Frontdoor 10Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

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

For the quarterly period ended June 30, 2020

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

For the transition period from to

Commission file number 001-38617

________________________________________________

frontdoor, inc.

(Exact name of registrant as specified in its charter)


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

150 Peabody Place, Memphis, Tennessee 38103

(Address of principal executive offices) (Zip Code)

901-701-5000

(Registrant’s telephone number, including area code)

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


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

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

Yes x No o

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

Yes x No o

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


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

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

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

Yes o No x

The number of shares of the registrant’s common stock outstanding as of July 31, 2020: 85,428,112 shares of common stock, par value $0.01 per share.

frontdoor, inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

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



Term/Abbreviation	Definition
2019 Form 10-K	frontdoor, inc. Annual Report on Form 10-K for the year ended December 31, 2019
2026 Notes	6.750% senior notes in the aggregate principal amount of $350 million
AOCI	Accumulated other comprehensive income or loss
ASC	FASB Accounting Standards Codification
ASC 326	ASC Topic 326, Financial Instruments–Credit Losses
ASC 740	ASC Topic 740, Income Taxes
ASU	FASB Accounting Standards Update
ASU 2016-13	ASU 2016-13, Financial Instruments–Credit Losses (Topic 326)
ASU 2018-15	ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
ASU 2020-04	ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Credit Agreement	The agreements governing the Term Loan Facility and the Revolving Credit Facility
Credit Facilities	The Term Loan Facility together with the Revolving Credit Facility
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	U.S. Financial Accounting Standards Board
HVAC	Heating, ventilation and air conditioning
Indenture	The indenture and supplemental indenture between Frontdoor and Wilmington Trust, National Association as trustee, that governs the 2026 Notes
IRS	Internal Revenue Service
LIBOR	London Inter-bank Offered Rate
Omnibus Plan	frontdoor, inc. 2018 Omnibus Incentive Plan
ServiceMaster	ServiceMaster Global Holdings, Inc.
Revolving Credit Facility	$250 million revolving credit facility
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Spin-off	Separation of the businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names by ServiceMaster into a stand-alone publicly traded company, which was completed on October 1, 2018
Term Loan Facility	$650 million senior secured term loan facility
U.S.	United States of America
U.S. GAAP	Accounting principles generally accepted in the U.S.

The following terms in this Quarterly Report on Form 10-Q are our trademarks: frontdoor^™, American Home Shield^®, HSA^TM, OneGuard^®, Landmark Home Warranty^®, Candu^TM, Streem^® and the frontdoor logo.

TABLE OF CONTENTS

	Page ‎No.
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations and Comprehensive Income	3

Condensed Consolidated Statements of Financial Position	4

Condensed Consolidated Statements of Changes in (Deficit) Equity	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

Cautionary Statement Concerning Forward-Looking Statements	17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

Item 4. Controls and Procedures	32

Part II. Other Information

Item 1. Legal Proceedings	33

Item 1A. Risk Factors	33

Item 6. Exhibits	34

Signature	35

‎

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Revenue	$	417	$	388	$	711	$	658
Cost of services rendered		200		183		347		326
Gross Profit		218		205		364		333
Selling and administrative expenses		125		104		229		193
Depreciation and amortization expense		10		6		18		12
Restructuring charges		1		—		4		—
Spin-off charges		—		—		—		1
Interest expense		14		16		29		31
Interest and net investment loss (income)		3		(2)		1		(3)
Income before Income Taxes		65		81		83		98
Provision for income taxes		17		20		21		25
Net Income	$	49	$	60	$	62	$	73
Other Comprehensive Loss, Net of Income Taxes:
Net unrealized loss on derivative instruments		(1)		(7)		(16)		(12)
Total Comprehensive Income	$	48	$	53	$	45	$	61
Earnings per Share:
Basic	$	0.57	$	0.71	$	0.73	$	0.87
Diluted	$	0.57	$	0.71	$	0.72	$	0.87
Weighted-average Common Shares Outstanding:
Basic		85.2		84.6		85.2		84.6
Diluted		85.5		84.8		85.4		84.7

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)



	As of
	June 30,		December 31,
	2020		2019
Assets:
Current Assets:
Cash and cash equivalents	$	545	$	428
Marketable securities		2		7
Receivables, less allowance of $2 in each period		9		11
Prepaid expenses and other assets		20		16
Total Current Assets		577		461
Other Assets:
Property and equipment, net		59		51
Goodwill		502		501
Intangible assets, net		187		191
Operating lease right-of-use assets		14		17
Deferred customer acquisition costs		18		18
Other assets		4		11
Total Assets	$	1,361	$	1,250
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable	$	74	$	48
Accrued liabilities:
Payroll and related expenses		17		17
Home service plan claims		95		66
Interest payable		9		9
Other		41		29
Deferred revenue		173		188
Current portion of long-term debt		7		7
Total Current Liabilities		416		364
Long-Term Debt		971		973
Other Long-Term Liabilities:
Deferred taxes		41		45
Operating lease liabilities		17		20
Other long-term obligations		41		27
Total Other Long-Term Liabilities		99		92
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 85,425,009 shares issued and outstanding at June 30, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019		1		1
Additional paid-in capital		37		29
Accumulated deficit		(126)		(188)
Accumulated other comprehensive loss		(37)		(21)
Total Deficit		(125)		(179)
Total Liabilities and Shareholders' Equity	$	1,361	$	1,250

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

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

(In millions)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Common Stock
Balance at beginning of period	$	1	$	1	$	1	$	1
Balance at end of period		1		1		1		1
Additional Paid-in Capital
Balance at beginning of period		31		3		29		1
Issuance of common stock		1		—		1		—
Taxes paid related to net share settlement of equity awards		—		—		(1)		—
Stock-based employee compensation		5		3		8		4
Balance at end of period		37		6		37		6
Accumulated Deficit
Balance at beginning of period		(174)		(323)		(188)		(336)
Net income		49		60		62		73
Balance at end of period		(126)		(263)		(126)		(263)
Accumulated Other Comprehensive Loss
Balance at beginning of period		(36)		(14)		(21)		(9)
Other comprehensive loss, net of tax		(1)		(7)		(16)		(12)
Balance at end of period		(37)		(21)		(37)		(21)
Total Deficit	$	(125)	$	(278)	$	(125)	$	(278)

