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 ~~September 30, 2018~~March 31, 2023

☐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 ~~001-36507~~001-38617

________________________________________________

~~frontdoor, inc.~~Frontdoor, Inc.

(Exact name of registrant as specified in its charter)

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

~~150 Peabody Place,~~

3400 Players Club Parkway, Memphis, Tennessee ~~38103~~38125

(Address of principal executive offices) (Zip Code)

~~901-701-5002~~901-701-5000

(Registrant’s telephone number, including area code)

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


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

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

Yes ☐x No ☒o

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

Yes ☒x No ☐o

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


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

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

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

Yes ☐o No ☒x

~~The number~~As of April 28, 2023, there were 81,726,217 shares outstanding of the registrant’s ~~common stock outstanding as of November 2, 2018: 84,536,832 shares of~~ common stock, par value $0.01 per share.

~~frontdoor, inc.~~Frontdoor, Inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

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



~~Term/~~Term / Abbreviation		Definition
2022 Form 10-K		Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2022
~~2026 Notes~~AOCI		~~Our 6.750% senior notes in the aggregate principal amount of $350 million~~
~~AOCI~~		Accumulated other comprehensive income or loss
ASC		FASB Accounting Standards Codification
~~ASC 605~~ASU		~~ASC Topic 605,~~ ~~Revenue Recognition~~
~~ASC 606~~		~~ASC Topic 606,~~ ~~Revenue from Contracts with Customers~~
~~ASC 740~~		~~ASC Topic 740,~~ ~~Income Taxes~~
~~ASU~~		FASB Accounting Standards Update
ASU ~~2014-09~~2020-04		ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers~~2020-04, Reference Rate Reform (Topic ~~606)~~848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
ASU ~~2016-01~~2022-06		ASU ~~2016-01,~~ ~~Recognition and Measurement~~2022-06, Reference Rate Reform (Topic 848); Deferral of ~~Financial Assets and Financial Liabilities~~the Sunset Date of Topic 848
~~ASU 2016-02~~Code		~~ASU 2016-02,~~ ~~Leases (Topic 842)~~Internal Revenue Code of 1986, as amended
~~ASU 2017-01~~Credit Agreement		~~ASU 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~
~~ASU 2017-09~~		~~ASU 2017-09,~~ ~~Stock Compensation—Scope of Modification Accounting~~
~~ASU 2018-02~~		~~ASU 2018-02,~~ ~~Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~
~~ASU 2018-03~~		~~ASU 2018-03,~~ ~~Technical Corrections and Improvements to Financial Instruments~~
~~ASU 2018-09~~		~~ASU 2018-09,~~ ~~Codification Improvements~~
~~Credit Agreement~~		The agreements governing the ~~Term Loan Facility and the Revolving~~ Credit ~~Facility~~Facilities
Credit Facilities		The Term Loan ~~Facility~~Facilities together with the Revolving Credit Facility
~~Exchange Act~~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
~~Indenture~~IRS		Collectively, the Indenture and First Supplemental Indenture, each dated as of August 16, 2018, among Frontdoor, Wilmington Trust, National Association as trustee, and certain other parties named herein, governing the 2026 NotesInternal Revenue Service
~~NASDAQ~~LIBOR	London Inter-bank Offered Rate
NASDAQ	Nasdaq Global Select Market
~~Parent~~Omnibus Plan		~~ServiceMaster Global Holdings,~~Frontdoor, Inc. 2018 Omnibus Incentive Plan
~~Registration Statement~~		~~Registration Statement on Form 10 (File No. 001-38617), filed with the SEC on August 1, 2018, as amended~~
Revolving Credit Facility		~~Our $250~~$250 million revolving credit facility effective June 17, 2021
SEC		U.S. Securities and Exchange Commission
Securities Act		Securities Act of 1933, as amended
~~ServiceMaster~~Streem		~~ServiceMaster Global Holdings, Inc.~~Streem, LLC, our technology business that uses augmented reality, computer vision and machine learning to provide services
~~SVM~~Term Loan A		~~ServiceMaster's wholly-owned subsidiary, The ServiceMaster Company, LLC~~$260 million term loan A facility effective June 17, 2021
Term Loan ~~Facility~~B		~~Our $650~~$380 million ~~senior secured~~ term loan B facility effective June 17, 2021
~~U.S. GAAP~~Term Loan Facilities	The Term Loan A together with the Term Loan B
Topic 848	ASC 848, Reference Rate Reform
U.S. or United States	United States of America
U.S. GAAP	Accounting principles generally accepted in the United States of America
~~U.S. Tax Reform~~		~~The Tax Cuts and Jobs Act enacted on December 22, 2017, which includes significant changes to the U.S. corporate tax system~~

~~The following terms~~In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Frontdoor,” “we,” “our,” “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.

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 ~~trademarks: frontdoor~~™~~, American Home Shield~~®~~, HSA~~®~~, OneGuard~~®~~, Landmark~~®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 ~~frontdoor logo.~~property of their respective owners.

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

TABLE OF CONTENTS

	~~Page~~ ~~No.~~

	Page
	No.
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed ~~Combined~~Consolidated Statements of Operations and Comprehensive Income	3

Condensed ~~Combined~~Consolidated Statements of Financial Position	4

Condensed ~~Combined~~Consolidated Statements of Changes in ~~Parent’s~~Equity (Deficit) ~~Equity~~	5

Condensed ~~Combined~~Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
~~Notes to Condensed Combined Financial Statements~~	7

Cautionary Statement Concerning Forward-Looking Statements	2116

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2218

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3528

Item 4. Controls and Procedures	3528

Part II. Other Information	28

Item 1. Legal Proceedings	3628

Item 1A. Risk Factors	3628
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6. Exhibits	3729

Signature	3931

‎

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Frontdoor, Inc.

Condensed ~~Combined~~Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In ~~millions)~~millions, except per share data)



	Three Months Ended
	March 31,
	2023		2022
Revenue	$	367	$	351
Cost of services rendered		197		207
Gross Profit		170		144
Selling and administrative expenses		125		125
Depreciation and amortization expense		9		8
Restructuring charges		1		—
Interest expense		10		7
Interest and net investment income		(3)		—
Income before Income Taxes		29		3
Provision for income taxes		7		2
Net Income	$	22	$	2

Other Comprehensive (Loss) Income, Net of Income Taxes:
Unrealized (loss) gain on derivative instruments, net of income taxes		(2)		13
Total Other Comprehensive (Loss) Income, Net of Income Taxes		(2)		13
Comprehensive Income	$	20	$	15

Earnings per Share:
Basic	$	0.27	$	0.02
Diluted	$	0.27	$	0.02

Weighted-average Common Shares Outstanding:
Basic		81.5		82.3
Diluted		81.9		82.6

Three Months Ended

Nine Months Ended

September 30,

September 30,

2018

2017

2018

2017
Revenue

$
377

$
346

$
979

$
899
Cost of services rendered

202

168

532

453
Gross Profit

176

179

448

447
Selling and administrative expenses

90

82

259

241
Depreciation expense

3

2

8

7
Amortization expense

2

2

6

6
Restructuring charges

—

4

3

6
Spin-off charges

8

6

23

6
Affiliate royalty expense

1

1

1

1
Interest expense

7

—

7

1
Interest income from affiliate

—

(1)

(2)

(2)
Interest and net investment income

—

(1)

(1)

(1)
Income before Income Taxes

65

83

143

183
Provision for income taxes

16

29

36

67
Net Income

$
49

$
53

$
108

$
116
Total Comprehensive Income

$
49

$
53

$
108

$
116

See the accompanying Notes to the ~~unaudited~~ Condensed ~~Combined~~Consolidated Financial Statements (Unaudited).

‎

Frontdoor, Inc.

Condensed ~~Combined~~Consolidated Statements of Financial Position (Unaudited)

(In ~~millions)~~millions, except share data)



	As of
	March 31,		December 31,
	2023		2022
Assets:
Current Assets:
Cash and cash equivalents	$	337	$	292
Receivables, less allowance of $3 and $4, respectively		6		5
Prepaid expenses and other current assets		38		33
Total Current Assets		381		330
Other Assets:
Property and equipment, net		66		66
Goodwill		503		503
Intangible assets, net		146		148
Operating lease right-of-use assets		10		11
Deferred customer acquisition costs		17		16
Other assets		6		8
Total Assets	$	1,128	$	1,082
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable	$	82	$	80
Accrued liabilities:
Payroll and related expenses		19		22
Home service plan claims		81		103
Other		29		21
Deferred revenue		167		121
Current portion of long-term debt		17		17
Total Current Liabilities		396		364
Long-Term Debt		588		592
Other Long-Term Liabilities:
Deferred tax liabilities, net		37		39
Operating lease liabilities		17		18
Other long-term liabilities		8		8
Total Other Long-Term Liabilities		62		65
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 86,294,094 shares issued and 81,723,843 shares outstanding as of March 31, 2023 and 86,079,773 shares issued and 81,517,243 shares outstanding as of December 31, 2022		1		1
Additional paid-in capital		92		90
Retained earnings		146		124
Accumulated other comprehensive income		6		8
Less treasury stock, at cost; 4,570,251 shares as of March 31, 2023 and 4,562,530 shares as of December 31, 2022		(162)		(162)
Total Shareholders' Equity		83		61
Total Liabilities and Shareholders' Equity	$	1,128	$	1,082

As of

September 30,

December 31,

2018

2017
Assets:

Current Assets:

Cash and cash equivalents

$
305

$
282
Marketable securities

9

25
Receivables, less allowances of $2 and $1, respectively

11

406
Contract asset

29

—
Prepaid expenses and other assets

7

10
Deferred customer acquisition costs

—

18
Total Current Assets

361

741
Other Assets:

Property and equipment, net

46

31
Goodwill

476

476
Intangible assets, net

160

165
Long-term marketable securities

—

2
Deferred customer acquisition costs

21

—
Other assets

3

1
Total Assets

$
1,065

$
1,416
Liabilities and Parent's Equity:

Current Liabilities:

Accounts payable

$
45

$
33
Accrued liabilities:

Payroll and related expenses

9

15
Home service plan claims

77

57
Interest payable

3

—
Other

12

19
Deferred revenue

176

573
Due to Parent

144

—
Current portion of long-term debt

9

9
Total Current Liabilities

476

705
Long-Term Debt

978

—
Other Long-Term Liabilities:

Deferred taxes

43

38
Other long-term obligations

6

11
Total Other Long-Term Liabilities

50

49
Commitments and Contingencies (Note 8)

Parent's Equity:

Net Parent Investment

(439)

661
Total Parent's (Deficit) Equity

(439)

661
Total Liabilities and Parent's Equity

$
1,065

$
1,416

See the accompanying Notes to the ~~unaudited~~ Condensed ~~Combined~~Consolidated Financial Statements (Unaudited).

Frontdoor, Inc.

Condensed ~~Combined~~Consolidated Statement of Changes in ~~Parent’s (Deficit)~~ Equity (Unaudited)

(In millions)

Net Parent

Total Parent's

Investment

Equity
Balance December 31, 2016

$
560

$
560
Net income

15

15
Stock-based compensation expense

1

1
Net transfers to Parent

(7)

(7)
Balance March 31, 2017

$
569

$
569
Net income

48

48
Stock-based compensation expense

1

1
Net transfers to Parent

(34)

(34)
Balance June 30, 2017

$
584

$
585
Net income

53

53
Net transfers to Parent

(11)

(11)
Balance September 30, 2017

$
627

$
627

Balance December 31, 2017

$
661

$
661
Net income

13

13
Stock-based compensation expense

1

1
Net transfers to Parent

(34)

(34)
Balance March 31, 2018

$
642

$
642
Net income

45

45
Stock-based compensation expense

1

1
Net transfers to Parent

(30)

(30)
Balance June 30, 2018

$
657

$
657
Net income

49

49
Stock-based compensation expense

1

1
Net transfers to Parent

(147)

(147)
Non-cash debt exchange with Parent

(1,000)

(1,000)
Balance September 30, 2018

$
(439)

$
(439)



	Three Months Ended
	March 31,
	2023		2022
Common Stock:
Balance at beginning of period	$	1	$	1
Balance at end of period		1		1
Additional Paid-in Capital:
Balance at beginning of period		90		70
Stock-based compensation expense		5		6
Taxes paid related to net share settlement of equity awards		(3)		(3)
Balance at end of period		92		73
Retained Earnings:
Balance at beginning of period		124		53
Net income		22		2
Balance at end of period		146		55
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of period		8		(18)
Other comprehensive (loss) income, net of tax		(2)		13
Balance at end of period		6		(5)
Treasury Stock:
Balance at beginning of period		(162)		(103)
Repurchase of common stock		—		(40)
Balance at end of period		(162)		(143)
Total Shareholders' Equity	$	83	$	(20)

See the accompanying Notes to the ~~unaudited~~ Condensed ~~Combined~~Consolidated Financial Statements (Unaudited).

‎

Frontdoor, Inc.

Condensed ~~Combined~~Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2018		2017		2023		2022
Cash and Cash Equivalents at Beginning of Period	$	282	$	168	$	292	$	262
Cash Flows from Operating Activities:
Net Income		108		116		22		2
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation expense		8		7
Amortization expense		6		6
Deferred income tax provision		5		1
Depreciation and amortization expense						9		8
Deferred income tax benefit						(2)		—
Stock-based compensation expense		3		3		5		6
Restructuring charges		3		6		1		—
Payments for restructuring charges		(6)		(4)		(1)		—
Spin-off charges		23		6
Payments for spin-off charges		(22)		(3)
Change in working capital, net of acquisitions:
Other						—		(2)
Changes in working capital:
Receivables		5		(70)		(1)		2
Prepaid expenses and other assets		(28)		1
Prepaid expenses and other current assets						(6)		1
Accounts payable		13		7		2		7
Deferred revenue						46		35
Accrued liabilities		15		20		(24)		(13)
Deferred revenue		(8)		42
Current income taxes						9		1
Net Cash Provided from Operating Activities		126		136		60		47
Cash Flows from Investing Activities:
Purchases of property and equipment		(21)		(9)		(8)		(9)
Purchases of available-for-sale securities		(16)		(28)
Sales and maturities of available-for-sale securities		33		42
Net Cash (Used for) Provided from Investing Activities		(4)		5
Net Cash Used for Investing Activities						(8)		(8)
Cash Flows from Financing Activities:
Payments on seller financed debt and capital lease obligations		(6)		(2)
Net transfers to Parent		(74)		(51)
Discount paid on issuance of debt		(2)		—
Debt issuance costs paid		(16)		—
Repayments of debt						(4)		(4)
Repurchase of common stock						—		(40)
Other financing activities						(3)		(3)
Net Cash Used for Financing Activities		(98)		(53)		(7)		(47)
Cash Increase During the Period		23		88
Cash Increase (Decrease) During the Period						45		(8)
Cash and Cash Equivalents at End of Period	$	305	$	256	$	337	$	255

See the accompanying Notes to the ~~unaudited~~ Condensed ~~Combined~~Consolidated Financial Statements (Unaudited).

‎

Frontdoor, Inc.

~~frontdoor, inc.~~Notes to the Condensed Consolidated Financial Statements

~~NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS~~(Unaudited)

~~(UNAUDITED)~~

Note 1. ~~Basis~~Description of ~~Presentation~~Business

References in this Quarterly Report on Form 10-Q to “Frontdoor,” “we,” “our,” or “us” refer to frontdoor, inc. and all of its operations combined for purposes of its financial statements. Frontdoor is ~~a Delaware corporation with its principal executive offices in Memphis, Tennessee. Amounts presented in accompanying tables may not sum due to rounding.~~

~~On July 26, 2017, ServiceMaster announced its intention to spin off~~ the ownership and operations of its businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names (the “Separated Business”) into a stand-alone publicly traded company (the “Spin-off”). The accompanying condensed combined financial statements represent, on a historical cost basis, the combined assets, liabilities, revenue and expenses related to the Separated Business. Frontdoor was formed as a wholly-owned subsidiary of ServiceMaster on January 2, 2018 for purposes of holding the Separated Business in connection with the Spin-off. During 2018, ServiceMaster contributed the Separated Business to Frontdoor. On October 1, 2018, we settled the net parent investment and the Spin-off was completed by a pro rata distribution to ServiceMaster’s stockholders of approximately 80.2% of our common stock. Each holder of ServiceMaster common stock received one share of our common stock for every two shares of ServiceMaster common stock held at the close of business on September 14, 2018, the record date of the distribution. ServiceMaster structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. As a result of the Spin-off, Frontdoor is now an independent public company trading on NASDAQ under the symbol “FTDR.”

