What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-01 · 115 added, 232 removed, 204 unchanged (63% of the section changed)

5 unchanged sentences

“Risk Factors” in our 2023 Form 10-K.

Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates primarily under the American Home Shield brand.

Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances.

Our home service plan customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than 20 home systems and appliances, including electrical, plumbing, HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps.

Frontdoor also provides on-demand home services and a one-stop app for home repair and maintenance.

Enabled by our Streem technology, the app empowers homeowners by connecting them in real time through video chat with pre-qualified experts to diagnose and solve their problems.

As of September 30, 2023, we had 2.0 million active home service plans across all brands in the United States.

For the three months ended September 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $524 million, $71 million and $128 million, respectively, and $484 million, $28 million and $79 million, respectively .

For the nine months ended September 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $1,414 million, $163 million and $302 million, respectively, and $1,322 million, $63 million and $181 million, respectively.

Frontdoor is the leading provider of home warranties in the United States, as measured by revenue, and operates primarily under the American Home Shield brand.

Our customizable home warranties 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 warranty customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than 20 home systems and appliances, including electrical, plumbing, HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps.

Frontdoor also provides on-demand home services and a one-stop app experience for home repair and maintenance.

Enabled by our Streem technology, the app empowers homeowners by connecting them in real time through video chat with qualified experts to diagnose and solve their problems.

As of March 31, 2024, we had 2.0 million active home warranties across all brands in the United States.

For the three months ended March 31, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $378 million, $34 million and $71 million, respectively, and $367 million, $22 million and $54 million, respectively.

For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations—Adjusted EBITDA.”

For the nine months ended September 30, 2023 , our total operating revenue included 77 percent of revenue derived from existing customer renewals, while eight percent and 11 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and four percent was derived from other revenue channels.

For the nine months ended September 30, 2022 , our total operating revenue included 72 percent of revenue derived from existing customer renewals, while 12 percent and 13 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

For the three months ended March 31, 2024, our total operating revenue included 79 percent of revenue derived from existing customer renewals, while seven percent and nine percent were derived from new home warranty sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and five percent was derived from other revenue channels.

For the three months ended March 31, 2023, our total operating revenue included 76 percent of revenue derived from existing customer renewals, while nine percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

Key Factors and Trends Affecting Our Results of Operations

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While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the impact on us of unfavorable economic conditions in any particular region of the United States.

During the nine months ended September 30, 2023, our financial condition and results of operations continued to be adversely impacted by the following:

 Challenging real estate market conditions, driven by a decline in the number of home resale transactions, primarily resulting from higher interest rates, combined with low home inventory levels, continue to constrain demand for home service plans in the first-year real estate channel.

 Consumer sentiment remains mixed as a result of a broad range of current macroeconomic conditions.

We believe this environment impacted demand for home service plans in the first-year direct-to-consumer and renewal channels.

 Our contractor network continues to be impacted by inflation, including higher labor, parts and equipment costs and labor availability challenges.

During the three months ended March 31, 2024, our financial condition and results of operations continued to be adversely impacted by the following:

• Challenging real estate market conditions, driven by a decline in the number of home resale transactions as compared to the three months ended March 31, 2023, primarily resulting from higher interest rates, combined with low home inventory levels, continue to constrain demand for home warranties in the first-year real estate channel.

• Consumer sentiment remains mixed as a result of a broad range of current macroeconomic conditions, including pressure on consumer prices and rising interest rates.

We believe this environment impacted demand for home warranties in the first-year direct-to-consumer and renewal channels.

• Our contractor network continues to be impacted by inflation as compared to the three months ended March 31, 2023, including higher labor, parts and equipment costs and labor availability challenges.

We continue to take actions to mitigate these impacts, including increasing the percent of service requests completed by lower-cost preferred contractors, increasing the share of parts and equipment our contractors source through us at lower costs and other process improvement efforts.

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Seasonal fluctuations are primarily driven by a higher number of HVAC work orders in the summer months.

In 2022, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately two percent, 47 percent, 39 percent and 12 percent of our net income, and approximately 12 percent, 36 percent, 37 percent and 15 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

In 2023, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 13 percent, 41 percent, 42 percent and five percent of our net income, and approximately 15 percent, 35 percent, 37 percent and 13 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

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Extreme temperatures, typically in the winter and summer months, can lead to an increase in service requests related to home systems, particularly HVAC systems, resulting in higher costs and lower profitability, while mild temperatures in the winter or summer months can lead to lower home systems claim frequency, resulting in lower costs and higher profitability.

