — | 2 | ||||||||||||||||||||
Interest expense | 7 | 12 | (40) | 1 | 3 | 10 | 7 | 38 | 2 | 1 | ||||||||||||||||||||
Loss on extinguishment of debt | — | 30 | * | — | 7 | |||||||||||||||||||||||||
Interest and net investment income | (4) | — | * | (1) | — | |||||||||||||||||||||||||
Income before Income Taxes | 43 | 54 | (21) | 9 | 12 | 93 | 43 | 114 | 18 | 9 | ||||||||||||||||||||
Provision for income taxes | 10 | 14 | (29) | 2 | 3 | 23 | 10 | 129 | 4 | 2 | ||||||||||||||||||||
Net Income | $ | 33 | $ | 40 | (18) | % | 7 | % | 9 | % | $ | 70 | $ | 33 | 110 | % | 13 | % | 7 | % |
_______________________________
* not meaningful
Six Months Ended June 30, 20222023 Compared to Six Months Ended June 30, 20212022
% of Revenue | ||||||||||||||||||||||||||||||
Six Months Ended | Increase | Six Months Ended | Increase | Six Months Ended | ||||||||||||||||||||||||||
June 30, | (Decrease) | % of Revenue | June 30, | (Decrease) | June 30, | |||||||||||||||||||||||||
(In millions) | 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2023 | 2022 | % | 2023 | 2022 | ||||||||||||||||||||
Revenue | $ | 838 | $ | 791 | 6 | % | 100 | % | 100 | % | $ | 890 | $ | 838 | 6 | % | 100 | % | 100 | % | ||||||||||
Cost of services rendered | 483 | 402 | 20 | 58 | 51 | 449 | 483 | (7) | 51 | 58 | ||||||||||||||||||||
Gross Profit | 355 | 390 | (9) | 42 | 49 | 440 | 355 | 24 | 49 | 42 | ||||||||||||||||||||
Selling and administrative expenses | 266 | 254 | 5 | 32 | 32 | 287 | 266 | 8 | 32 | 32 | ||||||||||||||||||||
Depreciation and amortization expense | 17 | 19 | (10) | 2 | 2 | 18 | 17 | 10 | 2 | 2 | ||||||||||||||||||||
Restructuring charges | 12 | 2 | * | 1 | — | 1 | 12 | (89) | — | 1 | ||||||||||||||||||||
Interest expense | 14 | 25 | (45) | 2 | 3 | 20 | 14 | 40 | 2 | 2 | ||||||||||||||||||||
Interest and net investment (income) loss | — | (1) | * | — | — | |||||||||||||||||||||||||
Loss on extinguishment of debt | — | 31 | * | — | 4 | |||||||||||||||||||||||||
Interest and net investment income | (8) | — | * | (1) | — | |||||||||||||||||||||||||
Income before Income Taxes | 46 | 60 | (23) | 6 | 8 | 122 | 46 | 162 | 14 | 6 | ||||||||||||||||||||
Provision for income taxes | 12 | 15 | (21) | 1 | 2 | 30 | 12 | 160 | 3 | 1 | ||||||||||||||||||||
Net Income | $ | 35 | $ | 45 | (23) | % | 4 | % | 6 | % | $ | 91 | $ | 35 | 163 | % | 10 | % | 4 | % |
_______________________________
* not meaningful
Revenue
We reported revenue of $487$523 million and $462$487 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $838$890 million and $791$838 million for the six months ended June 30, 2023 and 2022, and 2021, respectively. RevenueThe following tables provide a summary of our revenue by major customer acquisition channel is as follows:channel:
Three Months Ended June 30, 20222023 Compared to Three Months Ended June 30, 20212022
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
June 30, | June 30, | Increase (Decrease) | ||||||||||||||||||||||
(In millions) | 2022 | 2021 | Increase (Decrease) | 2023 | 2022 | $ | % | |||||||||||||||||
Renewals | $ | 347 | $ | 316 | $ | 31 | 10 | % | $ | 398 | $ | 347 | $ | 51 | 15 | % | ||||||||
Real estate(1) | 57 | 77 | (20) | (26) | 42 | 57 | (14) | (25) | ||||||||||||||||
Direct-to-consumer(1) | 66 | 57 | 8 | 15 | 58 | 66 | (7) | (11) | ||||||||||||||||
Other | 18 | 13 | 5 | 43 | 24 | 18 | 6 | 32 | ||||||||||||||||
Total revenue | $ | 487 | $ | 462 | $ | 25 | 5 | % | ||||||||||||||||
Total | $ | 523 | $ | 487 | $ | 36 | 7 | % |
________________________________
(1)First-year revenue only.