~~We are the largest~~leading provider of home service plans in the United States, as measured by revenue, and ~~operate~~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 ~~plans cover~~plan customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of ~~up to 21 household~~more than 20 home systems and appliances, including electrical, plumbing, ~~central~~ HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/~~cooktops. We serve customers across all 50 states~~cooktops, as well as optional coverages for electronics, pools, spas and ~~the District of Columbia.~~

Throughout the period covered by the accompanying condensed combined financial statements, we operated as a wholly-owned subsidiary of ServiceMaster and separate stand-alone financial statements historically have not been prepared for us. The accompanying condensed combined financial statements have been prepared on a stand-alone basis and are derived from ServiceMaster's consolidated financial statements and accounting records, using ServiceMaster's historical basis in our assets and liabilities before the consummation of the Spin-off. These condensed combined financial statements reflect our financial position, results ofpumps. Our operations and cash flows in conformity with U.S. GAAP. Our financial position, results of operations and cash flows may not be indicative of our condition had we been a separate stand-alone entity during the periods presented, nor are the results stated herein necessarily indicative of our financial position, results of operations and cash flows had we operated as a separate, independent company during the periods presented. The accompanying condensed combined financial statements do not reflect any changes that may occur in our financing and operations as a result of the Spin-off.

~~The accompanying condensed combined financial statements~~also include all revenues, costs, assets and liabilities directly attributable to us. The accompanying condensed combined statements of operations and comprehensive income include allocations of certain costs from ServiceMaster incurred on our behalf. Such corporate-level costs are being allocated to us using methods based on proportionate formulas such as revenue, headcount and others. Such corporate costs include costs pertaining to: accounting and finance, legal, human resources, information technology, insurance, marketing, tax services, procurementon-demand home services and ~~other costs. We consider the expense allocation methodology~~Streem, a technology platform that uses augmented reality, computer vision and ~~results~~machine learning to ~~be reasonable for all periods presented. However, these allocations may not be indicative~~help home service professionals more quickly and accurately diagnose breakdowns and complete repairs. As of ~~the actual level of expense that we would have incurred if~~March 31, 2023, we had ~~operated as a separate stand-alone, publicly traded company during the periods presented nor are these costs necessarily indicative of costs we may incur in the future.~~2.1 million active home service plans, which were offered nationally.

Current and deferred income taxes and related tax expense have been determined based on our stand-alone results by applying ASC 740 as if we were a separate taxpayer, following the separate return methodology. See Note 5 to the accompanying condensed combined financial statements for additional information. Our portion of current income taxes payable is deemed to have been remitted to ServiceMaster in the period the related tax expense was recorded. Our portion of current income taxes receivable is deemed to have been remitted to us by ServiceMaster in the period to which the receivable applies only to the extent that we could have recognized a refund of such taxes on a stand-alone basis under the law of the relevant taxing jurisdiction.

Cash and cash equivalents included in the accompanying condensed combined statements of financial position reflect cash and cash equivalents that are specifically attributable to us. Short and long-term debt included in the accompanying condensed combined statements of financial position reflects debt for which we are the legal obligor; as such, ServiceMaster's debt has not been allocated to us for any of the periods presented. See Note 11 to the accompanying condensed combined financial statements for more information related to our indebtedness.

ServiceMaster maintains various stock-based compensation and employee benefit plans at a corporate level. Our employees participate in those plans, and a portion of the cost of those plans is included in the accompanying condensed combined financial statements.

We recommend that the accompanying condensed combined financial statements be read in conjunction with the audited combined financial statements and the notes thereto included in our Registration Statement. The accompanying condensed combined 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.

Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 32 to the audited ~~combined~~consolidated financial statements included in our ~~Registration Statement.~~2022 Form 10-K. There have been no material changes to ~~the~~our significant accounting policies during the three months ended March 31, 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 ~~three~~fair presentation of our financial position, results of operations and ~~nine months ended September 30, 2018, other than those described below.~~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.

~~Adoption of New~~Newly Adopted Accounting Standards

In ~~May 2014,~~March 2020, the FASB issued ASU ~~2014-09~~2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to ~~provide a single comprehensive model for entities~~contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to ~~use in accounting for revenue arising from~~ contracts, with customers. Frontdoor adopted ASC 606, effective as of January 1, 2018, using the modified retrospective method to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjustedhedging relationships and ~~continue~~other transactions that reference LIBOR or another reference rate expected to be ~~reported in accordance with ASC 605. We implemented internal controls~~discontinued because of reference rate reform. This standard is currently effective and ~~system functionality where necessary~~upon adoption may be applied prospectively to ~~enable the preparation of financial information on adoption. See Note 3 to the accompanying condensed combined financial statements for more details.~~

contract modifications. In ~~January 201~~6,March 2021, the FASB issued ASU ~~2016-01~~2020-06, which extended the sunset date for the required transition to ~~change how entities measure certain equity investments,~~December 31, 2024. In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to ~~require~~replace LIBOR with SOFR as the ~~disclosure of changes in the fair value of financial liabilities measured~~benchmark rate under the fair value option that are attributable to a company's own credit, and to change certain other disclosure requirements. The changes in ASU 2016-01 specifically require that the changes in fair value of all investments in equity securities be recognized in net income. In March 2018, the FASB issued ASU 2018-03, which amends ASU 2016-01 and provides further clarification regarding this standard. FrontdoorCredit Agreement. We adopted ASU ~~2018-03 effective as of January 1, 2018. There was an immaterial impact to the accompanying condensed combined financial statements as a result of our adoption of~~2020-04 in connection with this ~~standard.~~

In ~~January 201~~7, the FASB issued ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a screen to determine when an integrated set of assets or activities is not a business. Frontdoor adopted ASU 2017-01 effective as of January 1, 2018. There was no impact to the accompanying condensed combined financial statements as a result of our adoption of this standard.

~~In May 201~~7, the FASB issued ASU 2017-09, which clarifies the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classificationtransition of the awards are the same immediately before and after the modification. Frontdoor adopted ASU 2017-09 effective as of January 1, 2018. There was no impact to the accompanying condensed combined financial statements as a result ofbenchmark rate under our ~~adoption of this standard. We will apply the guidance prospectively to awards modified on or after the adoption date.~~

In ~~February 201~~8, the FASB issued ASU 2018-02, allowing a reclassification from AOCI to retained earnings for stranded tax effects resulting from the corporate income tax rate change adopted as part of U.S. Tax Reform.Credit Agreement. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. As allowed by ASU 2018-02, Frontdoor elected to early adopt the amendments of ASU 2018-02 in the first quarter of 2018, and there was an immaterial impact to the accompanying condensed combined financial statements as a result of our adoption of this standard.

~~Accounting Standards Issued but Not Yet Effective~~

In ~~February 201~~6, the FASB issued ASU 2016-02, which is the final standard on accounting for leases. While both lessees and lessors are affected by the new guidance, the effects on lessees are much more significant. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leasestransition did not considered short-term leases. Entities are required to use a modified retrospective approach to adopt the guidance. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our condensed combined financial statements.

To date, we have performed the following actions with respect to the adoption of ASU 2016-02: a transition team has been established to implement the required changes; we have substantially completed an inventory of all of our leases; and an initial assessment of our leases and embedded leases is underway. We expect the adoption of ASU 2016-02 will increase the amount of total assets and liabilities that is reported relative to such amounts prior to adoption.

~~In July 2018, the FASB issued ASU 2018-09, which does not prescribe any new accounting guidance,~~ ~~but~~ instead makes minor improvements and provides clarifications of several different ASC areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. We are currently evaluating this guidance to determine the impact it may have on our condensed combined financial statements.

~~We have reviewed all other recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements will~~ have a material impact on our consolidated financial ~~condition or results of operations.~~statements and related disclosures.

Note 3. Revenue

The majority of our revenue is generated from annual home service plan contracts 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 ~~achieves the disclosure objective to depict~~depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. ~~We derive all of our revenue from customers in the United States.~~ Revenue by major customer acquisition channel is as follows:



	Three Months Ended
	March 31,
(In millions)	2023		2022
Renewals	$	278	$	247
Real estate⁽¹⁾		33		45
Direct-to-consumer⁽¹⁾		44		46
Other		11		13
Total	$	367	$	351

_____________________________

~~___~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
(In millions)

2018

2017

2018

2017
Renewals

$
251

$
228

$
648

$
590
Real estate(1)

78

74

205

194
Direct-to-consumer(1)

47

43

122

112
Other

1

1

4

3
Total

$
377

$
346

$
979

$
899

~~_____________________________~~

~~(1)~~

~~First year revenue only.~~

(1)First-year revenue only.

~~At contract inception, we assess the goods and services promised in our~~

Our home service plan contracts ~~with customers and identify a~~have one performance obligation, which is to provide for ~~each promise to transfer to~~ the ~~customer a good~~repair or ~~service (or a bundle~~replacement of ~~goods~~essential home systems and ~~services) that is distinct. To identify~~appliances, as applicable per the ~~performance obligation, we consider all of the goods and services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.~~

~~Renewals~~

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

~~Real estate~~

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

~~Direct- to-consumer~~

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

contract. We recognize revenue ~~related to each type of contract~~ at the ~~agreed-upon~~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~~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.~~liability, as described under the heading “Contract Assets and Liabilities” below. We regularly review our estimates of claims costs and adjust ~~the~~these estimates when appropriate.

~~Costs~~Renewals

Revenue from customer renewals of home service plan contracts, which were previously initiated in the real estate or direct-to-consumer channel are classified as renewals above. Renewals relate to ~~obtain~~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. These plans are typically paid in full at 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 which occur in response to our marketing efforts. Customer payments for direct-to-consumer sales are typically received 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 on-demand home services and Streem, as well as administrative fees and ancillary services attributable to our home service plan contracts.

Deferred Customer Acquisition Costs

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and ~~recognizes~~recognize the related expense ~~on a straight-line basis, as adjusted~~using the input method in proportion to ~~match~~ the ~~timing of revenue recognition,~~costs expected to be incurred in performing services under the contract, over the expected customer relationship period. AsDeferred customer acquisition costs were $17 million and $16 million as of ~~January 1, 2018, the effective date~~March 31, 2023 and December 31, 2022, respectively. Amortization of ~~our adoption of ASC 606, we capitalized a total of $21 million in~~ deferred customer acquisition costs was $4 million for each of the three months ended March 31, 2023 and 2022. There were no impairment losses related to ~~contracts that were not completed. As of September 30, 2018, we had~~these capitalized ~~a total of $21 million in deferred customer acquisition~~ costs ~~related to contracts that were not completed. In~~during the three ~~and nine~~ months ended ~~September 30, 2018, the amount of amortization was $6 million~~March 31, 2023 and ~~$17 million, respectively. There was no impairment loss in relation to costs capitalized.~~2022.

~~Contract balances~~8

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. Receivables, Less Allowance

We record a receivable ~~related to revenue recognized on services~~due from customers once we have an unconditional right to invoice and receive payment in the future related to the services ~~provided. All accounts receivables~~provided 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 combined statements~~costs expected to be incurred in performing the services under the contract are accelerated as compared to the recognition of ~~financial position.~~revenue on a straight-line basis over the contract period.

~~When~~Our contract liabilities consist of deferred revenue ~~is recognized on monthly-pay customers before being billed, a contract asset is created. Deferred revenue represents a contract liability and~~which 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. As

A summary of ~~September 30, 2018, a contract asset of $29 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. There was no such contract asset recorded as of December 31, 2017. Deferred revenue was $176 million and $573 million as of September 30, 2018 and December 31, 2017, respectively.

~~Changes~~changes in deferred revenue for the ~~nine~~three months ended ~~September 30, 2018, were~~March 31, 2023 is as follows:



(In millions)	~~Deferred~~ ~~revenue~~
Balance asat beginning of ~~January 1, 2018~~period	$	~~183~~ 121
Deferral of revenue		~~316~~ 101
Recognition of deferred revenue		~~(323)~~ (55)
Balance asat end of ~~September 30, 2018~~period	$	~~176~~ 167

There was approximately ~~$39 million and $181~~$47 million of revenue recognized induring the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2023 that was included in the deferred revenue balance as of ~~January 1, 2018.~~ December 31, 2022.

~~Arrangements with Multiple Performance Obligations~~Note 4. Intangible Assets

~~Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue~~The following table provides a summary of the components of our intangible assets:



	As of March 31, 2023						As of December 31, 2022
			Accumulated						Accumulated
(In millions)	Gross		Amortization		Net		Gross		Amortization		Net
Trade names⁽¹⁾	$	141	$	—	$	141	$	141	$	—	$	141
Customer relationships		173		(172)		—		173		(172)		—
Developed technology		19		(14)		4		19		(13)		5
Other		32		(31)		1		32		(31)		1
Total	$	365	$	(218)	$	146	$	365	$	(217)	$	148

_____________________________

(1)Not subject to ~~each performance obligation based on its relative stand-alone selling price. Any discounts given are allocated to the services to which the discounts relate.~~amortization.

~~Practical Expedients~~Amortization expense was $1 million and ~~Exemptions~~

We offer certain interest-free contracts to customers where payments are received over a period not exceeding one year. Additionally, customers have the option to pay for an annual home service plan in advance. We do not adjust the promised amount of consideration$2 million for the ~~effects of these financing components. At contract inception, the period of time between the performance of services~~three months ended March 31, 2023 and the customer payment is generally one year or less. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to taxing authorities. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Certain non-commission related incremental costs to obtain a contract with a customer are expensed as incurred because the amortization period would have been one year or less. These costs are included in Selling and administrative expenses in the accompanying condensed combined statements of operations and comprehensive income.

We utilize the portfolio approach to recognize revenue in situations where a portfolio of contracts have similar characteristics. The revenue recognized under the portfolio approach is not materially different than if every individual contract in the portfolio was accounted for separately.

~~Impact of ASC 606 on the Condensed Combined Financial Statements~~

We recorded a net increase to opening net parent investment of $2 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting ASC 606. Under ASC 606, commission costs incremental to a successful sale are deferred and recognized in the condensed combined statements of operations and comprehensive income over the expected customer relationship period. Previously, commissions and other sales-related costs were deferred and recognized over the initial contract period.

Changes to the accompanying condensed combined statements of financial position due to the adoption of ASC 606 include: (i) the reclassification of receivables to contract assets which are presented net of contract liabilities within deferred revenue and (ii) the reclassification of deferred customer acquisition costs to long-term assets as costs are recognized over the expected customer relationship period, which is in excess of one year. Prior to the adoption of ASC 606, when a customer elected to pay for their home service plan on a monthly basis, receivables and deferred revenue were recorded based on the total amount due from the customer. Receivables were reduced as amounts were paid, and deferred revenue was amortized over the life of the contract. Following the adoption of ASC 606, only the portion of the contract that is due in the current month will be recorded within receivables.

The following tables compare affected lines of the accompanying condensed combined financial statements as prepared under the provisions of ASC 606 to a presentation of these condensed combined financial statements under the prior revenue recognition guidance:

As of September 30, 2018
Condensed Combined Statement of Financial Position

As reported

Under Prior
Revenue
Recognition
Guidance
Current Assets:

Receivables

$
11

$
486
Contract asset

29

—
Deferred customer acquisition costs

—

18
Other Assets:

Deferred customer acquisition costs

21

—
Total Assets

$
1,065

$
1,508

Current Liabilities:

Deferred revenue

$
176

$
622
Other Long-Term Liabilities:

Deferred taxes

43

43
Total Liabilities

1,504

1,807
Net Parent Investment

(547)

(550)
Net Income

108

108
Liabilities and Parent's Equity

$
1,065

$
1,508

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2018
Condensed Combined Statement of Operations and
Comprehensive Income

As reported

Under Prior
Revenue
Recognition
Guidance

As reported

Under Prior
Revenue
Recognition
Guidance
Selling and administrative expenses

$
90

$
90

$
259

$
259
Provision for income taxes

16

16

36

36
Net Income

$
49

$
49

$
108

$
108

~~The adoption of ASC 606 had no significant impact on our cash flows. The aforementioned impacts resulted in offsetting shifts within cash flows from operations.~~

~~Note 4. Goodwill and Intangible Assets~~

Goodwill and indefinite-life intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. Our annual assessment date is October 1. The balance of goodwill was $476 million as of September 30, 2018 and December 31, 2017.2022, respectively. There were no ~~goodwill or trade name~~ impairment charges ~~recorded~~ 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 ranging from less than one year to 12 years, some of which include options to extend the ~~three~~leases for up to five years.