For example, favorable weather trends in the first nine months of 2023 as compared to the first nine months of 2022 resulted in a lower number of service requests per customer, which favorably impacted contract claims costs.

While weather variations as described above may affect our business, major weather events and other similar Acts of God, or natural disasters such as typhoons, hurricanes, tornadoes or earthquakes, typically do not increase our obligations to provide service.

Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to the home service plans that we offer.

For example, favorable weather trends in 2023 as compared to 2022 resulted in a lower number of service requests per customer, which favorably impacted contract claims costs.

While weather variations as described above may affect our business, major weather events and other similar Acts of God, or natural disasters such as typhoons, hurricanes, tornadoes, wildfires or earthquakes, typically do not increase our obligations to provide service.

Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to the home warranties that we offer.

Tariff and Import/Export Regulations

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We compete in the U.S.

home service plan category and the broader U.S.

home warranty category and the broader U.S.

home services industry.

The home service plan category is highly competitive.

While we have a broad range of competitors in each locality and region, we are the only home service plan company providing home service plans nationwide.

The home warranty category is highly competitive.

While we have a broad range of competitors in each locality and region, we are one of the few companies that provide home warranties nationwide.

The broader U.S.

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The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals.

We believe our nationwide network of approximately 15,000 pre-qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.

We believe our nationwide network of qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.

Acquisition Activity

We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions.

We anticipate that the highly fragmented nature of the home warranty category will continue to create strategic opportunities for acquisitions.

Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so.

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We have also used acquisitions to enhance our technological capabilities and geographic presence.

For example, in 2019, we acquired Streem to enable home service professionals to more efficiently interact with customers and complete repairs, and, in 2020, we acquired a business to expand on-demand home services via its intellectual capital and know-how, technology platform capabilities and geographic presence.

Non-GAAP Financial Measures

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See “—Results of Operations—Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “—Liquidity and Capital Resources—Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow.

Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period.

Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period, and Adjusted EBITDA is also a component of our incentive compensation program.

We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons.

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• Free Cash Flow,

 number of home service plans, and

• number of home warranties, and

• customer retention rate.

The majority of our revenue is generated from annual home service plan contracts entered into with our customers.

Home service plan contracts are typically one year in duration.

The majority of our revenue is generated from annual home warranty contracts entered into with our customers.

Home warranty contracts are typically one year in duration.

We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts.

Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided.

Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions.

Our revenue volume is impacted by new home warranty sales, customer retention and acquisitions.

We derive substantially all of our revenue from customers in the United States.

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Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued.

The dilutive effect, if any, of stock options, performance options (which are stock options that become exercisable upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement), restricted stock units (“RSUs”), performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and restricted stock awards (“RSAs”) are reflected in diluted earnings per share by applying the treasury stock method.

The dilutive effect, if any, of stock options, performance options (which are stock options that become exercisable upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement), restricted stock units (“RSUs”), performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA margin.

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GAAP and represents net cash provided from operating activities less property additions.

Number of Home Service Plans and Customer Retention Rate.

We report on our number of home service plans and customer retention rate as measurements of our operating performance.

Number of Home Warranties and Customer Retention Rate.

We report on our number of home warranties and customer retention rate as measurements of our operating performance.

These measurements are presented on a rolling 12-month basis in order to avoid seasonal anomalies.

The number of home service plans is representative of our recurring home service plan customer base and is measured as the number of customers with active contracts as of the respective period-end date.

Our customer retention rate is calculated as the ratio of the number of end-of-period home service plan contracts to the sum of the number of beginning-of-period home service plan contracts and the number of new home service plan sales and acquired accounts during the respective period.

The number of home warranties is representative of our recurring home warranty customer base and is measured as the number of customers with active contracts as of the respective period-end date.

Our customer retention rate is calculated as the ratio of the number of end-of-period home warranty contracts to the sum of the number of beginning-of-period home warranty contracts and the number of new home warranty sales and acquired accounts during the respective period.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Form 10-K.