Revenue increased fiveseven percent for the three months ended June 30, 20222023 compared to the three months ended June 30, 2021, primarily driven by higher2022. The increase in renewal revenue due toprimarily reflects improved price realization and growth in the number of renewed home service plans.realization. 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 increasedecrease in direct-to-consumer revenue primarily reflects improveda decline in the number of first-year direct-to-consumer home service plans which we believe resulted from a change in consumer sentiment as a result of macroeconomic factors and higher consumer price realization and a mix shift to higher priced products.sensitivity. The increase in other revenue was primarily driven by growth in ProConnect.on-demand home services.
Six Months Ended June 30, 20222023 Compared to Six Months Ended June 30, 20212022
Six Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | Increase (Decrease) | ||||||||||||||||||||||
(In millions) | 2022 | 2021 | Increase (Decrease) | 2023 | 2022 | $ | % | |||||||||||||||||
Renewals | $ | 593 | $ | 539 | $ | 54 | 10 | % | $ | 677 | $ | 593 | $ | 83 | 14 | % | ||||||||
Real estate(1) | 102 | 134 | (32) | (24) | 75 | 102 | (27) | (26) | ||||||||||||||||
Direct-to-consumer(1) | 112 | 98 | 14 | 14 | 103 | 112 | (9) | (8) | ||||||||||||||||
Other | 31 | 20 | 10 | 51 | 35 | 31 | 4 | 14 | ||||||||||||||||
Total revenue | $ | 838 | $ | 791 | $ | 47 | 6 | % | ||||||||||||||||
Total | $ | 890 | $ | 838 | $ | 51 | 6 | % |
________________________________
(1)First-year revenue only.
Revenue increased six percent for the six months ended June 30, 20222023 compared to the six months ended June 30, 2021, primarily driven by higher2022. The increase in renewal revenue due toprimarily reflects improved price realization and growth in the number of renewed home service plans.realization. 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 increasedecrease in direct-to-consumer revenue primarily reflects improveda decline in the number of first-year direct-to-consumer home service plans which we believe resulted from a change in consumer sentiment as a result of macroeconomic factors and higher consumer price realization and a mix shift to higher priced products.sensitivity. The increase in other revenue was primarily driven by growth in ProConnect.on-demand home services.
The following table provides a summary of the number of home service plans, growth in number of home service plans and customer retention rate are presented below.rate:
As of | As of | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2022 | 2021 | 2023 | 2022 | ||||||||
Number of home service plans | 2.17 | 2.24 | 2.07 | 2.17 | ||||||||
(Reduction) growth in number of home service plans | (3) | % | 3 | % | ||||||||
Reduction in number of home service plans | (4) | % | (3) | % | ||||||||
Customer retention rate | 74.4 | % | 74.9 | % | 76.3 | % | 74.4 | % |
The reduction in the number of home service plans and customer retention rate as of June 30, 2022 were negatively2023 was primarily 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 a decline in the impact on customer experiencenumber of industry-wide supply chain challenges.direct-to-consumer home service plans, which we believe resulted from a change in consumer sentiment as a result of macroeconomic factors and higher consumer price sensitivity.