The weighted-average remaining lease term and ~~nine months ended September 30, 2018 and 2017. There were no accumulated impairment losses recorded~~weighted-average discount rate related to our operating leases are as follows:



	As of
	March 31,		December 31,
	2023		2022
Weighted-average remaining lease term (years)	9		9
Weighted-average discount rate	6.3	%	6.3	%

We recognized operating lease expense of ~~September 30, 2018 and December 31, 2017.~~

~~The table below summarizes the other intangible asset balances:~~

As of September 30, 2018

As of December 31, 2017
(In millions)

Gross

Accumulated
Amortization

Net

Gross

Accumulated
Amortization

Net
Trade names(1)

$
140

$
—

$
140

$
140

$
—

$
140
Customer relationships

173

(164)

9

172

(160)

12
Other

32

(21)

11

32

(19)

13
Total

$
345

$
(185)

$
160

$
344

$
(179)

$
165

~~(1)~~

~~Not subject to amortization.~~

~~Amortization expense was $2~~$1 million for each of the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017,~~2022. These expenses are included in selling and $6administrative 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
	March 31,		December 31,
(In millions)	2023		2022
Other accrued liabilities	$	3	$	3
Operating lease liabilities		17		18
Total operating lease liabilities	$	20	$	21

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

The following table presents the maturities of our operating lease liabilities as of March 31, 2023:



(In millions)
2023 (remainder)⁽¹⁾	$	3
2024⁽¹⁾		2
2025⁽¹⁾		2
2026⁽¹⁾		2
2027		3
2028		2
Thereafter		10
Total future minimum lease payments		23
Less imputed interest		(6)
Total	$	17

_____________________________

(1)Amount is presented net of future sublease income totaling $4 million, ~~for each of the nine months ended September 30, 2018 and 2017. For the existing intangible assets, we anticipate amortization expense for~~which relates to the remainder of ~~2018~~the year ending December 31, 2023 and ~~each~~the years ending December 31, 2024 through December 31, 2026.

Note 6. Income Taxes

We are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the ~~next five years to be approximately $2 million, $6 million, $5 million, $4 million, $1 million~~three months ended March 31, 2023 and ~~$1 million, respectively.~~2022 was generated in the United States.

~~Note 5. Income Taxes~~

~~As required by ASC 740, we~~We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. ~~Our~~As a result, our estimated tax rate is adjusted each ~~quarter in accordance with ASC 740.~~

quarter. The effective tax rate on our income before income taxes was 2425.2 percent and 3651.1 percent for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively, and 25 percent and 37 percent for the nine months ended September 30, 2018 and 2017,~~2022, respectively. The decrease in our effective tax ~~rates~~rate was primarily due to the impacts of share-based awards and state income taxes on limited pre-tax income ~~for the three and nine months ended September 30, 2018 were reduced primarily by the reduction~~ in the U.S. federal corporate income tax rate from 35 percent to 21 percent. The effective tax rates on income for the three and nine months ended September 30, 2017 were reduced primarily by excess tax benefits for share-based awards.prior year.

As of September 30, 2018 and December 31, 2017, we had $6 million and $4 million, respectively, of tax benefits primarily reflected in federal and state tax returns that have not been recognized for financial reporting purposes. Our policy is to recognize potential interest and penalties related to our tax positions within the tax provision. Total interest and penalties included in the accompanying condensed combined statements of operations and comprehensive income are immaterial.

On December 22, 2017, U.S. Tax Reform was signed into law. This legislation includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The adjustments to deferred tax assets and liabilities are provisional amounts estimated based on information available as of December 31, 2017. As described below, we have made reasonable estimates. At September 30, 2018, we have considered all available information. These amounts are subject to change as we obtain information necessary to complete the calculations. We will recognize any changes to the provisional amounts as we refine our estimates of our deferred tax assets and liabilities and our interpretations of the application of U.S. Tax Reform. We expect to complete our analysis of the provisional items during the fourth quarter of 2018. The effects of other provisions of U.S. Tax Reform are not expected to have a material impact on our condensed combined financial statements.

~~Corporate Tax Rate Change~~

We are subject to the provisions of ASC 740-10, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. We remeasured deferred tax assets and liabilities based on the new U.S. tax rates at which they are expected to reverse in the future, which is generally 21 percent. The provisional amount recorded at December 31, 2017 relating to the remeasurement of these deferred tax balances was a net reduction of total deferred tax liabilities of $20 million. During the third quarter of 2018, we recorded a provisional discrete net tax expense of $1 million related to adjustments to the remeasurement of certain deferred tax assets and liabilities as a result of the U.S. federal tax return filing and other related matters. We are still analyzing certain aspects of U.S. Tax Reform and refining our calculations, which could potentially affect these deferred tax balances or potentially give rise to changes in existing deferred tax amounts. Any subsequent adjustment to these amounts will be recorded to tax expense in the fourth quarter of 2018 when the full analysis is complete.

~~Deferred Tax Analysis~~

~~U.S. Tax Reform changes the treatment of certain income and expense items for which we record deferred tax assets and liabilities.~~ ~~We have~~ assessed our valuation of deferred tax assets and liabilities at September 30, 2018, as well as valuation allowance analyses affected by various aspects of the U.S. Tax Reform. We have recorded no provisional amounts related to valuation allowances and revaluation of deferred tax assets affected by various aspects of U.S. Tax Reform. However, we are still analyzing certain aspects of the U.S. Tax Reform and refining our calculations, which could potentially affect the valuation of these balances.

~~Note 6. Restructuring Charges~~

~~We incurred restructuring charges of less than $1 million (less than $1 million, net of tax) and $4 million ($3 million, net of tax) for the~~ ~~three~~ months ended September 30, 2018 and 2017, respectively, and $3 million ($2 million, net of tax) and $6 million ($3 million, net of tax) for the nine months ended September 30, 2018 and 2017, respectively.

For the three months and nine months ended September 30, 2018, restructuring charges primarily include an allocation of severance costs related to actions taken to enhance capabilities and reduce costs in ServiceMaster's corporate functions that provide company-wide administrative services to support operations. Amounts also include non-personnel charges primarily relating to the relocation to our corporate headquarters.

For the three months and nine months ended September 30, 2017, restructuring charges primarily represent an allocation of severance costs at ServiceMaster and non-personnel charges primarily relating to the relocation of our corporate headquarters.

The pre-tax charges discussed above are reported in Restructuring charges in the accompanying condensed combined statements of operations and comprehensive income. Certain restructuring comparative figures in the accompanying condensed combined statements of cash flows have been reclassified to conform to the current year presentation.

A ~~reconciliation~~ of the beginning and ending balances of accrued restructuring charges, which are included in Accrued liabilities—Other in the accompanying condensed combined statements of financial position, is presented as follows:



~~(In millions)~~	~~Accrued~~ ~~Restructuring~~ ~~Charges~~
~~Balance as of December 31, 2017~~	$	3
~~Costs incurred~~		3
~~Costs paid or otherwise settled~~		~~(6)~~
~~Balance as of September 30, 2018~~	$	—

~~Balance as of December 31, 2016~~	$	—
~~Costs incurred~~		6
~~Costs paid or otherwise settled~~		~~(4)~~
~~Balance as of September 30, 2017~~	$	2

~~Note 7. Spin-off Charges~~

~~We incurred Spin-off charges of $8 million ($6 million, net of tax) and $6 million ($5 million, net of tax) for the~~ ~~three~~ months ended September 30, 2018 and 2017, respectively, and $23 million ($18 million, net of tax) and $6 million ($5 million, net of tax), for the nine months ended September 30, 2018 and 2017, respectively.

At December 31, 2017, we had $1 million of Spin-off charges accrued and $2 million of prepaid Spin-off charges which were recognized during the nine months ended September 30, 2018. As of September 30, 2018, there were no unpaid or accrued amounts in the accompanying condensed combined statements of financial position.

These charges include nonrecurring costs incurred to evaluate, plan and execute the Spin-off and are primarily related to third-party consulting and other incremental costs directly associated with the Spin-off process.

~~We expect to incur aggregate charges related to the Spin-off of approximately $25 million in 2018. In addition, incremental capital~~ ~~expenditures~~ required to effect the Spin-off in 2018 will range from $15 million to $20 million in the aggregate, principally reflecting costs to replicate information technology systems historically shared by ServiceMaster.

Note 8.7. Commitments and Contingencies

We lease certain property and equipment under various operating lease arrangements. Most of the property leases provide that we pay taxes, insurance and maintenance applicable to the leased premises. As leases for existing locations expire, we expect to renew the leases or substitute another location and lease. Rental expense, including allocated corporate rent, was $2 million and $1 ~~million for the three months ended September 30, 2018 and 2017, respectively, and $4 million for each of the nine months~~ ~~ended~~ ~~September 30, 2018 and 2017, respectively.~~

We ~~also accrue for home service plan claims in Accrued liabilities—Home service plan claims.~~ 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 ~~claims experience and actuarial projections. Our~~estimates, we engage a third-party actuary ~~performs a reserve~~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 ~~the~~our estimates when appropriate. ~~Reserves~~We believe that 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 ~~established based on~~recorded in the ~~ultimate cost to settle claims. Home service plan claims take about three months to settle, on average, and substantially all claims~~period the adjustments are settled within six months. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. During the nine months ended September 30, 2018, we revised our previous estimate of contract claims as of December 31, 2017 and increased contract claims accruals by $7 million. Current activity could differ causing further changes in estimates.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 ~~financial condition~~ 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 ~~financial condition~~ or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.

~~Note 9. Related Party Transactions~~

~~Pre-Separation Period~~

~~We have historically been managed and operated in the normal course of business by ServiceMaster along with other~~ ~~businesses~~. Accordingly, certain shared costs have been allocated to us and reflected as expenses in the accompanying condensed combined financial statements. Our management and the management of ServiceMaster consider the expenses included and the allocation methodologies used to be reasonable and appropriate reflections of the historical ServiceMaster expenses attributable to us for purposes of the accompanying condensed combined financial statements; however, the expenses reflected in the accompanying condensed combined financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we historically operated as a separate, stand-alone entity. In addition, the expenses reflected in the accompanying condensed combined financial statements may not be indicative of related expenses that we could incur in the future.

~~Corporate expenses~~

The accompanying condensed combined financial statements include transactions with ServiceMaster for services (such as executive functions, information systems, accounting and finance, human resources, legal and general corporate expenses) that were provided to us by the centralized ServiceMaster organization. Corporate-level items also include personnel-related expenses of corporate employees (such as salaries, insurance coverage, stock-based compensation costs, etc.). Throughout the period covered by the accompanying condensed combined financial statements, the costs of such functions, services and items have been directly charged or allocated to us using methods management believes are reasonable. The methods for allocating functions, services and items to us are based on proportional allocation bases which include revenue, headcount and others. All such costs have been deemed to have been incurred and settled through net parent investment in the period in which the costs were recorded. Directly charged corporate expenses are included in Selling and administrative expenses in the accompanying condensed combined statements of operations and comprehensive income in the amounts of $7 million and $3 million for the three months ended September 30, 2018 and 2017, respectively, and $14 million and $10 million for the nine months ended September 30, 2018 and 2017, respectively. Allocated corporate expenses are also included in Selling and administrative expenses in the accompanying condensed combined statements of operations and comprehensive income in the amounts of $11 million and $10 million for the three months ended September 30, 2018 and 2017, respectively, and $35 million and $36 million for the nine months ended September 30, 2018 and 2017, respectively.

~~ServiceMaster trade and service marks~~

We had a trademark license agreement with ServiceMaster in which we were charged a royalty fee for the use of ServiceMaster-owned trade and service marks. The royalty fee was 0.175 percent of our customer revenues for the period. The royalty fee is included within Affiliate royalty expense in the accompanying condensed combined statements of operations and comprehensive income in the amounts $1 million for each of the three and nine months ended September 30, 2018 and 2017. The trademark license agreement with ServiceMaster has been terminated in connection with the Spin-off.

~~Health insurance coverage~~

ServiceMaster administers a self-insured health insurance program for its employees, including, through June 30, 2018, our employees. We paid premiums to ServiceMaster for this coverage, which were based on the number of our employees in the medical plan. These premiums are reflected in the accompanying ~~condensed~~ combined statements of operations and comprehensive income in the amounts of $2 million for the three months ended September 30, 2017 and $6 million for each of the nine months ended September 30, 2018 and 2017. As we entered into a separate health insurance program effective July 1, 2018, there are no premiums associated with ServiceMaster’s program recorded in the three months ended September 30, 2018. In addition to these costs, a portion of medical insurance costs for corporate employees have been allocated to us through the corporate expense allocation discussed under the heading “Corporate expenses” above.

~~Risk management~~

~~ServiceMaster carries insurance policies on insurable risks at levels which it believes to be appropriate. ServiceMaster~~ ~~purchases~~ insurance policies from third-party insurance carriers, which typically incorporate significant deductibles or self-insured retentions. Prior to the Spin-off, we paid a premium to ServiceMaster in exchange for the coverage provided. Expenses related to coverage provided by ServiceMaster and changes in ultimate losses relating to self-insured programs are reflected in the accompanying condensed combined statements of operations and comprehensive income in the amount of $1 million for each of the three months ended September 30, 2018 and 2017, and $2 million for each of the nine months ended September 30, 2018 and 2017. We have no captive insurer to provide a self-insured retention program following the Spin-off.

~~Due to Parent~~

Due to Parent on the accompanying condensed combined statements of financial position of $144 million as of September 30, 2018 represents the inter-company balance due to ServiceMaster. This amount was settled in cash after the Spin-off. See Note 17 to the accompanying condensed combined financial statements for more information regarding this cash settlement.

~~Agreements with ServiceMaster~~

In connection with the Spin-off, we entered into various agreements with ServiceMaster to provide a framework for our relationship with ServiceMaster after the Spin-off, including the following agreements:

Separation and Distribution Agreement. This agreement identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned to each of Frontdoor and ServiceMaster as part of the Spin-off and provides for when and how these transfers, assumptions and assignments will occur.

Transition Services Agreement. Pursuant to this agreement, ServiceMaster and Frontdoor will provide certain services to one another on an interim, transitional basis. The services to be provided include certain information technology services, finance and accounting services and human resource and employee benefits services. The agreed-upon charges for such services are generally intended to allow the providing company to recover all costs and expenses of providing such services.

Tax Matters Agreement. This agreement governs the respective rights, responsibilities and obligations of ServiceMaster and Frontdoor after the Spin-off with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Spin-off and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, the preparation and filing of tax returns, tax elections, the control of audits and other tax proceedings and assistance and cooperation in respect of tax matters.

Employee Matters Agreement. This agreement allocates liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs and other related matters. The agreement governs certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company.

Stockholders and Registration Rights Agreement. Pursuant to this agreement, Frontdoor agrees that, upon the request of ServiceMaster, Frontdoor will use its reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of Frontdoor common stock retained by ServiceMaster.

Note ~~10.~~8. Stock-Based Compensation

Certain of our employees participate in stock-based compensation plans sponsored by ServiceMaster. ServiceMaster's stock-based compensation plans include incentive compensation plans. All awards granted under the plans are based on ServiceMaster's common shares and, as such, are reflected in ServiceMaster's consolidated statements of stockholders' equity and not in our combined statements of stockholders' equity. Stock-based compensation expense includes expense attributable to us based on the awards and terms previously granted to our employees and an allocation of ServiceMaster's corporate and shared functional employee expenses.