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Six Months Ended
	June 30,
	2020		2019
Cash and Cash Equivalents at Beginning of Period	$	428	$	296
Cash Flows from Operating Activities:
Net Income		62		73
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense		18		12
Deferred income tax provision		1		1
Stock-based compensation expense		8		4
Restructuring charges		4		—
Payments for restructuring charges		(3)		—
Spin-off charges		—		1
Payments for spin-off charges		—		(1)
Other		4		2
Change in working capital, net of acquisitions:
Receivables		2		3
Prepaid expenses and other current assets		(1)		1
Accounts payable		26		17
Deferred revenue		(15)		(1)
Accrued liabilities		30		16
Current income taxes		4		11
Net Cash Provided from Operating Activities		140		140
Cash Flows from Investing Activities:
Purchases of property and equipment		(18)		(10)
Business acquisitions, net of cash received		(5)		(3)
Purchases of available-for-sale securities		(2)		—
Sales and maturities of available-for-sale securities		7		4
Other investing activities		—		(3)
Net Cash Used for Investing Activities		(19)		(12)
Cash Flows from Financing Activities:
Payments of debt and finance lease obligations		(3)		(4)
Other financing activities		(1)		—
Net Cash Used for Financing Activities		(4)		(4)
Cash Increase During the Period		118		124
Cash and Cash Equivalents at End of Period	$	545	$	420

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

‎

frontdoor, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

References in this Quarterly Report on Form 10-Q to “Frontdoor,” “we,” “our,” or “us” refer to frontdoor, inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee. 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.

We are the largest provider of home service plans in the U.S., as measured by revenue, and operate under the American Home Shield, HSA, OneGuard and Landmark brands. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our home service plans cover the repair or replacement of major components of up to 21 household systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. In 2019, we launched our new on-demand home services business under the brand name Candu, and we acquired Streem, a technology startup that uses augmented reality, computer vision and machine learning to help home service professionals more quickly and accurately diagnose breakdowns and complete repairs and to help real estate professionals consult with and provide virtual tours to potential buyers and agents. We serve customers across all 50 states and the District of Columbia.

We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated and combined financial statements and the notes thereto included in our 2019 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.

Impact of COVID-19

On March 11, 2020, the World Health Organization (“WHO”) characterized the recent novel coronavirus disease (“COVID-19”) as a pandemic, and on March 13, 2020, the U.S. declared a national emergency concerning the outbreak. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. In response to the pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business. The COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

While we did not experience a material impact on our results of operations and overall financial performance during the first quarter, during the second quarter of 2020, our results of operations and financial performance were adversely impacted by COVID-19 as follows:

We experienced a decline in first-year real estate sales attributable, in part, to the adverse impact COVID-19 had on U.S. existing home sales. Due to the annual nature of our service plan agreements, the impact of this decline will carry forward into future periods.

We experienced an increase in appliance and plumbing claims primarily due to the increased usage of home systems and appliances driven by state and local shelter at home orders and recommendations.

We increased our marketing spend in the first-year direct-to-consumer channel to help mitigate the decline in first-year real estate sales.

We incurred incremental wages at our contact centers due to increased demand driven by temporary closures at our offshore business process outsourcers.

We incurred incremental direct costs in response to COVID-19, which were temporary in nature and primarily related to incremental health and childcare benefits for our employees and hoteling costs related to our offshore business process outsourcers.

f Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2019 Form 10-K. There have been no material changes to the significant accounting policies for the six months ended June 30, 2020.

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, which was amended in parts by subsequent accounting standards updates (collectively ASC 326). This standard requires earlier recognition of credit losses while also providing additional transparency about credit risk. Further, the new credit loss model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. We adopted ASC 326 using the modified retrospective approach, effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard prospectively, effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

Accounting Standards Issued Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022, when the reference rate replacement activity is expected to be completed. We are currently evaluating its impact on our consolidated financial statements and related disclosures.

Note 3. Revenue

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

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

___



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2020		2019		2020		2019
Renewals	$	289	$	263	$	489	$	444
Real estate⁽¹⁾		74		75		130		129
Direct-to-consumer⁽¹⁾		51		48		87		81
Other		3		2		6		4
Total	$	417	$	388	$	711	$	658

_____________________________

(1)First-year revenue only.

Renewals

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

Real estate

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

Direct-to-consumer

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

Costs to obtain a contract with a customer

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense, using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $18 million as of June 30, 2020 and December 31, 2019. Amortization of these deferred acquisition costs was $6 million for each of the three months ended June 30, 2020 and 2019 and $10 million for each of the six months ended June 30, 2020 and 2019. There were 0 impairment losses in relation to these capitalized costs.

Contract balances

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

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. Deferred revenue was $173 million and $188 million as of June 30, 2020 and December 31, 2019, respectively, and, as of June 30, 2020, includes a net contract liability of $3 million related to the recognition of monthly pay-customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the six months ended June 30, 2020 were as follows:



(In millions)	Deferred revenue
Balance as of December 31, 2019	$	188
Deferral of revenue		195
Recognition of deferred revenue		(210)
Balance as of June 30, 2020	$	173

There was approximately $73 million and $145 million of revenue recognized in the three and six months ended June 30, 2020, respectively, that was included in the deferred revenue balance as of December 31, 2019.

Note 4. Goodwill and Intangible Assets

Goodwill and indefinite-lived 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. An assessment for impairment is performed on October 1 of every year. The balance of goodwill was $502 million and $501 million as of June 30, 2020 and December 31, 2019, respectively. There were 0 goodwill or trade name impairment charges recorded in the six months ended June 30, 2020 and 2019. There were 0 accumulated impairment losses recorded as of June 30, 2020 and December 31, 2019. During the second quarter of 2020, we completed a business acquisition for $5 million, which was primarily allocated to developed technology and other intangible assets.

The table below summarizes the other intangible asset balances:



	As of June 30, 2020						As of December 31, 2019
(In millions)	Gross		Accumulated ‎Amortization		Net		Gross		Accumulated ‎Amortization		Net
Trade names⁽¹⁾	$	141	$	—	$	141	$	141	$	—	$	141
Customer relationships		173		(169)		3		173		(168)		5
Developed technology		38		(5)		33		34		(1)		33
Other		37		(26)		10		37		(25)		12
Total	$	388	$	(201)	$	187	$	385	$	(193)	$	191

___________________________________

(1)Not subject to amortization.