Cost of Services Rendered
We reported cost of services rendered of $276$253 million and $221$276 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $483$449 million and $402$483 million for the six months ended June 30, 20222023 and 2021,2022, respectively. The following tables provide a summary of the changes in cost of services rendered:
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, 20222023 Compared to Three Months Ended June 30, 20212022
(In millions) | ||||||
Three Months Ended June 30, 2021 | $ | 221 | ||||
Three Months Ended June 30, 2022 | $ | 276 | ||||
Impact of change in revenue | 2 | (7) | ||||
Contract claims costs | 53 | (18) | ||||
Three Months Ended June 30, 2022 | $ | 276 | ||||
Other | 1 | |||||
Three Months Ended June 30, 2023 | $ | 253 |
The increaseimpact of change in revenue is driven by the reduction in number of home service plans. The decrease in contract claims costs primarily reflects an accelerationa favorable weather impact 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$17 million as cooler than normal weather across the country during the second quarter. In addition,drove a lower number of service requests per customer. Additionally, contract claims costs forreflects a $4 million favorable adjustment related to the development of prior period claims, compared to a $7 million unfavorable adjustment in the second quarter of 2022, include a $7 million unfavorable adjustment related to the adverse development of prior period claims.and continued process improvement initiatives. These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.
Six Months Ended June 30, 20222023 Compared to Six Months Ended June 30, 2021
2022
(In millions) | ||||||
Six Months Ended June 30, 2021 | $ | 402 | ||||
Six Months Ended June 30, 2022 | $ | 483 | ||||
Impact of change in revenue | 3 | (13) | ||||
Contract claims costs | 77 | (22) | ||||
Bad debt expense | 2 | |||||
Six Months Ended June 30, 2022 | $ | 483 | ||||
Other | 1 | |||||
Six Months Ended June 30, 2023 | $ | 449 |
The increaseimpact of change in revenue is driven by the reduction in number of home service plans. The decrease in contract claims costs primarily reflects an accelerationa favorable weather impact 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$23 million as mild weather across the country during the second quarter. In addition,drove a lower number of service requests per customer. Additionally, contract claims costs forreflects a $9 million favorable adjustment related to the six months ended June 30, 2022 includedevelopment of prior period claims, compared to a $12 million unfavorable adjustment related toin the adverse developmentfirst six months of prior period claims.2022, and continued process improvement initiatives. These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.
Selling and Administrative Expenses
We reported selling and administrative expenses of $140162 million and $136$140 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $266$287 million and $254$266 million for the six months ended June 30, 2023 ad 2022, respectively and 2021, respectively.. The following tables provide a summary of the components of selling and administrative expenses:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2023 | 2022 | 2023 | 2022 | ||||||||
Sales and marketing costs | $ | 88 | $ | 72 | $ | 147 | $ | 128 | ||||
Customer service costs | 27 | 30 | 53 | 58 | ||||||||
General and administrative costs | 47 | 38 | 86 | 80 | ||||||||
Total | $ | 162 | $ | 140 | $ | 287 | $ | 266 |
The following tables provide a summary of the changes in selling and administrative expenses:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2022 | 2021 | 2022 | 2021 | ||||||||
Sales and marketing costs | $ | 72 | $ | 67 | $ | 128 | $ | 121 | ||||
Customer service costs | 30 | 30 | 58 | 57 | ||||||||
General and administrative costs | 38 | 39 | 80 | 76 | ||||||||
Total | $ | 140 | $ | 136 | $ | 266 | $ | 254 |
Three Months Ended June 30, 20222023 Compared to Three Months Ended June 30, 20212022
(In millions) | ||||||
Three Months Ended June 30, 2021 | $ | 136 | ||||
Three Months Ended June 30, 2022 | $ | 140 | ||||
Sales and marketing costs | 6 | 16 | ||||
Customer service costs | (3) | |||||
Stock-based compensation expense | (2) | 2 | ||||
General and administrative costs | 1 | 6 | ||||
Three Months Ended June 30, 2022 | $ | 140 | ||||
Three Months Ended June 30, 2023 | $ | 162 |
The increase in salesSales and marketing costs wasincreased due to our investment in marketing associated with the launch of the Frontdoor brand. Customer service costs decreased primarily due to lower labor costs driven by increased investments to drive sales growth in the homea lower number of service plan direct-to-consumer channel and ProConnect.requests. General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.