We recognized stock-based compensation expense of $1$5 million ($14 million, net of tax) and ~~less than $1~~$6 million ~~(less than $1~~($6 million, net of tax) for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively, and $3 million ($2 million, net of tax) for each of the nine months ended September 30, 2018 and 2017.~~2022, respectively. These ~~charges~~costs are included in ~~Selling~~selling and administrative expenses in the accompanying condensed ~~combined~~consolidated statements of operations and comprehensive income.

A summary of awards granted under the Omnibus Plan during the three months ended March 31, 2023 is as follows:




		Weighted-	Weighted-	Weighted-
	Number of	Average	Average	Average
	Awards	Exercise	Grant Date	Vesting
	Granted	Price	Fair Value	Period
Stock options	627,062	26.42	12.21	4.0
Performance options⁽¹⁾	652,004	26.42	10.40	0.8
Restricted stock units	885,946		26.44	3.0

_____________________________

(1)The information related to performance options above assumes 100% of the performance target is met. The performance options contain a market condition that is based on a per share price target for our common stock, and the ultimate number of performance options that may be earned depends on the achievement of this market condition.

As of March 31, 2023, there was $60 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 3.1 years.

Note ~~11.~~9. Long-Term Debt

~~Long-term~~A summary of our debt is ~~summarized in the following table:~~as follows:



	As of
	March 31,		December 31,
(In millions)	2023		2022
Term Loan A maturing in 2026⁽¹⁾	$	236	$	239
Term Loan B maturing in 2028⁽²⁾		369		370
Revolving Credit Facility maturing in 2026		—		—
Total debt		605		609
Less current portion		(17)		(17)
Total long-term debt	$	588	$	592

_______________________________

As of

September 30,

December 31,
(In millions)

2018

2017
Term Loan Facility maturing in 2025(1)

$
640

$
—
Revolving Credit Facility maturing in 2023

—

—
2026 Notes(2)

344

—
Other

3

9
Less current portion

(9)

(9)
Total long-term debt

$
978

$
—

~~(1)~~

~~As of September 30, 2018, presented net of $8 million in unamortized debt issuance costs and $2 million in unamortized original issue discount paid.~~

~~(2)~~

~~As of September 30, 2018, presented net of $6 million in unamortized debt issuance costs.~~

~~On August 16, 2018, we engaged in a series of financing transactions pursuant to which we incurred long-term debt consisting of the~~ (1)Term Loan ~~Facility~~A is presented net of unamortized debt issuance costs of $1 million and $2 million as of March 31, 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 March 31, 2023 and December 31, 2022.

In March 2023, in connection with the ~~2026 Notes. The proceeds~~planned phase-out of ~~the debt was attributed directly to SVM and as such is reflected as a non-cash distribution in the accompanying condensed combined financial statements.~~

LIBOR, we amended our Credit Facilities

~~On August 16, 2018, we entered into~~ to replace LIBOR with SOFR as the benchmark rate under the Credit ~~Agreement, providing~~Agreement. This change was effective in March 2023 for ~~the~~ Term Loan ~~Facility maturing August 16, 2025~~A and the Revolving Credit Facility ~~which terminates on August 16, 2023. The interest rates applicable to the~~and will be effective in June 2023 for Term Loan Facility and the Revolving Credit Facility are based on a fluctuating rate of interest measured by reference to either, at our option, (i) an adjusted LIBOR plus a margin of 2.50% per annum or (ii) an alternate base rate plus a margin of 1.50% per annum.B.

The obligations under the Credit Agreement are guaranteed by certain subsidiaries (collectively, the “Guarantors”) and are secured by substantially all of the tangible and intangible assets of Frontdoor and the Guarantors, subject to certain customary exceptions.

~~The Revolving Credit Facility provides for senior secured revolving loans and stand-by and other letters of credit. The Revolving Credit Facility limits outstanding letters of credit to $25 million.~~ As of ~~September 30, 2018, there were no~~March 31, 2022, we had $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and ~~there was $250 million of~~the available borrowing capacity under ~~the Revolving Credit Facility.~~

The Credit Agreement contains customary affirmative and negative covenants, including limitations on the incurrence of indebtedness, liens, ability to engage in certain fundamental transactions, make certain dispositions, make certain restricted payments and engage in transactions with affiliates. The Credit Agreement also contains a financial covenant requiring the maintenance of a Consolidated First Lien Leverage Ratio, as defined in the Credit Agreement, of not greater than 3.50 to 1.00 at the end of each fiscal quarter for which the amount of obligations outstanding under the Revolving Credit Facility (subject to certain exceptions, as set forth in the Credit Agreement) exceeds 30% of the aggregate amount of Revolving Commitments, as defined in the Credit Agreement. We believe this covenant is the only significant restrictive covenant in the Credit Agreement.was $248 million. As of ~~September 30, 2018,~~March 31, 2023, we were in compliance with the ~~financial~~ covenants under the Credit ~~Agreement that were in effect on such date.~~Agreement.

~~2026 Notes~~Scheduled Debt Payments

~~On August 16, 2018, Frontdoor issued the 2026 Notes in a transaction that was exempt from registration under the Securities Act.~~ The ~~2026 Notes are jointly and severally guaranteed on a senior unsecured basis by the Guarantors.~~following table presents future scheduled debt payments as of March 31, 2023:

The 2026 Notes are governed by the Indenture. Pursuant to the Indenture, we are able to redeem the 2026 Notes, in whole or in part, at any time and from time to time prior to August 15, 2021 at a redemption price equal to 100% of the principal amount thereof plus the applicable “make whole” premium, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Also pursuant to the Indenture, we are able to redeem the 2026 Notes, in whole or in part, at any time and from time to time on and after August 15, 2021 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the relevant date of redemption. In addition, we are able to redeem up to 40% of the 2026 Notes, at any time and from time to time prior to August 15, 2021, in an amount not to exceed the net cash proceeds of one or more equity offerings, at a redemption price set forth in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date.

If we experience a Change of Control Triggering Event (as defined in the Indenture), we must offer to purchase all of the 2026 Notes (unless otherwise redeemed) at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date.

The Indenture contains covenants that, among other things, limit the ability of Frontdoor and its restricted subsidiaries, as described in the Indenture, to: issue, assume, guarantee or incur additional indebtedness; pay dividends or make distributions or purchase or otherwise acquire or retire for value capital stock or subordinated obligations; issue certain preferred stock or similar equity securities; make loans and investments; create restrictions on the ability of Frontdoor’s restricted subsidiaries to make payments or distributions to Frontdoor; enter into certain transactions with affiliates; sell or otherwise dispose of assets, including capital stock of subsidiaries; incur liens; and, in the case of Frontdoor, merge, consolidate or convey, transfer or lease all of substantially all of the assets of Frontdoor and its restricted subsidiaries taken as a whole. Most of these covenants will be suspended during any period in which the 2026 Notes have investment grade ratings from both Moody’s Investors Service, Inc. (or its successors) and Standard & Poor’s Ratings Services (or its successors).

The 2026 Notes are unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness. The subsidiary guarantees of the 2026 Notes are senior unsecured obligations of the Guarantors and rank equally in right of payment with all of the existing and future senior unsecured indebtedness of our non-guarantor subsidiaries. The 2026 Notes are effectively junior to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.


(In millions)
2023 (remainder)	$	13
2024		17
2025		17
2026		205
2027		4
2028		355
Total future scheduled debt payments		611
Less unamortized debt issuance costs		(4)
Less unamortized discount		(1)
Total debt	$	605

Note ~~12.~~10. Supplemental Cash Flow Information

Supplemental information relating to ~~the~~our accompanying condensed ~~combined~~consolidated statements of cash flows is ~~presented in the following table:~~as follows:



	Nine Months Ended
	September 30,				Three Months Ended
					March 31,
(In millions)	2018		2017		2023		2022
Cash paid for or (received from):
Cash paid for (received from):
Interest expense	$	4	$	—	$	9	$	6
Interest and dividend income		(1)		(1)
Interest income						(3)		—
Income tax payments, net of refunds						—		—

~~We acquired $1 million and less than $1 million~~

Note 11. Comprehensive Income (Loss)

Comprehensive income (loss) consists of property and equipment through capital leases and other noncash financing transactions in the nine months ended September 30, 2018 and 2017, respectively, which have been excluded from the condensed combined statements of cash flows as non-cash investing and financing activities.

~~On August 16, 2018, we incurred long-term debt consisting of the Term Loan Facility~~net income (loss) and the ~~2026 Notes in favor of SVM.~~unrealized gains (losses) on our derivative instrument. We ~~did not receive any cash proceeds as a result of these transactions, and they are not reflected~~disclose comprehensive income (loss) in the accompanying condensed ~~combined statements of cash flows.~~

~~Note 13. Cash and Marketable Securities~~

Cash, money market funds and certificates of deposits with maturities of three months or less when purchased are included in Cash and cash equivalents in the accompanying condensed combined statements of financial position. As of September 30, 2018 and December 31, 2017, marketable securities primarily consisted of treasury bills with maturities of less than one year and are classified as available-for-sale securities. Long-term marketable securities at December 31, 2017 consisted primarily of common equity securities allocated to us from ServiceMaster’s deferred compensation plan, which were not transferred to us as part of the Spin-off.

Realized gains and losses of less than $1 million related to the fair value remeasurement of the common equity securities were recognized in Interest and net investment income in the accompanying condensed combinedconsolidated statements of operations and comprehensive income ~~for each~~and condensed consolidated statements of changes in equity.

A summary of the ~~three and nine months ended September 30, 2018 and 2017. Unrealized gains and losses~~changes in AOCI is as follows:



Balance at beginning of period	$	8
Other comprehensive loss before reclassifications:
Pre-tax amount		(2)
Impact of income taxes		—
After-tax amount		(1)
Amounts reclassified from AOCI⁽¹⁾		(1)
Total other comprehensive loss		(2)
Balance at end of period	$	6

___________________________________

(1)Amounts are net of income taxes. See the table below on ~~marketable securities~~reclassifications out of ~~less than $1 million were recognized~~AOCI for additional information.

A summary of reclassifications out of AOCI is as follows:



	Three Months Ended
	March 31,
(In millions)	2023		2022
Gain (loss) on interest rate swap contract⁽¹⁾	$	1	$	(3)
Impact of income taxes⁽²⁾		—		1
Total reclassifications during the period	$	1	$	(2)

___________________________________

(1)Included in interest expense in the accompanying condensed ~~combined~~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 12. Derivative Financial Instruments

We currently use a derivative financial instrument to manage risks associated with changes in interest 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.

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 ~~of September 30, 2018 and December 31, 2017.~~

~~We periodically review our debt securities~~either an asset or liability at fair value, with changes in fair value recorded in AOCI. Cash flows related to ~~determine whether there has been an other than temporary decline in value. There were no impairment charges due to declines in~~ the ~~value of these investments for the three and nine months ended September 30, 2018 and 2017.~~

~~The table below summarizes proceeds from sale of securities, maturities of available-for-sale securities and gross realized (gains) losses:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
(In millions)

2018

2017

2018

2017
Proceeds from sale of securities

$
16

$
11

$
17

$
12
Maturities of available-for-sale securities

6

15

15

30
Gross realized (gains) losses

—

—

—

—

~~Note 14. Comprehensive Income~~

~~Comprehensive income, which primarily includes net income and unrealized gains on marketable securities, is disclosed~~interest rate swap contract are classified as operating activities in the accompanying condensed ~~combined~~ consolidated statements of ~~operations~~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 11 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and ~~comprehensive income. Amounts included in other comprehensive income including unrealized gains on marketable securities, as well as reclassifications~~for the amounts reclassified out of AOCI ~~upon~~and into earnings during the ~~adoption of ASU 2016-01, were less than $1~~periods presented. As the underlying forecasted transactions occur during the next 12 months, we estimate the unrealized hedging gain in AOCI expected to be recognized in earnings is $4 million, net of ~~taxes, for each~~tax, as of March 31, 2023. The amounts ultimately reclassified into earnings during the ~~three~~next 12 months will be determined based on the actual interest rates in effect at the time the positions are settled, and ~~nine months ended September 30, 2018 and 2017.~~as a result, they could differ materially from our estimate noted above.

1813

Note ~~15.~~13. Fair Value Measurements

We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that ~~the business~~ ~~categorizes~~ ~~using~~we categorize into a three-level hierarchy, from highest to lowest level of observable inputs, as follows: ~~(1)~~ unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1")~~, (2)~~; 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 ~~(3)~~ 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 of~~values due to the ~~short maturity~~short-term maturities of these financial instruments. ~~The period-end~~As of March 31, 2023 and December 31, 2022, the carrying amounts of short- and long-term marketable securities also approximate fair value and primarily consists of available-for-sale debt securities. Unrealized gains and losses are reported net of tax as a component of AOCI in the accompanying condensed combined statements of financial position. Any unrealized losses where the decline in value is other than temporary are reported in Interest and net investment income in the accompanying condensed combined statements of operations and comprehensive income. There were no other than temporary declines in value for the periods ended September 30, 2018 and 2017. The carrying amount ofour total debt ~~was $987~~were $605 million and $9$609 million, respectively, and the estimated fair ~~value was $1,017~~values were $602 million and $9$613 million, ~~as of September 30, 2018 and December 31, 2017,~~ respectively. The fair value of ~~Frontdoor’s~~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 ~~September 30, 2018 and December 31, 2017.~~the respective period end dates.

~~The~~ ~~carrying amount and estimated~~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 these 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 ~~instruments that~~assets and liabilities during the three months ended March 31, 2023. Transfers between hierarchy levels, if any, are ~~recorded~~recognized at the end of the reporting period. There were no transfers between hierarchy levels during the three months ended March 31, 2023.

Our interest rate swap contract is currently our only financial instrument remeasured at fair value on a recurring ~~basis for~~basis. A summary of the ~~periods presented~~carrying value and fair value of this financial instrument are as follows:

Estimated Fair Value Measurements
(In millions)

Statement of Financial
Position Location

Carrying
Value

Quoted
Prices
In Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
As of September 30, 2018:

Financial Assets:

Investments in marketable securities

Marketable securities

9

9

—

—
Total financial assets

$
9

$
9

$
—

$
—
As of December 31, 2017:

Financial Assets:

Deferred compensation trust assets

Long-term marketable securities

$
1

$
1

$
—

$
—
Investments in marketable securities

Marketable securities and
Long-term marketable securities

26

25

1

—
Total financial assets

$
27

$
26

$
1

$
—



			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 March 31, 2023:
Prepaid expenses and other current assets	$	5	$	—	$	5	$	—
Other assets		2		—		2		—
Total assets	$	7	$	—	$	7	$	—

As of December 31, 2022:
Prepaid expenses and other current assets	$	6	$	—	$	6	$	—
Other assets		4		—		4		—
Total assets	$	10	$	—	$	10	$	—

Note 14. 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 March 31, 2023, we have purchased a total of 4,478,194 outstanding shares at an aggregate cost of $162 million under this program, which is included in treasury stock on the accompanying condensed consolidated statements of financial position, and wehad $238 million remaining available for future repurchases under the program.

A summary of repurchases of outstanding shares is as follows:



	Three Months Ended
	March 31,
(In millions, except per share data)	2023		2022
Number of shares purchased		—		1.1
Average price paid per share⁽¹⁾	$	—	$	36.95
Cost of shares purchased	$	—	$	40

________________________________

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

Note ~~16. Pro Forma~~15. 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.

AtA summary of the ~~date~~calculations of ~~distribution, we had 84,515,619 common shares outstanding. The calculation of both~~our basic and diluted earnings per share is as follows:



	Three Months Ended
	March 31,
(In millions, except per share data)	2023		2022
Net Income	$	22	$	2
Weighted-average common shares outstanding:		81.5		82.3
Effect of dilutive securities:
RSUs⁽¹⁾		0.4		0.3
Stock options⁽²⁾		—		—
Weighted-average common shares outstanding - assuming dilution:		81.9		82.6
Basic earnings per share	$	0.27	$	0.02
Diluted earnings per share	$	0.27	$	0.02

___________________________________

(1)RSUs of 510,116 shares and 429,064 shares for the three ~~and nine~~ months ended ~~September 2018~~March 31, 2023 and ~~2017 utilizes~~2022, respectively, were not included in the common shares at the date of distribution as the basis for the calculation of weighted-average common shares outstanding for periods prior to the Spin-off, because at that time we did not operate as a separate, stand-alone entity, and no equity-based awards were outstanding prior to the date of distribution.