Amortization expense was $4 million and $1 million for the three months ended June 30, 2020 and 2019, respectively, and $7 million and $3 million for the six months ended June 30, 2020 and 2019, respectively. The following table outlines expected amortization expense for existing intangible assets for the remainder of 2020 and the next five years:



(In millions)
2020 (remainder)	$	7
2021		13
2022		10
2023		9
2024		7
2025		—
Total	$	46

Note 5. Leases

We have operating leases primarily for corporate offices and call centers and finance leases for vehicles. Our leases have remaining lease terms of one year to 15 years, some of which include options to extend the leases for up to five years. Renewal options that are reasonably certain to be exercised are included in the lease term. An incremental borrowing rate is used in determining the present value of lease payments unless an implicit rate is readily determinable. Incremental borrowing rates are determined based on our secured borrowing rating and the lease term. Disclosures related to finance lease obligations are immaterial and, as such, are not included in the discussion below.

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



	As of
	June 30,		December 31,
	2020		2019
Weighted-average remaining lease term (years)	10		10
Weighted-average discount rate	6.2	%	6.1	%

We recognized operating lease expense of $1 million for each of the three months ended June 30, 2020 and 2019 and $1 million and $2 million for the six months ended June 30, 2020 and 2019, respectively. These expenses are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

For the six months ended June 30, 2020, and 2019, cash paid for amounts included in the measurement of lease liabilities were $3 million and $2 million, respectively, and are reflected in the accompanying condensed consolidated statements of cash flows. For the six months ended June 30, 2020, amounts include $2 million of lease termination costs related to the decision to consolidate the operations of Landmark Home Warranty, LLC (“Landmark”) with those of OneGuard Home Warranties (“OneGuard”). See Note 8 to the accompanying condensed consolidated financial statements for further information.

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



	As of
	June 30,		December 31,
(In millions)	2020		2019
Operating lease right-of-use assets	$	19	$	23
Less lease incentives		(6)		(6)
Operating lease right-of-use assets, net	$	14	$	17

Other accrued liabilities	$	2	$	3
Operating lease liabilities		17		20
Total operating lease liabilities	$	19	$	23

The following table presents maturities of our operating lease liabilities as of June 30, 2020.



(In millions)
2020 (remainder)	$	2
2021		3
2022		3
2023		3
2024		2
2025		1
Thereafter		12
Total lease payments		27
Less imputed interest		(7)
Total	$	19

As of June 30, 2020, we have entered into additional leases as a lessee for real estate that have not yet commenced. These leases will result in operating lease right-of-use assets and corresponding lease liabilities of approximately $8 million. These leases are expected to commence during the second half of 2020 and first half of 2021, with lease terms between three years and seven years.

Note 6. Income Taxes

As required by ASC 740, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740. The effective tax rate on income was 25.5 percent and 25.1 percent for the three months ended June 30, 2020 and 2019, respectively, and 25.4 percent for each of the six months ended June 30, 2020 and 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. We do not expect the provisions of the legislation to have a significant impact on our effective tax rate or our income tax payable and deferred income tax positions.

We are subject to taxation in the U.S., various states and foreign jurisdictions. Pursuant to the terms of the tax matters agreement entered into with ServiceMaster in connection with the Spin-off, we are not subject to federal examination by the IRS or examination by state taxing authorities where a unitary or combined state income tax return is filed for the years prior to 2018. We are not subject to state and local income tax examinations by tax authorities in jurisdictions where separate income tax returns are filed for the years prior to 2015. Substantially all of our income before income taxes for the six months ended June 30, 2020 and 2019 was generated in the U.S.

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 consolidated statements of operations and comprehensive income are immaterial.

Note 7. Acquisitions

Business combinations have been accounted for using the acquisition method, and, accordingly, the results of operations of the acquired businesses have been included in the accompanying condensed consolidated financial statements since their dates of acquisition. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates.

As discussed in our 2019 Form 10-K, we completed the acquisition of Streem in the fourth quarter of 2019. During the six months ended June 30, 2020, we updated our preliminary allocation and reclassified $1 million from other intangibles, primarily customer relationships, to goodwill. As of June 30, 2020, the purchase price allocation for this acquisition has not been finalized.

During the second quarter of 2020, we acquired a business for a cash purchase price of $5 million to expand the Candu on-demand offering via their technology platform. The purchase price was primarily allocated to developed technology and other intangible assets. As of June 30, 2020, the purchase price allocation for this acquisition has not been finalized.

Regarding the two acquisitions discussed above, we are still evaluating the fair value of certain intangible assets. As we finalize the fair value of assets acquired and liabilities assumed for each acquisition, additional purchase price adjustments may be recorded during the measurement period in 2020.

Note 8. Restructuring Charges

We incurred restructuring charges of $1 million ($1 million, net of tax) and less than $1 million (less than $1 million, net of tax) for the three months ended June 30, 2020 and 2019, respectively, and $4 million ($3 million, net of tax) and less than $1 million (less than $1 million, net of tax) for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020, restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities. For the three months ended June 30, 2019, restructuring charges comprised severance costs.

For the six months ended June 30, 2020, restructuring charges comprised $2 million of lease termination costs and $1 million of severance and other costs related to the decision to consolidate the operations of Landmark with those of OneGuard, which was completed during the first quarter of 2020, as well as $1 million of accelerated depreciation of certain technology systems. For the six months ended June 30, 2019, restructuring charges comprised severance costs.

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

As of December 31, 2019, there was less than $1 million of restructuring charges accrued, which were paid or otherwise settled during the six months ended June 30, 2020. As of June 30, 2020, there was less than $1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

Note 9. Commitments and Contingencies

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

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

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

Note 10. Stock-Based Compensation

We recognized stock-based compensation expense of $5 million ($4 million, net of tax) and $3 million ($2 million, net of tax) for the three months ended June 30, 2020 and 2019, respectively, and $8 million ($7 million, net of tax) and $4 million ($4 million, net of tax) for the six months ended June 30, 2020 and 2019, respectively. These charges are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

As of June 30, 2020, there was $40 million of total unrecognized compensation costs, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards. These remaining costs are expected to be recognized over a weighted-average period of 2.74 years.