Six Months Ended June 30, 20222023 Compared to Six Months Ended June 30, 20212022
(In millions) | ||||||
Six Months Ended June 30, 2021 | $ | 254 | ||||
Six Months Ended June 30, 2022 | $ | 266 | ||||
Sales and marketing costs | 10 | 19 | ||||
Customer service costs | (5) | |||||
Stock-based compensation expense | (1) | 1 | ||||
General and administrative costs | 4 | 6 | ||||
Six Months Ended June 30, 2022 | $ | 266 | ||||
Six Months Ended June 30, 2023 | $ | 287 |
The increase in salesSales and marketing costs wasincreased due to our investment in marketing associated with the launch of the Frontdoor brand. Customer service costs decreased primarily due to lower labor costs driven by increased investments to drive sales growth in the homea lower number of service plan direct-to-consumer channel and ProConnect.requests. General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees and higher personnel costs.fees.
Depreciation and Amortization Expense
Depreciation expense was $7$8 million and $6$7 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $16 million and $13 million for the six months ended June 30, 2023 and 2022, respectively. Amortization expense was $1 million and $2 million for the three months ended June 30, 2023 and 2022, respectively, and $2 million and $4 million for the six months ended June 30, 2023 and 2022, respectively. The increase in depreciation expense was primarily due to incremental capital expenditures. The decrease in amortization expense was primarily driven by the impairment to the Streem reporting unit in the third quarter of 2022.
Restructuring Charges
We had restructuring charges of less than $1 million and $12 million for the three months ended June 30, 2023 and 2022, respectively, and $1 million and $12 million for the six months ended June 30, 2023 and 2022, and 2021, respectively. Amortization expense was $2 million and $3 million for
For the three months ended 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 2021.2023, these charges primarily include severance costs.
For the three and six months ended June 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our Memphisprior corporate 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.
Interest Expense
Interest expense was $7$10 million and $12$7 million for the three months ended June 30, 20222023 and 2021,2022, respectively, and $14$20 million and $25$14 million for the six months ended June 30, 20222023 and 2021,2022, respectively. The decreaseincrease was driven by higher interest rates on our debt reduction and refinancing activities in 2021.
Loss on Extinguishment of Debtvariable rate debt.
Loss on extinguishment of debtInterest and Net Investment Income
Interest and net investment income was $30$4 million and $31less than $1 million for thethe three months ended June 30, 2023 and 2022, respectively, and $8 million and less than $1 million for the six months ended June 30, 2021,2023 and 2022, respectively. Amounts relate toThe increase driven was by higher interest rates on our debt reductioncash and refinancing activities in 2021. There were no such charges for the three and six months ended June 30, 2022.cash equivalent balances.
Provision for Income Taxes
The effective tax rate on income before income taxes was 23.224.8 percent and 26.023.2 percent for the three months ended June 30, 2023 and 2022 and 2021,, respectively, and 25.124.9 percent and 24.525.1 percent for the six months ended June 30, 20222023 and 2021,2022, respectively. The decreaseincrease in the effective tax rate for the three months ended June 30, 20222023 compared to 2021 is2022 was primarily due to the impacts of share-based awards and a decrease in income tax credits, partially offset in part, by 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, offset, in part, by an increase in income tax credits.