~~Basic and~~ diluted earnings per share ~~are calculated as follows:~~calculation because their effect would have been anti-dilutive.

(2)Stock options to purchase 1,114,819 shares and 1,200,018 shares for the three months ended March 31, 2023 and 2022, respectively, and performance options to purchase 258,596 shares for the three months ended March 31, 2023 were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

Three Months Ended

Nine Months Ended

September 30,

September 30,
(In millions, except per share data)

2018

2017

2018

2017
Net income

$
49

$
53

$
108

$
116
Weighted-average common shares outstanding - basic and diluted

84.5

84.5

84.5

84.5
Pro forma earnings per share - basic

$
0.58

$
0.63

$
1.28

$
1.37
Pro forma earnings per share - diluted

$
0.58

$
0.63

$
1.28

$
1.37

~~Note 17. Subsequent Events~~

~~Cash Settlement with ServiceMaster~~

In connection with the Spin-off and effective as of October 1, 2018, the inter-company balance due to ServiceMaster of $144 million recorded in Due to Parent on the accompanying condensed combined statements of financial position was settled in cash with ServiceMaster. Additionally, in connection with the Spin-off and effective as of October 1, 2018, ServiceMaster contributed $81 million of cash to us. The effect of these transactions reduced the $314 million of Cash and cash equivalents and Marketable securities as of September 30, 2018 to $251 million of Cash and cash equivalents and Marketable securities as of October 1, 2018.

~~Interest Rate Swap~~

On October 24, 2018, we entered into an interest rate swap agreement effective October 31, 2018 that expires on August 16, 2025. The notional amount of the agreement was $350 million. Under the terms of the agreement, we will pay a fixed rate of interest of 3.0865% on the $350 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of zero percent) on the notional amount.

2015

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This ~~report~~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, ~~including, in particular, projected~~regarding business strategies, market potential, future financial performance and ~~any statements about our plans, strategies and prospects. Forward-looking statements can be identified by the use of forward-looking terms such as~~other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” ~~“should,”~~ “would,~~” “could,” “expect,” “anticipate,” “estimate,” “intend,~~” “aim,” ~~or other comparable terms. These~~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 ~~known~~risks, uncertainties and ~~unknown risks and uncertainties, many of which may be beyond our control. Such risks and uncertainties include, but are not limited to:~~

~~weakening general economic conditions, especially as they may affect home sales, unemployment and consumer confidence or spending levels;~~

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

~~our ability to successfully implement our business strategies;~~

~~compliance with, or violation of, laws and regulations, including consumer protection laws;~~

~~it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and acceleration of, such indebtedness;~~

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

~~our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with third-party contractors and vendors;~~

~~adverse weather conditions;~~

~~adverse credit and financial markets impeding access and leading to increased financing costs;~~

~~increases in minimum wage levels;~~

~~changes in the sourceand intensity of competition in our segment;~~

~~our third-party contractors and vendors taking actions that harm our business;~~

~~changes in our services or products;~~

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

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

~~laws and governmental regulations increasing our legal and regulatory expenses;~~

~~increases in interest rates increasing the cost of servicing our substantial indebtedness to be incurred;~~

~~increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to us, our debt securities to be issued or our credit facilities to be incurred;~~

~~restrictions contained in our debt agreements;~~

~~the effects of our substantial indebtedness and the limitations contained in the agreements governing such indebtedness; and~~

other factors ~~described in this information statement and from time to time in documents that we file with the SEC.~~

~~We caution you~~ that ~~forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our~~could cause actual results ~~of operations, financial condition and liquidity, and the development of the market segments in which we operate, may~~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 ~~or suggested~~this report are qualified by ~~the~~these cautionary statements. These forward-looking statements ~~contained~~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 ~~this news release.~~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, ~~as well as~~including the ~~disclosure contained under the heading~~risk factors discussed in Part I, Item 1A. “Risk Factors” in our ~~Registration Statement. Except as required by law, we do not undertake any obligation~~2022 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 ~~update or revise these~~differ materially from those anticipated in our forward-looking statements ~~to reflect new information or events or circumstances that occur after~~include the ~~date~~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 2022 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, the persistence of the COVID-19 pandemic and instability in the banking system as a result of 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;

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

our ability to ~~reflect~~ successfully implement our business strategies;

the ~~occurrence~~ability of ~~unanticipated events~~our marketing efforts to be successful or ~~otherwise.~~cost-effective;

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

our dependence on our first-year real estate and 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;

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

a 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 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 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.~~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 inon our website to be part of this Quarterly Report on Form 10-Q.

2117

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 ~~combined~~consolidated financial statements and related notes included in Part 1,I, Item 1 of this Quarterly Report on Form 10-Q, the audited ~~historical condensed combined~~consolidated financial statements and ~~the~~related notes thereto included in our ~~Registration Statement~~2022 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our ~~Registration Statement. References~~2022 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this ~~Quarterly Report on~~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 2022 Form ~~10-Q to “Frontdoor,” “we,” “our,” or “us” refer to frontdoor, inc. and all of its operations combined for purposes of its financial statements.~~10-K.

~~Business~~ Overview

~~We are~~Frontdoor is the ~~largest~~leading provider of home service plans in the United States, as measured by revenue, and ~~operate~~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 ~~plans cover~~plan customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of ~~up to 21 household~~more than 20 home systems and appliances, including electrical, plumbing, ~~central~~ HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/~~cooktops. We serve customers across all 50 states~~cooktops, as well as optional coverages for electronics, pools, spas and ~~the District~~pumps. Our operations also include on-demand home services and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, help home service professionals more quickly and accurately diagnose breakdowns and complete repairs. As of ~~Columbia.~~ March 31, 2023, we had 2.1 million active home service plans, which were offered nationally.

For the ~~year~~three months ended ~~December~~March 31, ~~2017,~~2023, we generated revenue, net income and Adjusted EBITDA of $367 million, $22 million and $54 million, respectively. For the three months ended March 31, 2022, we generated revenue, net income and Adjusted EBITDA of $351 million, $2 million and $25 million, respectively. For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations for the three months ended March 31, 2023 and 2022—Adjusted EBITDA.”

For the three months ended March 31, 2023, our total operating revenue included 6676 percent of revenue derived from existing customer renewals, while 22nine percent and 12 percent were derived from new ~~unit~~home service plan sales made in conjunction with existing home ~~resale~~real estate transactions and direct-to-consumer sales, ~~respectively.~~

~~The Spin-off~~

On July 26, 2017, ServiceMaster announced the Spin-off. The condensed combined financial statements included in Part 1, Item of this report represent, on a historical cost basis, the combined assets, liabilities,respectively, and three percent was derived from other revenue and expenses related to the Separated Business. Frontdoor was formed as a wholly-owned subsidiary of ServiceMaster on January 2, 2018 for purposes of holding the Separated Business in connection with the Spin-off. During 2018, ServiceMaster contributed the Separated Business to Frontdoor. On October 1, 2018, we settled the net parent investment and the Spin-off was completed by a pro rata distribution to ServiceMaster’s stockholders of approximately 80.2% of our common stock. Each holder of ServiceMaster common stock received one share of our common stock for every two shares of ServiceMaster common stock held at the close of business on September 14, 2018, the record date of the distribution. ServiceMaster structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. As a result of the Spin-off, Frontdoor is now an independent public company trading on NASDAQ under the symbol “FTDR.”

Our financial statements include nonrecurring costs incurred to evaluate, plan and execute the Spin-off. These costs are primarily related to third-party consulting and other incremental costs directly associated with the Spin-off process. Our results forchannels. For the three months ended ~~September 30, 2018~~March 31, 2022, our total operating revenue included 70 percent of revenue derived from existing customer renewals, while 13 percent and ~~2017 include Spin-off charges~~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.

Key Factors and Trends Affecting Our Results of ~~$8 million~~Operations

Macroeconomic Conditions

Current macroeconomic conditions, including inflation, global supply chain challenges, the persistence of the COVID-19 pandemic and $6 million, respectively. Our results for the nine months ended September 30, 2018 and 2017 include Spin-off charges of $23 million and $6 million, respectively. We expect to incur aggregate charges related to the Spin-off of approximately $25 million in 2018. In addition, incremental capital expenditures required to effect the Spin-off in 2018 will range from $15 million to $20 millioninstability in the ~~aggregate, principally reflecting costs to replicate information technology systems historically shared with ServiceMaster.~~

The Spin-off is expected to result in increased operating costs, which could be material to our results of operations. These increased costs are primarily associated with corporate functions such as finance, legal, information technology and human resources. We are currently evaluating the optimal structure of corporate functions to support the strategic objectives of our business as an independent public entity subsequent to the Spin-off and estimate these increased operating costs (“dis-synergies”) will be approximately $4 million in 2018. Dis-synergies for the three and nine months ended September 30, 2018 were $2 million and $3 million, respectively. For full year 2019, we currently project dis-synergies of approximately $7 million.

Our financial position, results of operations and cash flows may not be indicative of our condition had we been a separate stand-alone entity during the periods presented, nor are the results stated herein necessarily indicative of our financial position, results of operations and cash flows had we operated as a separate, independent company during the periods presented. The condensed combined financial statements included in Part 1, Item 1 of this report do not reflect any changes that may occur in our financing and operationsbanking system as a result of several recent regional bank failures, 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 ~~Spin-off.~~United States as a whole, we believe our nationwide presence limits the impact on us of unfavorable economic conditions in any particular region of the United States.

2218

~~The condensed combined~~During the first quarter of 2023, our financial ~~statements included in Part 1, Item 1 of this report include all revenues, costs, assets~~condition and ~~liabilities directly attributable to us. The condensed combined statements~~results of operations continued to be adversely impacted by the following:

The challenging home seller’s market, driven, in part, by extremely low home inventory levels and ~~comprehensive~~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, and labor availability challenges. We continue to take actions to mitigate these impacts, including increasing the share of parts and equipment our contractors source through us at lower costs, increasing the percent of service requests completed by lower-cost preferred contractors and accelerating contractor recruitment efforts.

Industry-wide parts and equipment availability is on track to return to pre-pandemic levels; however, inflation levels remain high.

Seasonality

Our business is subject to seasonal fluctuations, which drive variations in our revenue, net income ~~include allocations~~and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of ~~certain~~HVAC work orders in the summer months. In 2022, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately two percent, 47 percent, 39 percent and 12 percent of our net income, and approximately 12 percent, 36 percent, 37 percent and 15 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 HVAC systems, resulting in higher costs ~~from ServiceMaster incurred on~~and lower profitability, while mild temperatures in the winter or summer months can lead to lower home systems claim frequency, resulting in lower costs and higher profitability. For example, favorable weather trends in the first quarter of 2023 as compared to the first quarter of 2022 favorably impacted contract claims costs.

While weather variations as described above may affect our ~~behalf. Such corporate-level costs are being allocated to us using methods based on proportionate formulas~~business, major weather events and other similar Acts of God, or natural disasters such as revenue, headcount, and others. Such corporate costs include costs pertaining to: accounting and finance, legal, human resources, information technology, insurance, marketing, tax services, procurement servicestyphoons, hurricanes, 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 ~~consider~~compete in the ~~expense allocation methodology~~U.S. home service plan category and ~~results~~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 ~~be reasonable for all periods presented. However, these allocations may not be indicative~~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 ~~actual level of expense~~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 ~~we would have incurred if we had operated as a separate stand-alone, publicly traded company during the periods presented nor are these costs necessarily indicative of costs we may incur~~will expand our service offering in the ~~future.~~broader home services industry. We have also used acquisitions to enhance our technological capabilities and geographic presence. For example, in 2019, we acquired Streem to enable home service professionals to more efficiently interact with customers and complete repairs, and, in 2020, we acquired a business to expand on-demand home services via its intellectual capital and know-how, technology platform capabilities and geographic presence.

~~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 Registration Statement. There have been no material changes to our critical accounting policies for the three and nine months ended September 30, 2018.

Non-GAAP Financial Measures

To supplement our ~~condensed combined~~ results presented in accordance with U.S. GAAP, we have disclosed non-GAAP financial measures ~~of operating results~~ that exclude or adjust certain items. We present within this ~~Quarterly Report on Form 10-Q~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial ~~measure~~measures of Adjusted ~~EBITDA.~~EBITDA and Free Cash Flow. See ~~“Results~~“—Results of Operations — for the Three Months Ended March 31, 2023 and 2022—Adjusted EBITDA” for ~~the calculations.~~a reconciliation of net income to Adjusted EBITDA and “—Liquidity and Capital Resources—Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow. Management ~~believes this~~uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period. We believe these non-GAAP financial ~~measure provides~~measures provide investors, analysts and other interested parties useful information ~~for its and investors’ evaluation of~~to evaluate our business performance ~~and are~~as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful ~~for period-over-period comparisons of the performance~~as a supplemental measure of our ~~business.~~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 ~~this~~these non-GAAP financial ~~measure is~~measures are useful in evaluating our business, ~~this information~~they should be considered as supplemental in nature and isare 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, ~~this~~these non-GAAP financial ~~measure~~measures may not be the same as similarly entitled measures reported by other ~~companies.~~companies, limiting their usefulness as comparative measures.

~~U.S. Federal Income Tax Reform~~Key Business Metrics

On December 22, 2017, U.S. Tax Reform was signed into law. This legislation includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35 percent to 21 percent, which has reduced our effective tax rate and cash tax payments, beginning in 2018. The rate reduction took effect on January 1, 2018; however, U.S Tax Reform was signed in 2017 and had an immediate one-time effect of an income tax benefit of $20 million for the year ended December 31, 2017. See Note 5 to the audited combined financial statements in our Registration Statement for more details.

~~Some~~ of the provisions of U.S Tax Reform have the potential to affect us adversely, including but not limited to an expansion to the limitation on the deductibility of certain employee compensation. We do not expect the provisions set forth by U.S. Tax Reform to have a significant adverse impact on our effective tax rate. This description of the potential impact of U.S. Tax Reform is not comprehensive and represents our current views on such impacts; as a result, these views are subject to change as additional guidance becomes available and further analysis is completed.

~~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 ~~businesses.~~business. These metrics include:

~~revenue,~~

~~operating expenses,~~

~~net income,~~

~~earnings per share,~~

~~Adjusted EBITDA,~~

~~customer retention rate, and~~

~~growth in number of home service plans.~~

~~To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that management believes are not indicative of the~~ revenue,

operating expenses,

net income,

earnings ~~capabilities of our businesses. We also focus on measures designed to monitor cash flow, including~~ per share,

Adjusted EBITDA,

Adjusted EBITDA margin,

net cash provided from operating activities,

Free Cash Flow,

growth in number of home service plans, and ~~free cash flow.~~

customer retention rate.

Revenue.The majority of our revenue is generated from annual home service plan contracts 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 ~~unit~~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: ~~wages~~salaries and ~~salaries,~~wages, employee benefits and ~~health care;~~healthcare; contractor costs; parts, appliances and home systems ~~appliances and repair~~ 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 ~~U.S. GAAP~~ 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, 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 ~~RSUs~~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 restricted stock awards (“RSAs”) are reflected in diluted ~~net income~~earnings per share by applying the treasury stock method.

Adjusted ~~EBITDA.~~EBITDA and Adjusted EBITDA margin. We evaluate our operating and financial performance ~~and allocate resources~~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; ~~interest expense; interest income from affiliate; depreciation and amortization expense;~~ non-cash stock-based compensation expense; ~~restructuring charges; Spin-off charges; affiliate royalty~~interest expense; ~~(gain)~~ loss on ~~insured home service plan claims;~~extinguishment of debt; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA isand Adjusted EBITDA margin are useful for investors, analysts and other interested parties as ~~it facilitates~~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 ~~Spin-off charges, arrangements with affiliates~~ and equity-based, long-term incentive plans.