Note 11. Long-Term Debt

Long-term debt is summarized in the following table:



	As of
	June 30,		December 31,
(In millions)	2020		2019
Term Loan Facility maturing in 2025⁽¹⁾	$	631	$	634
Revolving Credit Facility maturing in 2023		—		—
2026 Notes⁽²⁾		345		345
Other		1		1
Less current portion		(7)		(7)
Total long-term debt	$	971	$	973

___________________________________

(1)As of June 30, 2020 and December 31, 2019, presented net of $6 million and $7 million, respectively, in unamortized debt issuance costs and $1 million in unamortized original issue discount paid.

(2)As of June 30, 2020 and December 31, 2019, presented net of $5 million in unamortized debt issuance costs.

Note 12. Supplemental Cash Flow Information

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



	Six Months Ended
	June 30,
(In millions)	2020		2019
Cash paid for (received from):
Interest expense	$	28	$	30
Income tax payments, net of refunds		16		13
Interest income		(2)		(3)

Note 13. Cash and Marketable Securities

Cash, money market funds and certificates of deposit with maturities of three months or less when purchased are included in Cash and cash equivalents in the accompanying condensed consolidated statements of financial position. As of June 30, 2020 and December 31, 2019, marketable securities primarily consisted of treasury bills with maturities of less than one year and are classified as available-for-sale securities. As of June 30, 2020 and December 31, 2019, the amortized cost of our short-term investments was $2 million and $7 million, respectively, and the estimated fair value of these investments was $2 million and $7 million, respectively.

Gains and losses on sales of investments, as determined on a specific identification basis, are included in investment income in the period they are realized. For the each of the three and six months ended June 30, 2020 and 2019, there were 0 gross realized gains, gross realized losses or proceeds resulting from sales of available-for-sale securities. Maturities of available-for-sale securities were $7 million and $4 million for the six months ended June 30, 2020 and 2019, respectively.

We periodically review our portfolio of investments to determine whether an allowance for credit losses is necessary. There was a $3 million loss on an investment recognized in the three and six months ended June 30, 2020, which is included in Interest and net investment loss (income) in the accompanying condensed consolidated statements of operations and comprehensive income. There were 0 credit losses due to declines in the value of our investments recognized for the three and six months ended June 30, 2019.

Note 14. Comprehensive Income (Loss)

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

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





	Unrealized
	Loss
(In millions)	on Derivatives		Total
Balance as of December 31, 2019	$	(21)	$	(21)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		(24)		(24)
Tax provision (benefit)		(5)		(5)
After-tax amount		(19)		(19)
Amounts reclassified from accumulated ‎ other comprehensive income (loss)⁽¹⁾		3		3
Net current period other comprehensive income (loss)		(16)		(16)
Balance as of June 30, 2020	$	(37)	$	(37)

Balance as of December 31, 2018	$	(9)	$	(9)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		(17)		(16)
Tax provision (benefit)		(4)		(4)
After-tax amount		(13)		(13)
Amounts reclassified from accumulated ‎ other comprehensive income (loss)⁽¹⁾		1		1
Net current period other comprehensive income (loss)		(12)		(12)
Balance as of June 30, 2019	$	(21)	$	(21)

___________________________________

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

Reclassifications out of AOCI included the following components for the periods indicated.



	Amounts Reclassified from Accumulated
	Other Comprehensive Income (Loss)
	Six Months Ended
	June 30,				Consolidated Statements of
(In millions)	2020		2019		Operations and Comprehensive Income Location
Loss on interest rate swap contract	$	(4)	$	(1)	Interest expense
Impact of income taxes		1		—	Provision for income taxes
Total reclassifications related to derivatives	$	(3)	$	(1)
Total reclassifications for the period	$	(3)	$	(1)

Note 15. Derivative Financial Instruments

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

We hedge the interest payments on a portion of our variable rate debt through the use of an interest rate swap agreement. Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded on the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks recorded in AOCI. Any change in the fair value of the hedging instrument resulting from ineffectiveness, as defined by accounting standards, is recognized in current period earnings. Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows.

The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 14 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and for the amounts reclassified out of AOCI and into earnings. As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $8 million, net of tax, as of June 30, 2020. The amounts that are ultimately reclassified into earnings will be based on actual interest rates at the time the positions are settled and may differ materially from the amount noted above.

Note 16. Fair Value Measurements

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

The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period-end carrying amount of short-term marketable securities also approximates fair value and 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 consolidated statements of financial position. There were 0 allowances for credit losses for the six months ended June 30, 2020 and 2019. The carrying amount of total debt was $977 million and $980 million, and the estimated fair value was $993 million and $1,031 million as of June 30, 2020 and December 31, 2019, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of June 30, 2020 and December 31, 2019.

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

We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were 0 transfers between levels during the six months ended June 30, 2020 and 2019.

The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented 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 June 30, 2020:
Financial Assets:
Investments in marketable securities	Marketable securities	$	2	$	2	$	—	$	—
Total financial assets		$	2	$	2	$	—	$	—
Financial Liabilities:
Interest rate swap contract	Other accrued liabilities	$	10	$	—	$	10	$	—
	Other long-term obligations		37		—		37		—
Total financial liabilities		$	48	$	—	$	48	$	—

As of December 31, 2019:
Financial Assets:
Investments in marketable securities	Marketable securities	$	7	$	7	$	—	$	—
Total financial assets		$	7	$	7	$	—	$	—
Financial Liabilities:
Interest rate swap contract	Other accrued liabilities	$	5	$	—	$	5	$	—
	Other long-term obligations		22		—		22		—
Total financial liabilities		$	27	$	—	$	27	$	—

Note 17. Earnings Per Share

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

Basic and diluted earnings per share are calculated as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions, except per share data)	2020		2019		2020		2019
Net Income	$	49	$	60	$	62	$	73
Weighted-average common shares outstanding		85.2		84.6		85.2		84.6
Effect of dilutive securities:
RSUs		0.2		0.1		0.2		0.1
Stock options⁽¹⁾		0.1		0.1		0.1		—
Weighted-average common shares outstanding - assuming dilution		85.5		84.8		85.4		84.7
Basic earnings per share	$	0.57	$	0.71	$	0.73	$	0.87
Diluted earnings per share	$	0.57	$	0.71	$	0.72	$	0.87