There have been no material changes to our critical accounting policies for the nine months ended September 30, 2023 .

Goodwill and Intangible Assets

In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis, or more frequently, if circumstances indicate a potential impairment.

In connection with the preparation of our condensed consolidated financial statements for the third quarter of 2022, we determined that indicators of a potential goodwill and intangible assets impairment were present for our Streem reporting unit.

In particular, we will be more focused on integrating Streem’s technology into our core business and will be less focused on selling this technology platform to third-party business-to-business customers as a software-as-a-service platform.

This shift in focus resulted in significantly lower projected revenue for Streem.

We performed an interim impairment analysis of the Streem reporting unit as of September 30, 2022.

In performing the discounted cash flow analysis, we determined that the carrying amount of the Streem reporting unit exceeded its fair value.

An impairment charge of $14 million was recognized during the third quarter of 2022, which comprised the remaining net carrying amount of Streem’s goodwill of $9 million and intangibles of $5 million.

We do not believe there are any additional circumstances that would indicate any other 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.

There have been no material changes to our critical accounting policies for the three months ended March 31, 2024.

Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Three Months Ended

September 30,

(In millions)

2 unchanged sentences

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

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Provision for income taxes

_______________________________

* not meaningful

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

Nine Months Ended

September 30,

(In millions)

Cost of services rendered

Selling and administrative expenses

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

Interest expense

Interest and net investment income

Income before Income Taxes

Provision for income taxes

_______________________________

* not meaningful

We reported revenue of $524 million and $484 million for the three months ended September 30, 2023 and 2022 , respectively, and $1,414 million and $1,322 million for the nine months ended September 30, 2023 and 2022, respectively.

The following tables provide a summary of our r evenue by major customer acquisition channel:

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

We reported revenue of $378 million and $367 million for the three months ended March 31, 2024 and 2023, respectively.

The following table provides a summary of our revenue by major customer acquisition channel:

Three Months Ended

September 30,

Increase (Decrease)

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Direct-to-consumer (1)

________________________________

(1) First-year revenue only.

Revenue increased eight percent for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions.

The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging real estate market.

The decrease in direct-to-consumer revenue primarily reflects a decline in the number of first-year direct-to-consumer home service plans which we believe is a result of a broad range of macroeconomic conditions impacting consumer demand in the home service plan category.

The increase in other revenue was primarily driven by growth in on-demand home services .

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

Nine Months Ended

September 30,

Increase (Decrease)

(In millions)

Real estate (1)

Direct-to-consumer (1)

________________________________

(1) First-year revenue only.

Revenue increased seven percent for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions.

The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging real estate market.

The increase in other revenue was primarily driven by growth in on-demand home services .

The following table provides a summary of the number of home service plans, reduction in number of home service plans and customer retention rate:

September 30,

Revenue increased three percent for the three months ended March 31, 2024 compared to the three months ended March 31 , 2023.

The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions, offset, in part, by a decline in the number of renewed home warranties.

The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home warranties driven by a continuation of the challenging real estate market, offset, in part, by improved price realization from our prior pricing actions.

The decrease in direct-to-consumer revenue primarily reflects a decline in the number of first-year direct-to-consumer home warranties, which we believe was driven by a decline in the overall category demand for home warranties.

The increase in other revenue was primarily driven by growth in on-demand home services, primarily new HVAC sales.

The following table provides a summary of the number of home warranties, reduction in number of home warranties and customer retention rate:

(In millions)

Number of home service plans

Reduction in number of home service plans

Number of home warranties

Reduction in number of home warranties

Customer retention rate

The reduction in the number of home service plans as of September 30, 2023 was primarily impacted by a decline in the number of first-year real estate home service plans, which was driven by a continuation of the challenging real estate market, as well as a decline in the number of direct-to-consumer home service plans, which we believe resulted from a change in consumer sentiment as a result of macroeconomic conditions.

The reduction in the number of home warranties as of March 31, 2024 was primarily impacted by a decline in the number of first-year real estate home warranties, which was driven by a continuation of the challenging real estate market, as well as a decline in the number of direct-to-consumer home warranties, which we believe was driven by a decline in the overall category demand for home warranties.