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

~~Seasonality~~

~~Our business is subject to seasonal fluctuations, which drives variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher~~ The number of central HVAC orders in the summer months. In 2017, approximately 20 percent, 28 percent, 30 percent and 22 percent of our revenue, approximately 9 percent, 30 percent, 33 percent and 28 percent of our net income, and approximately 12 percent, 32 percent, 37 percent and 19 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

~~Effect of Weather Conditions~~

The demand for our services, and our results of operations, are affected by weather conditions. Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability. For example, in the second and third quarters of 2018, we experienced an increase in contract claims cost driven by a higher number of central HVAC work orders driven by higher summer temperatures as compared to historical averages. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency.

While weather variations as described above may affect our business, major weather events and other Acts of God, such as hurricanes and tornadoes, typically do not increase our obligations to provide service. As a rule, reparations associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to home service plans ~~that we offer,~~is representative of our recurring home service plan customer base and ~~such insurance coverage~~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 ~~fact reduces~~ our ~~obligations~~2022 Form 10-K. There have been no material changes to ~~provide service to systems and appliances damaged by insured, catastrophic events.~~our critical accounting policies for the three months ended March 31, 2023.

2421

Results of Operations



																	% of Revenue
	Three Months Ended				Increase						Three Months Ended				Increase		Three Months Ended
	September 30,				(Decrease)		% of Revenue				March 31,				(Decrease)		March 31,
(In millions)	2018		2017		2018 vs. 2017		2018		2017		2023		2022		%		2023		2022
Revenue	$	377	$	346	9	%	100	%	100	%	$	367	$	351	4	%	100	%	100	%
Cost of services rendered		202		168	20		53		48			197		207	(5)		54		59
Gross profit		176		179	(2)		47		52
Gross Profit												170		144	18		46		41
Selling and administrative expenses		90		82	9		24		24			125		125	(1)		34		36
Depreciation expense		3		2	*		1		1
Amortization expense		2		2	*		1		1
Depreciation and amortization expense												9		8	10		2		2
Restructuring charges		—		4	*		—		1			1		—	*		—		—
Spin-off charges		8		6	*		2		2
Affiliate royalty expense		1		1	*		—		—
Interest expense		7		—	*		2		—			10		7	42		3		2
Interest income from affiliate		—		(1)	*		—		—
Interest and net investment income		—		(1)	*		—		—			(3)		—	*		(1)		—
Income before Income Taxes		65		83	(21)		17		24			29		3	*		8		1
Provision for income taxes		16		29	(46)		4		8			7		2	*		2		—
Net Income	$	49	$	53	(7)	%	13	%	15	%	$	22	$	2	*	%	6	%	—	%

_______________________________

* not meaningful

Nine Months Ended

Increase

September 30,

(Decrease)

% of Revenue
(In millions)

2018

2017

2018 vs. 2017

2018

2017
Revenue

$
979

$
899

9
%

100
%

100
%
Cost of services rendered

532

453

17

54

50

Gross profit

448

447

—

46

50

Selling and administrative expenses

259

241

7

26

27

Depreciation expense

8

7

*

1

1

Amortization expense

6

6

*

1

1

Restructuring charges

3

6

*

—

1

Spin-off charges

23

6

*

2

1

Affiliate royalty expense

1

1

*

—

—

Interest expense

7

1

*

1

—

Interest income from affiliate

(2)

(2)

*

—

—

Interest and net investment income

(1)

(1)

*

—

—

Income before Income Taxes

143

183

(22)

15

20

Provision for income taxes

36

67

(47)

4

7

Net Income

$
108

$
116

(7)
%

11
%

13
%

Revenue

* not meaningful

~~Revenue~~

We reported revenue of ~~$377~~$367 million and ~~$346~~$351 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively, and $979 million and $899 million for the nine months ended September 30, 2018 and 2017,~~2022, respectively. ~~Revenue~~The following table provides a summary of our revenue by major customer acquisition ~~channel is as follows:~~channel:



	Three Months Ended								Three Months Ended
	September 30,								March 31,				Increase (Decrease)
(In millions)	2018		2017		Increase (Decrease)				2023		2022		$		%
Renewals	$	251	$	228	$	23	10	%	$	278	$	247	$	32	13	%
Real estate(1)		78		74		4	6			33		45		(13)	(28)
Direct-to-consumer(1)		47		43		4	10			44		46		(2)	(5)
Other		1		1		—	*			11		13		(1)	(11)
Total revenue	$	377	$	346	$	31	9	%
Total									$	367	$	351	$	15	4	%

________________________________

* not meaningful

~~(1)~~

~~First year revenue only.~~

(1)First-year revenue only.

Revenue increased 9four percent for the three months ended ~~September 30, 2018~~March 31, 2023 compared to ~~2017,~~the three months ended March 31, 2022. The increase in renewal revenue primarily reflects improved price 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 decrease in direct-to-consumer revenue primarily reflects a decline in the number of first-year direct-to-consumer home service plans which we believe resulted from the impact of inflation on consumer sentiment, higher-priced home service plan offerings and a changing competitive landscape, offset, in part, by improved price realization. The decrease in other revenue was primarily driven by ~~higher renewal revenue due to overall growth in~~lower Streem revenue.

The following table provides a summary of the number of home service plans, ~~as well as improved price realization. The increase in real estate revenue reflects a mix shift to higher priced home service plan offerings and~~ growth ~~in new sales. The increase in direct-to-consumer revenue reflects growth in new sales resulting from increased investments in marketing.~~

Nine Months Ended

September 30,

(In millions)

2018

2017

Increase (Decrease)
Renewals

$
648

$
590

$
59

10
%
Real estate(1)

205

194

11

6

Direct-to-consumer(1)

122

112

9

8

Other

4

3

1

*

Total revenue

$
979

$
899

$
80

9
%

* not meaningful

~~(1)~~

~~First year revenue only.~~

Revenue increased 9 percent for the nine months ended September 30, 2018 compared to 2017, primarily driven by higher renewal revenue due to overall growth in the number of home service plans as well as improved price realization. The increase in real estate revenue reflects a mix shift to higher priced home service plan offerings and growth in new sales. The increase in direct-to-consumer revenue reflects growth in new sales resulting from increased investments in marketing.

~~Growth~~ in number of home service plans and customer retention ~~rate are presented below.~~rate:



	As of
	March 31,
(In millions)	2023		2022
Number of home service plans	2.09		2.19
Reduction in number of home service plans	(4)	%	(3)	%
Customer retention rate	75.9	%	74.1	%

As of

September 30,

2018

2017(1)
Growth in Number of Home Service Plans

7
%

10
%
Customer Retention Rate

76
%

75
%

~~(1)~~

~~As of September 30, 2017, excluding the impact of customers acquired through acquisitions, the growth in number of home service plans was 6 percent and the customer retention rate was 76 percent.~~

The reduction in the number of home service plans as of March 31, 2023 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 number of direct-to-consumer home service plans, which we believe resulted from the impact of inflation on consumer sentiment, higher-priced home service plan offerings and a changing competitive landscape.

Cost of Services Rendered

We reported ~~costs~~cost of services rendered of ~~$202~~$197 million and ~~$168~~$207 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively,~~2022, respectively. The following table provides a summary of the changes in cost of services rendered:



(In millions)
Three Months Ended March 31, 2022	$	207
Impact of change in revenue		(7)
Contract claims costs		(4)
Three Months Ended March 31, 2023	$	197

The impact of change in revenue is driven by the reduction in number of home service plans. The decrease in contract claims costs reflects a $6 million favorable adjustment related to the development of prior period claims, compared to a $9 million unfavorable adjustment in the first quarter of 2022. Additionally, first-quarter 2023 contract claims costs reflects a favorable weather impact of $6 million, offset, in part, by inflationary cost pressures, including higher contractor-related expenses and ~~$532 million~~parts and ~~$453~~equipment costs.

Selling and Administrative Expenses

We reported selling and administrative expenses of $125 million for each of the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively.~~ 2022. The following tables provide a summary of the components of selling and administrative expenses:



	Three Months Ended
	March 31,
(In millions)	2023		2022
Sales and marketing costs	$	59	$	56
Customer service costs		26		28
General and administrative costs		40		41
Total	$	125	$	125

The following table provides a summary of the changes in ~~cost of services rendered:~~selling and administrative expenses:



~~(In millions)~~
~~Three Months Ended September 30, 2017~~	$	~~168~~
~~Impact of change in revenue~~		12
~~Contract claims~~		21
~~Other~~		1
~~Three Months Ended September 30, 2018~~	$	~~202~~



(In millions)
Three Months Ended March 31, 2022	$	125
Sales and marketing costs		3
Customer service costs		(2)
Stock-based compensation expense		(1)
Three Months Ended March 31, 2023	$	125

~~The above increase~~Sales and marketing costs increased due to our continued investment in ~~contract claims costs includes an adjustment related~~marketing to ~~adverse development of contract claims costs originally estimated and recorded~~drive sales growth in the ~~first half of 2018 of $5 million and the fourth quarter of 2017 of $1 million, principally~~home service plan direct-to-consumer channel. Customer service costs decreased primarily due to lower labor costs driven by a higher mix of appliance replacements versus repairs. Accruals for home service plan claims are made based on our historical claims experience and actuarial projections. Our actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporates cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs and adjust the estimates when appropriate. Additionally, the impact of higher appliance replacements in the third quarter of 2018 increased claims costs by $3 million. The increase in contract claims costs in the third quarter of 2018 also includes an increase in the underlying costs of repairs totaling $7 million, particularly in the appliance, HVAC and plumbing trades, and a higherlower number of work orders, primarily driven by significantly warmer summer temperatures in 2018 as compared to historical averages, which increased claims costs by $5 million. Other includes an increase in bad debtservice requests.

Depreciation and Amortization Expense

Depreciation expense ~~of $1 million.~~



~~(In millions)~~
~~Nine Months Ended September 30, 2017~~	$	~~453~~
~~Impact of change in revenue~~		29
~~Contract claims~~		49
~~Other~~		2
~~Gain on insured home service plan claims~~		~~(2)~~
~~Nine Months Ended September 30, 2018~~	$	~~532~~

The above increase in contract claims costs includes an adjustment of $7 million related to the adverse development of contract claims costs originally estimated and recorded in the second half of 2017, principally driven by a higher mix of appliance replacements versus repairs. Additionally, the impact of higher appliance replacements in 2018 increased claims costs by $13 million. The increase in contract claims costs for the nine months ended September 30, 2018 also includes an increase in the underlying costs of repairs totaling $14 million~~, particularly in the appliance, HVAC and plumbing trades,~~ and a higher number of work orders, primarily driven by colder winter temperatures in the first quarter and significantly warmer summer temperatures in the second and third quarters of 2018 as compared to historical averages, which increased claims costs by $15 million. ~~Other includes an increase in bad debt expense of $2 million.~~

~~Selling and Administrative Expenses~~

~~We reported selling and administrative expenses of $90~~was $8 million and ~~$82~~$6 million for the three months ended ~~September 30, 2018~~ ~~and~~ ~~2017, respectively,~~March 31, 2023 and ~~$259 million and $241 million for the nine months ended September 30, 2018 and 2017,~~2022, respectively. For the three months ended September 30, 2018 and 2017, selling and administrative expenses were comprised of sales and marketing and customer service costs of $70 million and $66 million, respectively, and general and administrative expenses of $20 million and $16 million, respectively. For the nine months ended September 30, 2018 and 2017, selling and administrative expenses were comprised of sales and marketing and customer service costs of $203 million and $190 million, respectively, and general and administrative expenses of $56 million and $51 million, respectively. The following tables provide a summary of changes in selling and administrative expenses:



~~(In millions)~~
~~Three Months Ended September 30, 2017~~	$	82
~~Sales and marketing costs~~		2
~~Customer service costs~~		2
~~Spin-off dis-synergies~~		2
~~Other~~		2
~~Three Months Ended September 30, 2018~~	$	90

The above increase in sales and marketing costs was driven by targeted spending to drive sales growth. The above increase in customer service costs was primarily driven by incremental investments in customer care center costs to deliver an improved level of customer service. Incremental ongoing costs related to the Spin-off of $2 million were incurred, which primarily related to the separation of information technology systems historically shared with ServiceMaster. Other includes an increase in professional fees of $1 million and less than $1 million of individually insignificant items.



~~(In millions)~~
~~Nine Months Ended September 30, 2017~~	$	~~241~~
~~Sales and marketing costs~~		7
~~Customer service costs~~		6
~~Spin-off dis-synergies~~		3
~~Other~~		2
~~Nine Months Ended September 30, 2018~~	$	~~259~~

The above increase in sales and marketing costs was driven by targeted spending to drive sales growth. The above increase in customer service costs was primarily driven by incremental investments in customer care center costs to deliver an improved level of customer service. Incremental ongoing costs related to the Spin-off of $3 million were incurred, which primarily related to the separation of information technology systems historically shared with ServiceMaster. Other includes an increase in professional fees of $2 million.

~~Depreciation Expense~~

~~Depreciation~~Amortization expense was $3$1 million and $2 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively,~~2022, respectively. Depreciation expense increased primarily due to incremental capital expenditures. Amortization expense decreased due to certain intangible assets being fully amortized subsequent to March 31, 2022.

Restructuring Charges

We had restructuring charges of $1 million and $8less than $1 million during the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, these charges primarily include severance costs.

Interest Expense

Interest expense was $10 million and $7 million for the ~~nine months ended September 30, 2018 and 2017, respectively.~~

~~Amortization Expense~~

~~Amortization expense was $2 million for each of the~~ three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, and $6 million for each of the nine months ended September 30, 2018 and 2017.~~

~~Restructuring Charges~~

~~We incurred restructuring charges of less than $1 million and $4 million for the three months ended September 30, 2018 and 2017,~~2022, respectively, ~~and $3 million and $6 million for the nine months ended September 30, 2018 and 2017, respectively.~~

~~Spin-Off Charges~~

~~We incurred Spin-off charges of $8 million and $6 million for the~~ ~~three~~ ~~months ended September 30, 2018 and 2017, respectively, and $23 million and $6 million, for the nine months ended September 30, 2018 and 2017, respectively.~~

~~These charges include nonrecurring costs incurred to evaluate, plan and execute the Spin-off and are primarily related to third-party consulting and other incremental costs directly associated~~ with the ~~Spin-off process.~~increase driven by higher interest rates on our variable rate debt.

~~Affiliate Royalty Expense~~Interest and Net Investment Income

~~Affiliate royalty expense represents royalty expense with ServiceMaster for the use of their trade names. We incurred royalty expense of $1 million for each of the three~~Interest and nine months ended September 30, 2018 and 2017. The trademark license agreement with ServiceMaster has been terminated in connection with the Spin-off, and we will not incur these expenses in future periods.

~~Interest Expense~~

~~Interest expense~~net investment income was $7$3 million and less than $1 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017,~~2022, respectively, with the increase driven by higher interest rates on our cash and $7cash equivalent balances.

Provision for Income Taxes

The effective tax rate on our income was 25.2 percent and 51.1 percent for the three months ended March 31, 2023 and 2022, respectively. The decrease in our effective tax rate was primarily due to the impacts of share-based awards and state income taxes on limited pre-tax income in the prior year.

Net Income

Net income was $22 million and $1 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in interest expense for the current year was driven by our current year financing transactions. See Note 11 to the accompanying condensed combined financial statements included in Part 1, Item 1 of this report for more details.

~~Interest Income from Affiliate~~

~~Interest income from affiliate was~~ ~~less than $1 million and~~ $1$2 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively, and $2 million for each of~~2022, respectively. The increase was primarily driven by the nine months ended September 30, 2018 and 2017, and represents interest earned on interest-bearing related party notes receivable included within Net parent investment in the condensed combined statements of financial position included in Part 1, Item 1 of this report. These notes were settled concurrently with the consummation of the Spin-off.operating results discussed above.

~~Interest and Net Investment Income~~Adjusted EBITDA

~~Interest and net investment income~~Adjusted EBITDA was ~~less than $1 million and~~ ~~$1 million~~ for the three months ended September 30, 2018 and 2017, respectively, and $1 million for each of the nine months ended September 30, 2018 and 2017, and was composed of net investment gains and interest and dividend income realized on our investment portfolio.