Net Income
Net income was $33$70 million and $40$33 million for the three months ended June 30, 2023 and 2022 and 2021,, respectively, and $35$91 million and $45$35 million for the six months ended June 30, 20222023 and 2021,2022, respectively. For both the three and six months ended June 30, 2022 compared to 2021, the decrease in net incomeThe increase was primarily driven by the decrease in the aforementioned operating results and the increase in restructuring charges, offset, in part, by the decrease in interest expense and the impact of the prior year loss on extinguishment of debt.discussed above.
Adjusted EBITDA
Adjusted EBITDA was $77$121 million and $114$77 million for the three months ended June 30, 2023 and 2022 and 2021,, respectively, and $102$174 million and $150$102 million for the six months ended June 30, 20222023 and 2021,2022, respectively. The following tables providetable provides a summary of the changes in our Adjusted EBITDA:
Three Months Ended June 30, 20222023 Compared to Three Months Ended June 30, 20212022
(In millions) | |||
Three Months Ended June 30, 2021 | $ | 114 | |
Impact of change in revenue | 23 | ||
Contract claims costs | (53) | ||
Sales and marketing costs | (6) | ||
General and administrative costs | (1) | ||
Three Months Ended June 30, 2022 | $ | 77 |
(In millions) | |||
Three Months Ended June 30, 2022 | $ | 77 | |
Impact of change in revenue | 42 | ||
Contract claims costs | 18 | ||
Sales and marketing costs | (16) | ||
Customer service costs | 3 | ||
General and administrative costs | (6) | ||
Interest and net investment income | 4 | ||
Other | (1) | ||
Three Months Ended June 30, 2023 | $ | 121 |
The increaseimpact of change in revenue reflects improved price realization, offset, in part, by the reduction in number of home service plans. The decrease in contract claims costs primarily reflects an accelerationa favorable weather impact 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$17 million as cooler than normal weather across the country during the second quarter. In addition,drove a lower number of service requests per customer. Additionally, contract claims costs forreflects a $4 million favorable adjustment related to the development of prior period claims, compared to a $7 million unfavorable adjustment in the second quarter of 2022, include a $7 million unfavorable adjustment related to the adverse development of prior period claims.and process improvement initiatives. These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.
The increase in salesSales and marketing costs wasincreased due to our investment in marketing associated with the launch of the Frontdoor brand. Customer service costs decreased primarily due to lower labor costs driven by increased investments to drive sales growth in the homea lower number of service plan direct-to-consumer channel and ProConnect.requests. General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.
The increase in interest and net investment income was driven by higher interest rates on our cash and cash equivalent balances.
Six Months Ended June 30, 20222023 Compared to Six Months Ended June 30, 20212022
(In millions) | ||||||
Six Months Ended June 30, 2021 | $ | 150 | ||||
Six Months Ended June 30, 2022 | $ | 102 | ||||
Impact of change in revenue | 44 | 65 | ||||
Contract claims costs | (77) | 22 | ||||
Sales and marketing costs | (10) | (19) | ||||
Customer service costs | 5 | |||||
General and administrative costs | (4) | (6) | ||||
Bad debt expense | (2) | |||||
Six Months Ended June 30, 2022 | $ | 102 | ||||
Interest and net investment income | 7 | |||||
Other | (1) | |||||
Six Months Ended June 30, 2023 | $ | 174 |
The increaseimpact of change in revenue reflects improved price realization, offset, in part, by the reduction in number of home service plans. The decrease in contract claims costs primarily reflects an accelerationa favorable weather impact 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$23 million as mild weather across the country during the second quarter. In addition,drove a lower number of service requests per customer. Additionally, contract claims costs forreflects a $9 million favorable adjustment related to the six months ended June 30, 2022 includedevelopment of prior period claims, compared to a $12 million unfavorable adjustment related toin the adverse developmentfirst six months of prior period claims.2022, and process improvement initiatives. These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.
The increase in salesSales and marketing costs wasincreased due to our investment in marketing associated with the launch of the Frontdoor brand. Customer service costs decreased primarily due to lower labor costs driven by increased investments to drive sales growth in the homea lower number of service plan direct-to-consumer channel and ProConnect.requests. General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional feesfees.