___________________________________

(1)Options to purchase 0.9 million shares and 0.6 million shares for the three and six months ended June 30, 2020, respectively, and 0.5 million shares and 0.3 million shares for the three and six months ended 2019, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance, the impact of COVID-19 on our business and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. Factors, risks, trends and uncertainties that could cause actual results or events to differ materially from those anticipated include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report as well as Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K filed with the SEC and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in addition to the following other factors, risks, trends and uncertainties:

risks related to the COVID-19 pandemic;

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

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

our ability to successfully implement our business strategies;

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

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

adverse weather conditions and Acts of God;

our ability to attract and retain key personnel;

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

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

adverse outcomes in litigation or other legal proceedings;

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

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

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

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

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

requirement to recognize and record impairment charges;

failure to maintain our strategic relationships with the real estate brokerages and agents that comprise our real estate customer acquisition channel;

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

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 U.S. by us or our business process outsource providers;

our limited history of operating as an independent company;

inability to achieve some or all of the benefits that we expected to achieve from the Spin-off;

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

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

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

increased borrowing costs due to lowering or withdrawal of the 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.

You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the disclosure included in Item 1A. Risk Factors in our 2019 Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Available Information

Our website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our 2019 Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained in our website to be part of this report.

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

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated and combined financial statements and related notes thereto included in our 2019 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as those factors discussed in “Risk Factors” included in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Overview

Frontdoor is the largest provider of home service plans in the U.S., as measured by revenue, and operates under the American Home Shield, HSA, OneGuard and Landmark brands. Our home service plans help our customers maintain their homes and protect against costly and unexpected breakdowns of essential home systems and appliances. Our home service plan customers subscribe to an annual service plan agreement that covers the repair or replacement of major components of up to 21 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. In 2019, we launched Candu, our on-demand home services brand, and acquired Streem, a technology startup that uses augmented reality, computer vision and machine learning to help home service professionals more quickly and accurately diagnose breakdowns and complete repairs and to help real estate professionals consult with and provide virtual tours to potential buyers and agents. We serve over two million customers annually across all 50 states and the District of Columbia.

For the three months ended June 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $417 million, $49 million and $100 million, respectively, and $388 million, $60 million and $105 million, respectively. For the six months ended June 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $711 million, $62 million and $147 million, respectively, and $658 million, $73 million and $149 million, respectively.

For the six months ended June 30, 2020, our total operating revenue included 69 percent of revenue derived from existing customer renewals, while 18 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

For the six months ended June 30, 2019, our total operating revenue included 67 percent of revenue derived from existing customer renewals, while 20 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

Key Factors and Trends Affecting Our Results of Operations

Impact of COVID-19

On March 11, 2020, the WHO characterized COVID-19 as a pandemic, and on March 13, 2020, the U.S. declared a national emergency concerning the outbreak. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. In response to the pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business. Specifically, we have:

Established a Cross-Functional Business Continuity Team. This core team actively monitors national and local developments and emerging issues, deploys coordinated and strategic real-time responses to address the needs of employees, customers and contractors, and ensures ongoing operational efficiency during this time.

Changed How Employees Work. We have fully transitioned all of our contact center agents to work remotely from their homes, ensuring uninterrupted customer service. All other employees, including those at our Memphis corporate headquarters, Denver technology center, India technology center and the Streem office in Portland, are also working remotely.

Increased Customer Communications. Our contractor network has been designated by the U.S. Department of Homeland Security as “Essential Critical Infrastructure Workers” during the COVID-19 response and has consistently been deemed “essential” by state and local governments. As of today, we do not foresee significant disruption to our ability to provide services to our customers. Nevertheless, we are managing customer responses on a case-by-case basis, and actions may vary by location. To address virus-related concerns and ensure that we are handling the most critical service requests first, we have established a special COVID-19 response team, increased customer communication and implemented safety screening protocols during the service initiation and delivery process.

Accelerated the Deployment of Streem’s Augmented Reality Technology. In order to protect the health and safety of the public, including our customers, contractors and real estate partners, we have accelerated the deployment of Streem’s augmented reality remote video technology. Using this innovative solution, we are enabling contractors to engage remotely with customers to reduce the number of required in-person visits and speed the repair process. For real estate professionals, an agent can connect remotely with a home seller, lead a virtual tour and guide the owner to areas that need closer inspection, all while allowing the creation of high definition digital assets that future buyers can view remotely without ever entering the home.

Increased Contractor Education and Communication. Because the contractor network provides essential services, it is generally operating normally despite varying state and local conditions. We are leveraging the Centers for Disease Control and Prevention (“CDC”) recommendations to increase customer and technician screening for COVID-19 and remain in ongoing communication with contractors to enable them to operate within CDC guidelines and help ensure the health and safety of their technicians, as well as our customers. To further these efforts, we introduced our Streem technology platform to our contractors at no cost during this time, enabling social distancing for customers and contractors through remote diagnostics and reduced in-person interactions to resolve customers’ issues. While our supply chain has not experienced significant disruptions to date, we are closely monitoring the transportation and distribution of parts and replacement units.

Financial Impact to our Business. While we did not experience a material impact on our financial condition and results of operations during the first quarter, during the second quarter of 2020, our financial condition and results of operations were adversely impacted by COVID-19 as follows:

We increased our marketing spend in the first-year direct-to-consumer channel to help mitigate the decline in first-year real estate sales.

We incurred incremental wages at our contact centers due to increased demand driven by temporary closures at our offshore business process outsourcers.

The COVID-19 situation remains very fluid, and we continue to adjust our response in real time. It remains difficult to predict the overall impact COVID-19 will have on our business through the remainder of the year. We anticipate that U.S. existing home sales and our first-year real estate sales will continue to be adversely impacted by COVID-19. In addition, we anticipate a continued increase in claims and incremental investments in marketing due to the factors noted above.

Macroeconomic Conditions

Macroeconomic conditions that may affect customer spending patterns, and thereby our results of operations, include home sales, consumer confidence and employment rates. During the second quarter of 2020, the COVID-19 pandemic increased economic uncertainty in these areas and adversely impacted U.S. existing home sales. We believe our ability to acquire customers through the direct-to-consumer channel helps to mitigate the effects of downturns in the real estate market, while our nationwide presence limits the risk of poor economic conditions in any particular geography.