~~Income before Income Taxes~~

~~Income before income taxes was $65~~$54 million and ~~$83~~$25 million for the three months ended ~~September 30, 2018~~March 31, 2023 and ~~2017, respectively, and $143 million and $183 million for the nine months ended September 30, 2018 and 2017,~~2022, respectively. The ~~change in income before income taxes primarily reflects~~following table provides a summary of the ~~net effect of year-over-year~~ changes in our Adjusted EBITDA:



(In millions)
Three Months Ended March 31, 2022	$	25
Impact of change in revenue		22
Contract claims costs		4
Sales and marketing costs		(3)
Customer service costs		2
Interest and net investment income		3
Three Months Ended March 31, 2023	$	54

The decrease in contract claims costs reflects a $6 million favorable adjustment related to the ~~following items:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
(In millions)

2018 vs. 2017

2018 vs. 2017
Adjusted EBITDA(1)

$
(10)

$
(18)
Spin-off charges(2)

(2)

(17)
Interest expense(3)

(7)

(7)
Other(4)

2

3
Decrease in income before income taxes

$
(17)

$
(39)

~~(1)~~

~~Represents the net change in Adjusted EBITDA as described below in "—Adjusted EBITDA."~~

~~(2)~~

~~Represents the net change in Spin-off charges, as described above in "—Spin-Off Charges."~~

~~(3)~~

~~Represents the net change in interest, as described above in "—Interest Expense."~~

~~(4)~~

~~Primarily represents the net change in depreciation, restructuring and non-cash stock-based compensation expense.~~

~~Provision for Income Taxes~~

~~On December 22, 2017, U.S. Tax Reform was signed into law. This legislation includes numerous changes in existing tax law, including~~development of prior period claims, compared to a ~~permanent reduction~~$9 million unfavorable adjustment in the ~~federal corporate income tax rate from 35 percent to 21 percent. The rate reduction took effect on January 1, 2018; however, U.S Tax Reform was signed in 2017 and had an immediate one-time effect~~first quarter of ~~an income tax benefit~~2022. Additionally, first-quarter 2023 contract claims costs reflects a favorable weather impact of ~~$20~~$6 million, ~~for the year ended December 31, 2017. See Note 5 to the condensed combined financial statements included in Part 1, Item 1 of this report for more details.~~

Some of the provisions of U.S. Tax Reform have the potential to affect us adversely, including but not limited to an expansion to the limitation on the deductibility of certain employee compensation. This description of the potential impacts of U.S. Tax Reform is not comprehensive and represents our current views on such impacts; as a result, these views are subject to change as additional guidance becomes available and further analysis is completed.

The effective tax rate on income was 24 percent and 36 percent for the three months ended September 30, 2018 and 2017, respectively, and 25 percent and 37 percent for the nine months ended September 30, 2018 and 2017, respectively. The effective tax rates on income for the three and nine months ended September 30, 2018 were reduced primarily by the reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent. The effective tax rates on income for the three and nine months ended September 30, 2017 were reduced primarily by excess tax benefits for share-based awards.

Our condensed combined financial statements included in Part 1, Item 1 of this report do not reflect any amounts due to ServiceMaster for income tax related matters as it is assumed that all such amounts due to ServiceMaster were settled at the end of each reporting period.

~~Net Income~~

Net income was $49 million and $53 million for the three months ended September 30, 2018 and 2017, respectively, and $108 million and $116 million for the nine months ended September 30, 2018 and 2017, respectively. The $4 million decrease for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily driven by the $17 million decrease described above in "—Income Before Income Taxes," offset, in part, by ~~a $13 million decrease~~inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

Sales and marketing costs increased due to our continued investment in marketing to drive sales growth in the ~~provision for income taxes as a result of~~home service plan direct-to-consumer channel. Customer service costs decreased primarily due to lower pre-tax income and U.S. Tax Reform. The $8 million decrease for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily driven by the $39 million decrease described above in "—Income Before Income Taxes," offset, in part, by a $31 million decrease in the provision for income taxes as a result of lower pre-tax income and U.S. Tax Reform.

~~Adjusted EBITDA~~

Adjusted EBITDA decreased 10 percent for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 and decreased 9 percent for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The following tables provide a summary of changes in our Adjusted EBITDA.



~~(In millions)~~
~~Three Months Ended September 30, 2017~~	$	96
~~Impact of change in revenue~~		19
~~Contract claims~~		~~(21)~~
~~Sales and marketing~~labor costs		~~(2)~~
~~Customer service costs~~		~~(2)~~
~~Spin-off dis-synergies~~		~~(2)~~
~~Other~~		~~(3)~~
~~Three Months Ended September 30, 2018~~	$	86

The above increase in contract claims costs includes an adjustment related to adverse development of contract claims costs originally estimated and recorded in the first half of 2018 of $5 million and the fourth quarter of 2017 of $1 million, principally driven by a ~~higher mix~~lower number of ~~appliance replacements versus repairs. Accruals for home~~ service plan claims are made based on our historical claims experience and actuarial projections. Our actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporates cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs and adjust the estimates when appropriate. Additionally, the impact of higher appliance replacements in the third quarter of 2018 increased claims costs by $3 million.requests. The increase in ~~contract claims costs in the third quarter of 2018 also includes an increase in the underlying costs of repairs totaling $7 million, particularly in the appliance, HVAC~~interest and plumbing trades, and a higher number of work orders, primarily driven by significantly warmer summer temperatures in 2018 as compared to historical averages, which increased claims costs by $5 million.

~~The above increase in sales and marketing costs~~net investment income was driven by targeted spending to drive sales growth. The above increase in customer service costs was primarily driven by incremental investment in customer care center costs to deliver an improved level of customer service. Incremental ongoing costs related to the Spin-off of $2 million were incurred, which primarily related to the separation of information technology systems historically shared with ServiceMaster. Other includes an increase in bad debt expense of $1 million, an increase in professional fees of $1 million,higher interest rates on our cash and ~~less than $1 million of individually insignificant items.~~cash equivalent balances.



~~(In millions)~~
~~Nine Months Ended September 30, 2017~~	$	~~209~~
~~Impact of change in revenue~~		51
~~Contract claims~~		~~(49)~~
~~Sales and marketing costs~~		~~(7)~~
~~Customer service costs~~		~~(6)~~
~~Spin-off dis-synergies~~		~~(3)~~
~~Other~~		~~(4)~~
~~Nine Months Ended September 30, 2018~~	$	~~191~~

3024

The above increase in contract claims costs includes an adjustment of $7 million related to the adverse development of contract claim costs originally estimated and recorded in the second half of 2017, principally driven by a higher mix of appliance replacements versus repairs. Additionally, the impact of higher appliance replacements in 2018 increased claims costs by $13 million. The increase in contract claims costs for the nine months ended September 30, 2018 also includes an increase in the underlying costs of repairs totaling $14 million, particularly in the appliance, HVAC and plumbing trades, and a higher number of work orders, primarily driven by colder winter temperatures in the first quarter and significantly warmer summer temperatures in the second and third quarters of 2018 as compared to historical averages, which increased claims costs by $15 million.

The above increase in sales and marketing costs was driven by targeted spending to drive sales growth. The above increase in customer service costs was primarily driven by incremental investment in customer care center costs to deliver an improved level of customer service. Incremental ongoing costs related to the Spin-off of $3 million were incurred, which primarily related to the separation of information technology systems historically shared with ServiceMaster. Other primarily includes an increase in bad debt expense of $2 million and an increase in professional fees of $2 million.

A reconciliation of Net Income to Adjusted EBITDA is ~~presented below.~~as follows:



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In millions)	2018		2017		2018		2017		2023		2022
Net Income	$	49	$	53	$	108	$	116	$	22	$	2
Depreciation and amortization expense		5		4		14		13		9		8
Restructuring charges(1)		—		4		3		6		1		—
Spin-off charges		8		6		23		6
Provision for income taxes		16		29		36		67		7		2
Non-cash stock-based compensation expense		1		—		3		3
Affiliate royalty expense		1		1		1		1
Non-cash stock-based compensation expense⁽²⁾										5		6
Interest expense		7		—		7		1		10		7
Interest income from affiliate		—		(1)		(2)		(2)
Gain on insured home service plan claims		(1)		(1)		(2)		(1)
Adjusted EBITDA	$	86	$	96	$	191	$	209	$	54	$	25

_________________________________

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

(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.

Liquidity and Capital Resources

Liquidity

A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. The Credit Agreement ~~as well as the Indenture, contain~~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 ~~September 30, 2018,~~March 31, 2023, we were in compliance with the covenants under the ~~agreements that were in effect~~Credit Agreement. Based on ~~such date. For more information regarding~~current conditions, we do not believe the ~~Term Loan Facility, the Revolving Credit Facility~~ongoing inflationary cost pressures, global supply chain challenges and the ~~2026 Notes, see Note 11 to the condensed combined financial statements included in Part 1, Item 1 of this report.~~

Historically, the primary source of liquidity for our business has been the cash flow provided by operations which was, prior to the Spin-off, transferred to ServiceMaster to support its overall cash management strategy. Prior to the Spin-off, transfers of cash to and from ServiceMaster have been reflected in Net Parent Investment in the historical combined statements of financial position and combined statements of cash flows. ServiceMaster's cash has not been assigned to us for anypersistence of the ~~periods presented in the condensed combined statement of financial position included in Part 1, Item 1 of this report because those cash balances are not directly attributable to us.~~

~~In connection with the Spin-off, our capital structure and sources of liquidity have changed significantly from our historical capital structure. We~~COVID-19 pandemic will ~~no longer participate in cash management with ServiceMaster, but rather our ability to fund our cash needs will depend on~~affect our ongoing ability to ~~generate and raise cash in the future. Although we believe that~~meet our future cash provided from operations, together with available capacity under our Revolving Credit Facility and our access to capital markets, will provide adequate resources to fund our operating and financing needs, our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) our credit rating, (ii) the liquidity of the overall capital markets and (iii) the current state of the economy. Moreover, to preserve the tax-free treatment of the Spin-off, we may not be able to engage in certain strategic or capital-raising transactions following the Spin-off, such as issuing equity securities beyond certain thresholds, which may limit our access to capital markets, ability to raise capital through equity issuances, and ability to make acquisitions using our equity as currency, potentially requiring us to issue more debt than would otherwise be optimal. There can be no assurances that we will continue to have access to capital markets on terms acceptable to us. See “— Risk Factors" included in Part II, Item 1A of this report for a further discussion.covenants.

Cash and short- and long-term marketable securities totaled $314 million and $309 million as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, there were no letters of credit outstanding and there was $250 million of available borrowing capacity under the Revolving Credit Facility.

In connection with the Spin-off and effective as of October 1, 2018, the inter-company balance due to ServiceMaster of $144 million recorded in Due to Parent in the condensed combined statements of financial position included in Part 1, Item 1 of this report was settled in cash with ServiceMaster. Additionally, in connection with the Spin-off and effective as of October 1, 2018, ServiceMaster contributed $81 million of cash to us. The effect of these transactions reduced the $314 million of Cash and cash equivalents totaled $337 million and ~~Marketable securities~~$292 million as of ~~September 30, 2018 to $251 million of Cash~~March 31, 2023 and December 31, 2022, respectively. Our cash and cash equivalents ~~and Marketable securities as of October 1, 2018.~~

~~Cash and short- and long-term marketable securities~~ include balances associated with regulatory requirements in our business. See “—Limitations on Distributions and Dividends by Subsidiaries.” ~~Our investment portfolio has been invested~~As of March 31, 2023 and December 31, 2022, the total net assets subject to these third-party restrictions were $150 million and $145 million, respectively. As of March 31, 2023, there was $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. The letters of credit are posted in ~~high-quality debt securities.~~ lieu of cash to satisfy regulatory requirements in certain states in which we operate. We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of March 31, 2023 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 will be effective in June 2023 for Term Loan B.

We closely monitor the performance of ~~these investments.~~our investment 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 have a diversified investment strategy for our cash investments, and look for opportunities to improve their performance, by diversifying these financial instruments among various counterparties, with priority given for the major financial institutions that serve as lenders under the Credit Agreement. Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although in substantially all of our accounts, our holdings exceed insured limits.

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.

~~Credit Facilities~~On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash provided from operating activities. As of March 31, 2023, we have purchased a total of 4,478,194 outstanding shares at an aggregate cost of $162 million under this program, which is included in treasury stock on the condensed consolidated statements of financial position, and ~~Senior Notes~~

~~On August 16, 2018,~~ we ~~entered into the Term Loan Facility and the Revolving Credit Facility and issued the 2026 Notes. Borrowings~~had $238 million remaining available for future repurchases under the ~~Term Loan Facility and~~program. Purchases under the ~~2026 Notes were incurred~~repurchase program may be made from time to time by the company in ~~favor of SVM as partial consideration for~~ the ~~transfer by SVM to Frontdoor of certain assets~~open market at prevailing market prices (including ~~the capital stock of one~~through a Rule 10b5-1 Plan), in privately negotiated transactions, or more subsidiaries) of SVM and its subsidiaries used in connection with the Separated Business. SVM subsequently exchanged the notes and term loans with a certain financial institution for certain outstanding indebtedness of SVM. We did not receivethrough any ~~cash proceeds as a result~~combination of these ~~transactions. See Note 11 to~~methods, through September 3, 2024. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the ~~condensed combined statement of financial position included in Part 1, Item 1 of this report for more information related to our indebtedness.~~

~~On October 24, 2018, we entered into an interest rate swap agreement effective October 31, 2018 that expires on August 16, 2025. The notional amount~~market price of the ~~agreement was $350 million. Under~~company’s stock, general market and economic conditions, the ~~terms~~company’s liquidity requirements, applicable legal requirements and other business considerations. The repurchase program does not obligate us to acquire any number of ~~the agreement, we will pay a fixed rate of interest of 3.0865% on the $350 million notional amount,~~shares in any specific period or at all and ~~we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of zero percent) on the notional amount.~~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. ~~As of September 30, 2018 and December 31, 2017, the total net assets subject to these third-party restrictions was $171 million and $169 million, respectively.~~ We expect that such limitations will be in effect for the foreseeable future. In connection with the Spin-off, increases in minimum capital and net worth requirements in certain jurisdictions will increase our total net assets subject to these third-party restrictions to approximately $198 million. 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 ~~combined~~consolidated statements of cash flows included in Part 1,I, Item 1 of this ~~report,~~Quarterly Report on Form 10-Q are summarized in the following ~~table.~~table:



	Nine Months Ended				Three Months Ended
	September 30,				March 31,
(In millions)	2018		2017		2023		2022
Net cash provided from (used for):
Operating activities	$	126	$	136	$	60	$	47
Investing activities		(4)		5		(8)		(8)
Financing activities		(98)		(53)		(7)		(47)
Cash increase during the period	$	23	$	88
Cash increase (decrease) during the period					$	45	$	(8)

Operating Activities

Net cash provided from operating activities ~~decreased by $10~~was $60 million ~~to $126~~and $47 million for the ~~nine~~three months ended ~~September 30, 2018 compared to $136 million for the nine months ended September 30, 2017.~~March 31, 2023 and 2022, respectively.

Net cash provided from operating activities ~~during~~for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2023 comprised ~~$157~~$34 million in earnings adjusted for non-cash charges ~~offset, in part, by $28~~and $26 million ~~for cash payments related to restructuring and Spin-off charges and a $3 million increase~~ in cash ~~required for~~provided from working capital. Cash provided from working capital was primarily driven by seasonality.

Net cash provided from operating activities ~~during~~for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022 comprised ~~$144~~$14 million in earnings adjusted for non-cash charges ~~offset, in part, by $7~~and $33 million ~~for cash payments related to restructuring and Spin-off charges and a $1 million increase~~ in cash ~~required for~~provided from working capital. Cash provided from working capital was primarily driven by seasonality.

Investing Activities

Net cash used for investing activities was $4$8 million for each of the three months ended March 31, 2023 and 2022.