The increase in interest and net investment income was driven by higher personnel costs.interest rates on our cash and cash equivalent balances.
A reconciliation of Net Income to Adjusted EBITDA is presented below.as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||
(In millions) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Net Income | $ | 33 | $ | 40 | $ | 35 | $ | 45 | $ | 70 | $ | 33 | $ | 91 | $ | 35 | ||||||||
Depreciation and amortization expense | 8 | 9 | 17 | 19 | 9 | 8 | 18 | 17 | ||||||||||||||||
Restructuring charges(1) | 12 | 1 | 12 | 2 | — | 12 | 1 | 12 | ||||||||||||||||
Provision for income taxes | 10 | 14 | 12 | 15 | 23 | 10 | 30 | 12 | ||||||||||||||||
Non-cash stock-based compensation expense(2) | 6 | 8 | 12 | 13 | 8 | 6 | 13 | 12 | ||||||||||||||||
Interest expense | 7 | 12 | 14 | 25 | 10 | 7 | 20 | 14 | ||||||||||||||||
Loss on extinguishment of debt(3) | — | 30 | — | 31 | ||||||||||||||||||||
Adjusted EBITDA | $ | 77 | $ | 114 | $ | 102 | $ | 150 | $ | 121 | $ | 77 | $ | 174 | $ | 102 |
_________________________________
(1)We exclude restructuring charges from Adjusted EBITDA because we believe they doit does 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 believeit 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 June 30, 2022,2023, we were in compliance with the covenants under the agreements that were in effect on such date. Based on current conditions, weCredit Agreement. We do not believe the COVID-19 pandemiccurrent macroeconomic conditions will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement.covenants.
Cash and cash equivalents totaled $269$344 million and $262$292 million as of June 30, 20222023 and December 31, 2021,2022, 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 June 30, 2022,2023 and December 31, 2021,2022, the total net assets subject to these third-party restrictions was $159were $158 million and $175$145 million, respectively. As of June 30, 2022,2023, there werewas $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and $248 million ofthe available borrowing capacity under the Revolving Credit Facility.Facility was $248 million. The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate. Available liquidity was $357 million at June 30, 2022, consisting of $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 as of June 30, 20222023 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.
In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement. This change was effective in March 2023 for Term Loan A and the Revolving Credit Facility and in June 2023 for Term Loan B.
We closely monitor the performance of our investment portfolio.portfolio, primarily cash deposits. 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 June 30, 2022,2023, we have purchasedrepurchased a total of 4,478,1945,552,053 outstanding shares at an aggregate cost of $162$195 million, under this program, which is included in treasury stock on the condensed consolidated statements of financial position. position, and had $205 million remaining available for future repurchases under this program. 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,Quarterly Report on Form 10-Q are summarized in the following table.table:
Six Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In millions) | 2022 | 2021 | 2023 | 2022 | ||||||||
Net cash provided from (used for): | ||||||||||||
Operating activities | $ | 94 | $ | 119 | $ | 112 | $ | 94 | ||||
Investing activities | (19) | (15) | (15) | (19) | ||||||||
Financing activities | (69) | (378) | (44) | (69) | ||||||||
Cash (decrease) increase during the period | $ | 6 | $ | (274) | ||||||||
Cash increase during the period | $ | 52 | $ | 6 |
Operating Activities
Net cash provided from operating activities was $94$112 million and $119$94 million for the six months ended June 30, 2023 and 2022 and 2021,, respectively.
Net cash provided from operating activities for the six months ended June 30, 2023 comprised $117 million in earnings adjusted for non-cash charges, offset, in part, by $5 million in cash used for working capital. Cash used for working capital was primarily driven by a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale, offset, in part, by seasonality.