Seasonality

Our business is subject to seasonal fluctuations, which drives variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of central HVAC work orders in the summer months. In 2019, approximately 20 percent, 28 percent, 30 percent and 22 percent of our revenue, approximately 9 percent, 39 percent, 40 percent and 12 percent of our net income, and approximately 14 percent, 35 percent, 35 percent and 16 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. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency. For example, seasonally mild temperatures were a factor throughout 2019, leading to a decrease in contract claims costs.

While weather variations as described above may affect our business, major weather events and other Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service. As a rule, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to home service plans that we offer, and such insurance coverage in fact reduces our obligations to provide service to systems and appliances damaged by insured, catastrophic events.

Tariff and Import/Export Regulations

Changes in U.S. tariff and import/export regulations may impact the costs of home systems, appliances and repair parts. 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 home systems, appliances and repair parts.

Competition

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

Acquisition Activity

We have a track record of acquiring other businesses and successfully integrating them into our operations, including the acquisition of Streem in 2019. We anticipate that the highly fragmented nature of the home service plan industry will continue to create strategic opportunities for further consolidation, and, with our scale, we believe we will be the acquirer of choice in the industry. In particular, we intend to focus strategically on underserved regions where we can enhance and expand service capabilities. Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, as well as enhance our technology capabilities, and we intend to continue to do so. We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services segment.

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 2019 Form 10-K. There have been no material changes to our critical accounting policies for the six months ended June 30, 2020, certain of which are described below.

Goodwill and Intangible Assets

In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value-based test on an annual basis, or more frequently, if circumstances indicate a potential impairment. As of June 30, 2020, we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets. We will continue to monitor the macroeconomic impacts on our business in our ongoing evaluation of potential impairments.

Non-GAAP Financial Measures

To supplement our 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measure of Adjusted EBITDA. See “Results of Operations — Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA, as well as “Key Business Metrics — Adjusted EBITDA” for further discussion of Adjusted EBITDA. Management uses Adjusted EBITDA to facilitate operating performance comparisons from period to period. We believe this non-GAAP financial measure provides investors, analysts and other interested parties useful information to evaluate our business performance as it facilitates company-to-company operating performance comparisons. While we believe this non-GAAP financial measure is useful in evaluating our business, it should be considered as supplemental in nature and is 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 non-GAAP financial measure may not be the same as similarly entitled measures reported by other companies, limiting its usefulness as a comparative measure.

Key Business Metrics

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

revenue,

operating expenses,

net income,

earnings per share,

Adjusted EBITDA,

Adjusted EBITDA margin,

net cash provided from operating activities,

Free Cash Flow,

growth in number of home service plans, and

customer retention rate.

Revenue. 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 sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the U.S.

Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as salaries and wages, employee benefits and health care; contractor costs; 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 measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs, performance shares and restricted stock awards are reflected in diluted net income per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA margin. We evaluate performance and allocate resources 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: provision for income taxes; interest expense; depreciation and amortization expense; non-cash stock-based compensation expense; restructuring charges; Spin-off charges; secondary offering costs; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, Spin-off charges and equity-based, long-term incentive plans.

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

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

‎

Results of Operations

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019



	Three Months Ended				Increase
	June 30,				(Decrease)		% of Revenue
(In millions)	2020		2019		2020 vs. 2019		2020		2019
Revenue	$	417	$	388	8	%	100	%	100	%
Cost of services rendered		200		183	9		48		47
Gross Profit		218		205	6		52		53
Selling and administrative expenses		125		104	20		30		27
Depreciation and amortization expense		10		6	61		2		2
Restructuring charges		1		—	*		—		—
Interest expense		14		16	(10)		3		4
Interest and net investment loss (income)		3		(2)	*		1		—
Income before Income Taxes		65		81	(19)		16		21
Provision for income taxes		17		20	(17)		4		5
Net Income	$	49	$	60	(19)	%	12	%	16	%

________________________________

* not meaningful

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019



	Six Months Ended				Increase
	June 30,				(Decrease)		% of Revenue
(In millions)	2020		2019		2020 vs. 2019		2020		2019
Revenue	$	711	$	658	8	%	100	%	100	%
Cost of services rendered		347		326	7		49		49
Gross Profit		364		333	9		51		51
Selling and administrative expenses		229		193	19		32		29
Depreciation and amortization expense		18		12	47		2		2
Restructuring charges		4		—	*		1		—
Spin-off charges		—		1	*		—		—
Interest expense		29		31	(7)		4		5
Interest and net investment loss (income)		1		(3)	*		—		—
Income before Income Taxes		83		98	(16)		12		15
Provision for income taxes		21		25	(16)		3		4
Net Income	$	62	$	73	(16)	%	9	%	11	%

________________________________

* not meaningful

Revenue

We reported revenue of $417 million and $388 million for the three months ended June 30, 2020 and 2019, respectively, and $711 million and $658 million for the six months ended June 30, 2020 and 2019, respectively. Revenue by major customer acquisition channel is as follows:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019



	Three Months Ended
	June 30,
(In millions)	2020		2019		Increase (Decrease)
Renewals	$	289	$	263	$	26	10	%
Real estate⁽¹⁾		74		75		(1)	(1)
Direct-to-consumer⁽¹⁾		51		48		4	7
Other		3		2		1	*
Total revenue	$	417	$	388	$	30	8	%

________________________________

* not meaningful

(1)First-year revenue only.

Revenue increased eight percent for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, driven by higher renewal revenue due to growth in the number of renewed home service plans, partly as a result of customer retention improvement initiatives, and improved price realization. The decrease in real estate revenue reflects a decline in the number of first-year real estate home service plans, due, in part, to the adverse impact COVID-19 had on U.S. existing home sales, offset, in part, by improved price realization. The increase in direct-to-consumer revenue reflects growth in the number of first-year direct-to-consumer home service plans, mostly driven by increased investments in marketing, and improved price realization.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019



	Six Months Ended
	June 30,
(In millions)	2020		2019		Increase (Decrease)
Renewals	$	489	$	444	$	45	10	%
Real estate⁽¹⁾		130		129		—	—
Direct-to-consumer⁽¹⁾		87		81		6	7
Other		6		4		2	*
Total revenue	$	711	$	658	$	53	8	%

________________________________

* not meaningful

(1)First-year revenue only.