Capital expenditures were $8 million and $9 million for the ~~nine~~three months ended ~~September 30, 2018 compared to net cash provided from investing activities of $5 million for the nine months ended September 30, 2017.~~

~~Capital expenditures increased to $21 million during the nine months ended September 30, 2018 from $9 million during the nine months ended September 30, 2017~~March 31, 2023 and 2022, respectively, and included ~~the headquarters relocation, information technology costs related to the separation and~~ recurring capital needs and ~~information~~ technology projects. We expect capital expenditures for the full year ~~2018~~2023 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately ~~$10 million. In addition, we expect incremental capital expenditures required to effect the Spin-off in 2018 will range from $15~~$35 million to ~~$20 million in the aggregate, principally reflecting costs to replicate information technology systems historically shared with ServiceMaster.~~$45 million. We have no additional material capital commitments at this time.

Cash flows used for purchases of marketable securities during the nine months ended September 30, 2018 and 2017 totaled $16 million and $28 million, respectively. Cash flows from sales and maturities of marketable securities for the nine months ended September 30, 2018 and 2017 totaled $33 million and $42 million, respectively, and were driven by the normal maturity of debt securities.

Financing Activities

Net cash used for financing activities was ~~$98~~$7 million and $47 million for the ~~nine~~three months ended ~~September 30, 2018 compared to $53 million for~~March 31, 2023 and 2022, respectively.

For the ~~nine~~three months ended ~~September 30, 2017. Payments on seller financed~~March 31, 2023, we made scheduled principal payment of debt of $4 million.

For the three months ended March 31, 2022, we made scheduled principal payments of debt and ~~capital~~finance lease obligations ~~were $6~~of $4 million and $2purchased outstanding shares at an aggregate cost of $40 million ~~for~~.

Free Cash Flow

The following table reconciles net cash provided from operating activities, which we consider to be the ~~nine months ended September 30, 2018 and 2017, respectively. Net transfers~~most directly comparable U.S. GAAP measure, to ~~Parent included~~Free Cash Flow using data derived from the condensed consolidated statements of cash flows in ~~financing activities were $74 million and $51 million for the nine months ended September 30, 2018 and 2017, respectively. Payments~~Part 1, Item 1 of ~~debt issuance costs of $16 million and the discount paid~~this Quarterly Report on ~~the debt issuance of $2 million were incurred in connection with the debt financing transactions in the nine months ended September 30, 2018.~~Form 10-Q:



	Three Months Ended
	March 31,
(In millions)	2023		2022
Net cash provided from operating activities	$	60	$	47
Property additions		(8)		(9)
Free Cash Flow	$	52	$	39

Contractual Obligations

Our ~~Registration Statement~~2022 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, ~~2017.~~2022. We continue to make the contractually required payments ~~and, therefore, the 2018~~associated with these commitments. There are no significant additions to our obligations and commitments ~~described~~since those reported in the 2022 Form 10-K.

Financial Position

A summary of the significant changes in our ~~Registration Statement have been reduced by~~financial position from December 31, 2022 to March 31, 2023 is as follows:

Home service plan claims decreased during the ~~required payments.~~

~~On August 16, 2018, we entered into~~three months ended March 31, 2023, reflecting both the ~~Term Loan Facility maturing August 16, 2025, the Revolving Credit Facility maturing August 16, 2023~~faster payment of claims and ~~issued the 2026 Notes due August 15, 2026. See Note 11~~a lower number of service requests per customer as compared to the prior quarter.

Deferred revenue increased during the three months ended March 31, 2023, reflecting a net contract liability related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition, offset, in part, by a decline in the number of first-year real estate home service plans.

Total shareholders’ equity was $83 million as of March 31, 2023 compared to $61 million as of December 31, 2022. The increase was primarily driven by net income. See the condensed ~~combined financial~~consolidated statements of changes in equity (deficit) included in Part 1,I, Item 1 of this ~~report~~Quarterly Report on Form 10-Q for ~~more details.~~additional information.

~~Off-Balance Sheet Arrangements~~

~~As of September 30, 2018 we did not have any significant off-balance sheet arrangements.~~

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The economy and its impact on discretionary consumer spending, labor wages, material costs, home resales, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.

In connection with the Spin-off, we entered into the Credit Facilities, which are subject to variable interest rates. See Note 11 to our condensed combined financial statements included in Part 1, Item 1 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” included in Part 1, Item 2 of this report for a description of our current indebtedness. 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 ~~swaps. Subsequent~~swap. There have been no material changes to ~~September 30, 2018, we have entered into interest rate swap agreements~~the market risk associated with debt obligations and other significant instruments from the risks described in the normal course of business to manage interest rate risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions under the agreements could have a material impact onPart II, Item 7A in our ~~financial statements. We do not hold or issue derivative financial instruments for trading or speculative purposes.~~2022 Form 10-K.

We believe our exposure to interest rate fluctuations, when viewed on both a gross and net basis, is material to our overall results of operations. A significant portion of our outstanding debt, including indebtedness under the Credit Facilities, bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our indebtedness and could materially reduce our profitability and cash flows. As of September 30, 2018, each one percentage point change in interest rates would result in an approximate $7 million change in the annual interest expense on our Term Loan Facility. Assuming all revolving loans were fully drawn as of September 30, 2018, each one percentage point change in interest rates would result in an approximate $3 million change in annual interest expense on our Revolving Credit Facility. The impact of increases in interest rates could be more significant for us than it would be for some other companies because of our substantial indebtedness.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of ~~disclosure controls~~Disclosure Controls and ~~procedures~~Procedures

~~We maintain a set~~Our management, with the participation of ~~disclosure controls~~our Chief Executive Officer and ~~procedures designed~~our 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 March 31, 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 Quarterly Report on Form 10-Q, 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.March 31, 2023.

Changes in ~~internal control~~Internal Control over ~~financial reporting~~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 the Exchange Act, occurred~~) during the ~~period covered by this report~~three months ended March 31, 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

~~Due~~The information required with respect to this Part II, Item 1 can be found under Note 7 to the ~~nature~~condensed consolidated financial statements included in Part I, Item 1 of our business activities, we are 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 effectthis Quarterly Report on our results of operations, financial condition or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.Form 10-Q.

ITEM 1A. RISK FACTORS

~~In addition to the other~~For information ~~set forth in this report, you should carefully consider the~~regarding factors ~~discussed in our Registration Statement, which~~that could ~~materially~~ affect our business, financial condition or ~~future results.~~results of operations, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K. There have been no material changes to the risk factors disclosed in our ~~Registration Statement.~~2022 Form 10-K during the three months ended March 31, 2023. The risks described in our ~~Registration Statement~~2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or ~~that~~those we currently ~~deem~~view to be immaterial could also ~~may~~ materially and adversely affect our business, financial condition ~~and/~~or ~~operating results.~~ results of operations.

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

Issuer Purchases of Equity Securities

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. We did not repurchase any shares during the three months ended March 31, 2023. As of March 31, 2023, we have repurchased a total of 4,478,194 outstanding shares at an aggregate cost of $162 million and had $238 million remaining available for future repurchases under this program. See Liquidity and Capital Resources – Liquidity in Part I, Item 2 of this Quarterly Report on Form 10-Q for more information.

‎

ITEM 6. EXHIBITS

~~Exhibit~~ ~~Number~~		~~Description~~
~~2.1+~~Exhibit ‎Number		Description
2.1		Separation and Distribution Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and ~~frontdoor, inc.~~Frontdoor, Inc. (incorporated by reference to Exhibit 2.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
3.1		~~Amended and~~ Restated Certificate of Incorporation of ~~frontdoor, inc.~~Frontdoor, Inc. (incorporated by reference to Exhibit 3.1 to Frontdoor’s ~~Current~~Quarterly Report on Form ~~8-K filed on October 1, 2018)~~10-Q for the quarter ended June 30, 2021).
3.2		Amended and Restated Bylaws of ~~frontdoor, inc.~~Frontdoor, Inc. (incorporated by reference to Exhibit 3.2 to Frontdoor’s Current Report on Form 8-K filed on ~~October~~July 1, ~~2018)~~2021).
~~4.1~~10.1#^		Indenture, dated as of August 16, 2018, among frontdoor, inc., the Subsidiary Guarantors named therein, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).
~~4.2~~		First Supplemental Indenture, dated as of August 16, 2018, among frontdoor, inc., the Subsidiary Guarantors named therein, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).
~~10.1~~		Form of Employee Stock Option Agreement under the ~~frontdoor, inc.~~Frontdoor, Inc. 2018 Omnibus Incentive Plan (the “Omnibus Plan”) (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).
~~10.2~~10.7^		Form of Employee Restricted Stock Unit Agreement under the Omnibus Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Company’s Registration Statement on Form 10 filed on August 30, 2018).
~~10.3~~		Form of Director Deferred Share Equivalent Agreement under the Omnibus Plan (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Company’s Registration Statement on Form 10 filed on August 30, 2018).
~~10.4~~		Form of AHS Holding Company, Inc. Indemnification Agreement by and between frontdoor, inc. and individual directors (incorporated by reference to Exhibit 10.2 to Frontdoor’s Registration Statement on Form 10 filed on August 1, 2018).
~~10.5~~		Transition Services Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and frontdoor, inc. (incorporated by reference to Exhibit 10.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
~~10.6~~		Tax Matters Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and frontdoor, inc. (incorporated by reference to Exhibit 10.2 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
~~10.7~~		Employee Matters Agreement, dated as of September 28, 2018, by and between Terminix Global Holdings, Inc. (formerly ServiceMaster Global Holdings, Inc.) and ~~frontdoor, inc.~~Frontdoor, Inc. (incorporated by reference to Exhibit 10.3 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
~~10.8~~10.9^		~~Stockholder~~Amendment and ~~Registration Rights~~Amended and Restated Credit Agreement, ~~dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and frontdoor, inc.~~ (incorporated by reference to Exhibit ~~10.4~~10.1 to Frontdoor’s Current Report on Form 8-K filed on ~~October 1, 2018)~~June 21, 2021).
~~10.9~~10.10*		Credit Agreement, dated as of August 16, 2018, among frontdoor, inc., as borrower, ServiceMaster Company, LLC, as initial term loan lender, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and agents party thereto from time to time (incorporated by reference to Exhibit 10.5 to Amendment No. 1, dated March 8, 2023, to ~~Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).~~Amended and Restated Credit Agreement
~~10.10~~10.11#^		~~Offer Letter dated July 17, 2018, from frontdoor, inc. to Brian Turcotte (incorporated by reference to Exhibit 10.3 to Frontdoor’s Registration Statement on Form 10 filed on August 1, 2018).~~
~~10.11~~		Offer Letter dated July 5, 2018, from ~~frontdoor, inc.,~~Frontdoor, Inc. to Jeffrey Fiarman (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).
31.1*10.13#^		Frontdoor, Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Frontdoor’s Registration Statement on Form 10 filed on August 30, 2018).
10.14#^		Form of Restricted Stock Unit Grant Notice under the Frontdoor, Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.15#^		Form of Stock Option Grant Notice under the Frontdoor, Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.16#^		Form of Performance Share Grant Notice under the Frontdoor, Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.17#^		Frontdoor, Inc. 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to Frontdoor’s Current Report on Form 8-K filed on May 2, 2019).
10.18#^		Form of Non-Qualified Stock Option Agreement under the Frontdoor, Inc. Omnibus Plan, effective March 2021 (incorporated by reference to Exhibit 10.1 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021).
10.19#^		Form of Restricted Stock Unit Agreement under the Frontdoor, Inc. Omnibus Plan, effective March 2021 (incorporated by reference to Exhibit 10.2 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021).
10.26#*		Offer Letter dated December 1, 2022, from Frontdoor, Inc. to Jessica Ross.
10.27#*		Separation and Transition Agreement dated as of December 1, 2022, between Frontdoor, Inc. and Brian K. Turcotte.
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension ~~Schema~~Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation ~~Linkbase~~Linkbase.
101.DEF*		Inline XBRL Taxonomy Extension Definition ~~Linkbase~~Linkbase.
101.LAB*		Inline XBRL Taxonomy Extension Label ~~Linkbase~~Linkbase.
101.PRE*		Inline XBRL Extension Presentation ~~Linkbase~~Linkbase.
104*		Cover page formatted as Inline XBRL and included in Exhibit 101.

___________________________________

# Denotes management compensatory plans, contracts or arrangements.

* Filed herewith.

~~+ Certain schedules and exhibits~~^ Included herein solely to ~~this agreement have been omitted~~correct an incorrect hyperlink in ~~accordance with Item 601(b)(2) of Regulation S-K. The descriptions of~~ the ~~omitted schedules and exhibits are contained within the relevant agreement. A copy of any omitted schedule and/or exhibit will be furnished supplementally~~Exhibit Index to the ~~SEC upon request.~~Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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.

‎

3830

SIGNATURE

~~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: November 6, 2018~~


	~~frontdoor, inc.~~
	~~(Registrant)~~FRONTDOOR, INC.

Date: May 4, 2023	By:	/s/ ~~Brian K. Turcotte~~Jessica P. Ross
		~~Brian K. Turcotte~~Name:	Jessica P. Ross
		Title:	Senior Vice President and Chief Financial Officer (~~Principal Financial Officer)~~principal financial officer)

3931



	Net Parent		Total Parent's
	Investment		Equity
Balance December 31, 2016	$	560	$	560
Net income		15		15
Stock-based compensation expense		1		1
Net transfers to Parent		(7)		(7)
Balance March 31, 2017	$	569	$	569
Net income		48		48
Stock-based compensation expense		1		1
Net transfers to Parent		(34)		(34)
Balance June 30, 2017	$	584	$	585
Net income		53		53
Net transfers to Parent		(11)		(11)
Balance September 30, 2017	$	627	$	627

Balance December 31, 2017	$	661	$	661
Net income		13		13
Stock-based compensation expense		1		1
Net transfers to Parent		(34)		(34)
Balance March 31, 2018	$	642	$	642
Net income		45		45
Stock-based compensation expense		1		1
Net transfers to Parent		(30)		(30)
Balance June 30, 2018	$	657	$	657
Net income		49		49
Stock-based compensation expense		1		1
Net transfers to Parent		(147)		(147)
Non-cash debt exchange with Parent		(1,000)		(1,000)
Balance September 30, 2018	$	(439)	$	(439)



	As of September 30, 2018
Condensed Combined Statement of Financial Position	As reported		Under Prior Revenue Recognition Guidance
Current Assets:
Receivables	$	11	$	486
Contract asset		29		—
Deferred customer acquisition costs		—		18
Other Assets:
Deferred customer acquisition costs		21		—
Total Assets	$	1,065	$	1,508

Current Liabilities:
Deferred revenue	$	176	$	622
Other Long-Term Liabilities:
Deferred taxes		43		43
Total Liabilities		1,504		1,807
Net Parent Investment		(547)		(550)
Net Income		108		108
Liabilities and Parent's Equity	$	1,065	$	1,508


	Three Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2018
Condensed Combined Statement of Operations and Comprehensive Income	As reported		Under Prior Revenue Recognition Guidance		As reported		Under Prior Revenue Recognition Guidance
Selling and administrative expenses	$	90	$	90	$	259	$	259
Provision for income taxes		16		16		36		36
Net Income	$	49	$	49	$	108	$	108



	As of September 30, 2018						As of December 31, 2017
(In millions)	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Trade names(1)	$	140	$	—	$	140	$	140	$	—	$	140
Customer relationships		173		(164)		9		172		(160)		12
Other		32		(21)		11		32		(19)		13
Total	$	345	$	(185)	$	160	$	344	$	(179)	$	165



				Estimated Fair Value Measurements
(In millions)	Statement of Financial Position Location	Carrying Value		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of September 30, 2018:
Financial Assets:
Investments in marketable securities	Marketable securities		9		9		—		—
Total financial assets		$	9	$	9	$	—	$	—
As of December 31, 2017:
Financial Assets:
Deferred compensation trust assets	Long-term marketable securities	$	1	$	1	$	—	$	—
Investments in marketable securities	Marketable securities and Long-term marketable securities		26		25		1		—
Total financial assets		$	27	$	26	$	1	$	—

Three Months Ended

(In millions)

Cash paid on operating lease liabilities