Net cash provided from operating activities for the six months ended June 30, 2022 comprised $68 million in earnings adjusted for non-cash charges and $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 $112 million in earnings adjusted for non-cash charges and an $8 million decrease in cash required for working capital. The decrease in cash required for working capital was driven by 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 $19$15 million and $15$19 million for the six months ended June 30, 2023 and 2022, respectively and 2021, respectively..
Capital expenditures were $19$15 million and $15$19 million for the six months ended June 30, 2023 and 2022 and 2021,, respectively, and included recurring capital needs and technology projects. We expect capital expenditures for the full year 20222023 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $4035 million to $50$45 million. We have no additional material capital commitments at this time.
Financing Activities
Net cash used for financing activities was $69$44 million and $378$69 million for the six months ended June 30, 2023 and 2022, respectively.
For the six months ended June 30, 2023, we made scheduled principal payment of debt of $8 million and 2021, respectively.purchased outstanding shares at an aggregate cost of $34 million.
For the six months ended June 30, 2022, we made scheduled principal payments of debt and finance lease obligations of $8 million and purchased outstanding shares at an aggregate cost of $59 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 auditedthe condensed consolidated financial statements.statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q:
Six Months Ended | ||||||||||||
Six Months Ended | June 30, | |||||||||||
(In millions) | June 30, | 2023 | 2022 | |||||||||
2022 | 2021 | |||||||||||
Net cash provided from operating activities | $ | 94 | $ | 119 | $ | 112 | $ | 94 | ||||
Property additions | (19) | (15) | (15) | (19) | ||||||||
Free Cash Flow | $ | 75 | $ | 104 | $ | 96 | $ | 75 |
Contractual Obligations
Our 20212022 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2021.2022. We continue to make the contractually required payments and, therefore, the 2022associated with these commitments. There are no significant additions to our obligations and commitments describedsince those reported in our 2021the 2022 Form 10-K have been reduced by the required payments.10-K.
Financial Position
The following discussion describesA summary of the significant changes in our financial position from December 31, 20212022 to June 30, 2022:2023 is as follows:
Contract asset increased during the six months ended June 30, 2022,2023, reflecting a net contract asset related to the recognition of monthly paymonthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.
Accounts payableOther accrued liabilities increased during the six months ended June 30, 2022,2023, 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.an increase in federal income tax payable.
Deferred revenue decreased during the six months ended June 30, 2022,2023, reflecting a decline in the number of first-year real estate home service plans.
Other long-term liabilities decreased duringplans, which are typically paid for upfront at the six months ended June 30, 2022, primarily due totime of closing on the change in the valuation of our interest rate swap.home sale.
Total shareholders’ equity was $6$131 million as of June 30, 20222023 compared to $2$61 million as of December 31, 2021.2022. The increase was primarily driven by net income, and the change in valuation of our interest rate swap, offset, in part, by the repurchases of our common stock. See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this reportQuarterly Report on Form 10-Q for further information.additional information
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 20212022 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a setOur management, with the participation of disclosure controlsour Chief Executive Officer and procedures designedour Chief Financial Officer, has evaluated (pursuant 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, ofAct) the effectiveness of our disclosure controls and procedures.procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2023. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective 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.June 30, 2023.
Changes in Internal Control over Financial Reporting
NoThere were no changes into our internal control over financial reporting as(as defined in Rule 13a-15(f) and Rule 15d-15(f) under) during the Exchange Act, occurred during our most recently completed fiscal quarterthree months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.Quarterly Report on Form 10-Q.
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 20212022 Form 10-K. There have been no material changes to the risk factors disclosed in our 20212022 Form 10-K.10-K during the three months ended June 30, 2023. The risks described in our 20212022 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 maycould also materially and adversely affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
Issuer Purchases of Equity Securities
Period | Total number of shares purchased | Average price | Total number of | Maximum dollar value | ||||||
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 |
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(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 June 30, 2022,2023, we have purchasedrepurchased a total of 4,478,1945,552,053 outstanding shares at an aggregate cost of $162$195 millionand had $205 million remaining available for future repurchases under this program.program. See Liquidity and Capital Resources – Liquidity in Part I, Item 2 of this reportQuarterly Report on Form 10-Q for more information.