Revenue increased eight percent for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans, partly as a result of customer retention improvement initiatives. Real estate revenue was relatively flat, as improved price realization was offset by a decline in the number of first-year real estate home service plans, due, in part, to the adverse impact COVID-19 had on U.S. existing home sales. The increase in direct-to-consumer revenue reflects growth in the number of first-year direct-to-consumer home service plans, mostly driven by increased investments in marketing, and improved price realization.

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



	As of
	June 30,
	2020		2019
Growth in number of home service plans	3	%	4	%
Customer retention rate	75	%	75	%

Cost of Services Rendered

We reported cost of services rendered of $200 million and $183 million for the three months ended June 30, 2020 and 2019, respectively, and $347 million and $326 million for the six months ended June 30, 2020 and 2019, respectively. The following tables provide a summary of changes in cost of services rendered:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019



(In millions)
Three Months Ended June 30, 2019	$	183
Impact of change in revenue		5
Contract claims costs		13
Three Months Ended June 30, 2020	$	200

The increase in contract claims costs reflects higher incidence in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, and normal inflation. Contract claims costs also reflects a favorable weather impact of approximately $1 million and process improvement benefits.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019



(In millions)
Six Months Ended June 30, 2019	$	326
Impact of change in revenue		9
Contract claims		13
Six Months Ended June 30, 2020	$	347

The increase in contract claims costs reflects higher incidence in the second quarter of 2020 in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, and normal inflation. Contract claims costs also reflects a favorable weather impact of approximately $5 million, process improvement benefits and lower incidence in the heating trade in the first quarter of 2020.

Selling and Administrative Expenses

We reported selling and administrative expenses of $125 million and $104 million for the three months ended June 30, 2020 and 2019, respectively, and $229 million and $193 million for the six months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $90 million and $74 million, respectively, and general and administrative expenses of $35 million and $30 million, respectively. For the six months ended June 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $164 million and $138 million, respectively, and general and administrative expenses of $65 million and $55 million, respectively. The following tables provide a summary of changes in selling and administrative expenses:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019



(In millions)
Three Months Ended June 30, 2019	$	104
Sales and marketing costs		14
Customer service costs		2
Stock-based compensation expense		2
General and administrative costs		3
Three Months Ended June 30, 2020	$	125

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel. The increase in customer service costs was primarily driven by investments to enhance customer service. General and administrative costs increased compared to prior year primarily due to investments in technology and incremental direct costs related to COVID-19 of $1 million.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019



(In millions)
Six Months Ended June 30, 2019	$	193
Sales and marketing costs		20
Customer service costs		6
Stock-based compensation		4
Secondary offering costs		(2)
General and administrative costs		8
Six Months Ended June 30, 2020	$	229

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel. The increase in customer service costs was primarily driven by investments to enhance customer service. General and administrative costs increased compared to prior year primarily due to higher personnel costs, investments in technology and incremental direct costs related to COVID-19 of $1 million.

Depreciation Expense

Depreciation expense was $5 million and $4 million for the three months ended June 30, 2020 and 2019, respectively, and $10 million and $9 million for the six months ended June 30, 2020 and 2019, respectively.

Amortization Expense

Amortization expense was $4 million and $1 million for the three months ended June 30, 2020 and 2019, respectively, and $7 million and $3 million for the six months ended June 30, 2020 and 2019, respectively. For the three and six months ended June 30, 2020, the increase was primarily due to amortization of intangible assets recognized from our acquisition of Streem.

Restructuring Charges

Restructuring charges were $1 million and less than $1 million for the three months ended June 30, 2020 and 2019, respectively, and $4 million and less than $1 million for the six months ended June 30, 2020 and 2019, respectively.

Interest Expense

Interest expense was $14 million and $16 million for the three months ended June 30, 2020 and 2019, respectively, and $29 million and $31 million for the six months ended June 30, 2020 and 2019, respectively.

Interest and Net Investment Loss (Income)

Interest and net investment loss (income) reflects a loss of $3 million for the three months ended June 30, 2020 and income of $2 million for the three months ended June 30, 2019 and a loss of $1 million for the six months ended June 30, 2020 and income of $3 million for the six months ended June 30, 2019. For the three and six months ended June 30, 2020, amounts primarily comprised a $3 million loss on investment, offset, in part, by interest on our investment portfolio. For the three and six months ended June 30, 2019, amounts primarily comprised interest on our investment portfolio.

Provision for Income Taxes

The effective tax rate on income was 25.5 percent and 25.1 percent for the three months ended June 30, 2020 and 2019, respectively, and 25.4 percent for each of the six months ended June 30, 2020 and 2019.

Net Income

Net income was $49 million and $60 million for the three months ended June 30, 2020 and 2019, respectively, and $62 million and $73 million for the six months ended June 30, 2020 and 2019, respectively. For the three and six months ended June 30, 2020 compared to 2019, the decrease was driven by the aforementioned operating results, offset, in part, by a decrease in the provision for income taxes as a result of lower income before income taxes.

Adjusted EBITDA

Adjusted EBITDA was $100 million and $105 million for the three months ended June 30, 2020 and 2019, respectively, and $147 million and $149 million for the six months ended June 30, 2020 and 2019, respectively. The following tables provide a summary of changes in our Adjusted EBITDA:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019



(In millions)
Three Months Ended June 30, 2019	$	105
Impact of change in revenue		25
Contract claims costs		(13)
Sales and marketing costs		(14)
Customer service costs		(2)
General and administrative costs		(1)
Other		(1)
Three Months Ended June 30, 2020	$	100

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel. The increase in customer service costs was primarily driven by investments to enhance customer service. General and administrative costs increased compared to prior year primarily due to investments in technology. Other primarily consists of interest and net investment income.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019



(In millions)
Six Months Ended June 30, 2019	$	149
Impact of change in revenue		44
Contract claims		(13)
Sales and marketing costs		(20)
Customer service costs		(6)
General and administrative costs		(6)
Six Months Ended June 30, 2020	$	147

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel. The increase in customer service costs was primarily driven by investments to enhance customer service. General and administrative costs increased compared to prior year primarily due to higher personnel costs and investments in technology.