Period | Total number of shares purchased | Average price | Total number of | Maximum dollar value | ||||||
Apr. 1, 2023 through Apr. 30, 2023 | — | $ | — | — | $ | 239 | ||||
May 1, 2023 through May 31, 2023 | 439,478 | 31.29 | 439,478 | 225 | ||||||
Jun. 1, 2023 through Jun. 30, 2023 | 634,381 | 31.53 | 634,381 | 205 | ||||||
Total | 1,073,859 | $ | 31.43 | 1,073,859 | $ | 205 |
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(1) The average price paid per share is calculated on a trade date basis and excludes commission.
ITEM 5. OTHER INFORMATION
On July 28, 2023, our board of directors approved and adopted amended and restated bylaws (the “Amended and Restated Bylaws”), which became effective the same day. Among other things, the Amended and Restated Bylaws update certain provisions of Article I, Sections 1.05 and 1.12 regarding the procedure and disclosure required in connection with stockholder director nominations, including to address newly adopted Rule 14a-19 of the Exchange Act. Such updates include, without limitation, requiring (i) a nominating stockholder to use a proxy card color other than white, which color is reserved for the exclusive use by the board, (ii) a nominating stockholder to represent whether it intends to solicit proxies in accordance with Rule 14a-19 and to provide reasonable evidence that it has satisfied Rule 14a-19, and (iii) additional background information and disclosures regarding, among other things, nominating stockholders, proposed director candidates, and other persons related to a stockholder’s solicitation of proxies. The Amended and Restated Bylaws also reflect updates to the provisions relating to adjournment procedures and lists of stockholders entitled to vote at stockholder meetings, in each case, to reflect recent amendments to the Delaware General Corporation Law, as well as other administrative and conforming changes, including the deletion of provisions related to our prior classified board structure.
As a result of the amendments affected by the Amended and Restated Bylaws, with respect to the 2024 Annual Meeting of stockholders and future annual meetings, to be considered timely, the information required to be submitted by stockholders in accordance with Rule 14a-19 in connection with the solicitation of proxies in support of director nominees other than the company’s nominees must be received by the Corporate Secretary of the company not less than 90 days nor more than 120 days prior to the first anniversary of the immediately preceding annual meeting; provided, however, that in the event that (x) the date of the annual meeting is advanced by more than 30 days or delayed by more than 70 days from such anniversary date of the preceding year’s annual meeting or (y) no annual meeting was held during the preceding year, notice by the stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting and the close of business on the 10th day following the day on which public announcement of the date of such meeting is first made. Therefore, with respect to the 2024 Annual Meeting, such nomination and related information required under the Amended and Restated Bylaws must be received by the company on or after January 12, 2024 but no later than February 11, 2024.
The foregoing description is a summary and is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, a copy of which is attached as Exhibit 3.2 hereto and is incorporated by reference herein.
ITEM 6. EXHIBITS
Exhibit | Description | ||
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31.2* | |||
32.1* | |||
32.2* | |||
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 | ||
101.CAL* | Inline XBRL Taxonomy Extension Calculation | ||
101.DEF* | Inline XBRL Taxonomy Extension Definition | ||
101.LAB* | Inline XBRL Taxonomy Extension Label | ||
101.PRE* | Inline XBRL Extension Presentation | ||
104* | Cover page formatted as Inline XBRL and included in Exhibit 101. |
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# 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.
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: August 4, 2022
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Date: August 2, 2023 | By: | /s/ Jessica P. Ross | ||||||
Name: | Jessica P. Ross | |||||||
Title: | Senior Vice President and Chief Financial Officer ( | |||||||