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2020		2019		2020		2019
Net Income	$	49	$	60	$	62	$	73
Depreciation and amortization expense		10		6		18		12
Restructuring charges		1		—		4		—
Spin-off charges		—		—		—		1
Provision for income taxes		17		20		21		25
Non-cash stock-based compensation expense		5		3		8		4
Interest expense		14		16		29		31
Secondary offering costs		—		—		—		2
Other non-operating expenses⁽¹⁾		5		—		5		—
Adjusted EBITDA	$	100	$	105	$	147	$	149

________________________________

(1)Other non-operating expenses for the three and six months ended June 30, 2020 includes (a) a loss on investment of $3 million, (b) incremental direct costs related to COVID-19 of $1 million, which were temporary in nature and primarily related to incremental health and childcare benefits for our employees and hoteling costs related to our offshore business process outsourcers and (c) acquisition-related transaction costs of less than $1 million.

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 covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of June 30, 2020, we were in compliance with the covenants under the agreements that were in effect on such date. We do not believe that COVID-19 will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement and Indenture.

Cash and short-term marketable securities totaled $548 million and $434 million as of June 30, 2020 and December 31, 2019, respectively. Cash and short-term marketable securities include balances associated with regulatory requirements in our business. See ��—Limitations on Distributions and Dividends by Subsidiaries.” As of June 30, 2020 and December 31, 2019, the total net assets subject to these third-party restrictions was $176 million and $168 million, respectively. As of June 30, 2020, there were no letters of credit outstanding and there was $250 million of available borrowing capacity under the Revolving Credit Facility. Available liquidity was $622 million at June 30, 2020, consisting of $372 million of cash not subject to third-party restrictions and $250 million of available borrowing capacity under the Revolving Credit Facility. We currently believe that cash generated by operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at June 30, 2020 will provide us with sufficient liquidity to meet our obligations for the foreseeable future.

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

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

Limitations on Distributions and Dividends by Subsidiaries

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

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

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

Cash Flows

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



	Six Months Ended
	June 30,
(In millions)	2020		2019
Net cash provided from (used for):
Operating activities	$	140	$	140
Investing activities		(19)		(12)
Financing activities		(4)		(4)
Cash increase during the period	$	118	$	124

Operating Activities

Net cash provided from operating activities was $140 million for each of the six months ended June 30, 2020 and 2019.

Net cash provided from operating activities in 2020 comprised $94 million in earnings adjusted for non-cash charges and a $46 million decrease in cash required for working capital. The decrease in cash required for working capital was driven by growth in our underlying business.

Net cash provided from operating activities in 2019 comprised $93 million in earnings adjusted for non-cash charges and a $47 million decrease in cash required for working capital. The decrease in cash required for working capital was driven by growth in our underlying business.

Investing Activities

Net cash used for investing activities was $19 million and $12 million for the six months ended June 30, 2020 and 2019, respectively.

Capital expenditures increased to $18 million for the six months ended June 30, 2020, compared to $10 million for the six months ended June 30, 2019, and included recurring capital needs and technology projects. We expect capital expenditures for the full year 2020 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $30 million to $40 million. We have no additional material capital commitments at this time.

Cash flows provided from purchases, sales and maturities of securities, net, for the six months ended June 30, 2020 and 2019 were $5 million and $4 million, respectively, and were driven by the maturities of marketable securities. There were no sales of marketable securities in the six months ended June 30, 2020 and 2019.

Cash payments for business acquisitions, net of cash acquired, were $5 million for the six months ended June 30, 2020, compared to $3 million for the six months ended June 30, 2019, and represent ongoing strategic investments in our business. The business acquisition in the six months ended June 30, 2020 was made to expand the Candu on-demand offering.

Cash flows used for other investing activities for the six months ended June 30, 2019 were $3 million and represent ongoing strategic investments in our business.

Financing Activities

Net cash used for financing activities was $4 million for each of the six months ended June 30, 2020 and 2019 and primarily consisted of payments on debt and finance lease obligations.

Contractual Obligations

Our 2019 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2019. We continue to make the contractually required payments, and, therefore, the 2020 obligations and commitments described in our 2019 Form 10-K have been reduced by the required payments.

As of June 30, 2020, we have entered into additional leases as a lessee for real estate that have not yet commenced. Rent payments are expected to commence during the second half of 2020 and first half of 2021, with lease terms between three and seven years. These leases will result in future non-cancelable operating lease payments of $2 million in 2021 and $9 million in the years thereafter (2022-2028).

Financial Position

The following discussion describes changes in our financial position from December 31, 2019 to June 30, 2020.

Cash and cash equivalents increased from prior year levels, primarily due to cash provided from operating activities.

Accounts payable increased from prior year levels, reflecting the timing of payments due to the seasonality of our business.

Home service plan claims increased from prior year levels, primarily due to the seasonality of contract claims, which increased amounts due to contractors and suppliers.

Other accrued liabilities and other long-term liabilities each increased from prior year levels, primarily due to the change in the valuation of our interest rate swap. See Note 16 to the condensed consolidated financial statements included in Part I, Item 1 of this report for more information.

Off-Balance Sheet Arrangements

As of June 30, 2020, 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.

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing an interest rate swap. There have been no material changes to the market risk associated with debt obligations and other significant instruments from the risks described in Part II, Item 7A in our 2019 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

Changes in internal control over financial reporting

No changes in our internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act, occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic, our workforce began working remotely in March 2020. These changes to the working environment did not have a material effect on our internal controls over financial reporting during the most recent quarter.

‎

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

For information regarding factors that could affect our business, financial condition or results of operations, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2019 Form 10-K and Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Except as described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, there have been no material changes to the risk factors disclosed in our 2019 Form 10-K. The risks described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

‎

ITEM 6. EXHIBITS

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. (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. (incorporated by reference to Exhibit 3.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
3.2		Amended and Restated Bylaws of frontdoor, inc. (incorporated by reference to Exhibit 3.2 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension Schema
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*		Inline XBRL Extension Presentation Linkbase
104*		Cover page formatted as Inline XBRL and included in Exhibit 101.

___________________________________

* Filed herewith.

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

‎

SIGNATURE

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

Date: August 6, 2020


	frontdoor, inc.
	(Registrant)

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

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Frontdoor (FTDR) 10-Q2020 Q2 Quarterly report

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