Cost of Services Rendered

We reported cost of services rendered of $256 million and $274 million for the three months ended September 30, 2023 and 2022 , respectively, and $706 million and $757 million for the nine months ended September 30, 2023 and 2022, respectively .

The following tables provide a summary of the changes in cost of services rendered:

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

(In millions)

Three Months Ended September 30, 2022

Impact of change in revenue

Contract claims costs

Three Months Ended September 30, 2023

The impact of change in revenue is driven by growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs primarily reflects the favorable impact of continued process improvement initiatives specifically relating to better cost management efforts across our contractor network, a transition to higher service fees, and a lower number of service requests per customer, offset, in part, by ongoing inflationary cost pressure.

Additionally, contract claims costs reflects a $9 million favorable adjustment related to the development of prior period claims, compared to a $2 million favorable adjustment in the third quarter of 2022.

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

We reported cost of services rendered of $184 million and $197 million for the three months ended March 31, 2024 and 2023, respectively.

The following table provides a summary of the changes in cost of services rendered:

(In millions)

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Impact of change in revenue

Contract claims costs

Nine Months Ended September 30, 2023

The impact of change in revenue is driven by the reduction in number of home service plans, offset, in part, by growth in on-demand home services.

The decrease in contract claims costs primarily reflects a favorable weather impact of $21 million as mild weather drove a lower number of service requests per customer.

The favorable impact of continued process improvement initiatives specifically relating to better cost management efforts across our contractor network and a transition to higher service fees, were offset, in part, by ongoing inflationary cost pressure.

Additionally, contract claims costs reflects a $9 million favorable adjustment related to the development of prior period claims, compared to a $12 million unfavorable adjustment in the first nine months of 2022.

Three Months Ended March 31, 2024

The impact of change in revenue is driven by the reduction in number of home warranties, offset, in part, by growth in on-demand home services.

The decrease in contract claims costs primarily reflects the impact of higher trade service fees, which drove a lower number of service requests per customer and a lower net cost per service request.

Ongoing inflationary cost pressures were offset, in part, by the favorable impact of continued process improvement initiatives specifically relating to better cost management across our contractor network.

Additionally, contract claims costs reflects a $1 million favorable adjustment related to the development of prior period claims, compared to a $6 million favorable adjustment in the first quarter of 2023.

Selling and Administrative Expenses

We reported selling and administrative expenses of $152 million and $137 million for the three months ended September 30, 2023 and 2022, respectively, and $439 million and $403 million for the nine months ended September 30, 2023 and 2022, respectively .

The following tables provide a summary of the components of selling and administrative expenses:

We reported selling and administrative expenses of $135 million and $125 million for the three months ended March 31, 2024 and 2023, respectively.

The following table provides a summary of the components of selling and administrative expenses:

Three Months Ended

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

General and administrative costs

The following tables provide a summary of the changes in selling and administrative expenses:

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table provides a summary of the changes in selling and administrative expenses:

(In millions)

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

Sales and marketing costs

1 unchanged sentence

Stock-based compensation expense

General and administrative costs

Three Months Ended September 30, 2023

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

Other general and administrative costs

Three Months Ended March 31, 2024

Sales and marketing costs increased primarily due to our investment in marketing associated with our direct-to-consumer channel.

The decrease in customer service costs was primarily driven by a lower number of service requests.

General and administrative costs increased primarily due to increased personnel costs.

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

(In millions)

Nine Months Ended September 30, 2022

Sales and marketing costs

Customer service costs

Stock-based compensation expense

General and administrative costs

Nine Months Ended September 30, 2023

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

Customer service costs decreased primarily due to lower labor costs driven by a lower number of service requests.

Gener al and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

Depreciation and Amortization Expense

Depreciation expense was $8 million and $6 million for the three months ended September 30, 2023 and 2022, respectively, and $24 million and $19 million for the nine months ended September 30, 2023 and 2022, respectively.

Amortization expense was $1 million and $2 million for the three months ended September 30, 2023 and 2022, respectively, and $3 million and $6 million for the nine months ended September 30, 2023 and 2022, respectively .

The increase in depreciation expense was primarily due to incremental capital expenditures.

The decrease in amortization expense was primarily driven by the impairment to the Streem reporting unit in the third quarter of 2022.

Goodwill and Intangibles Impairment

Goodwill and intangibles impairment was $14 million for the three and nine months ended September 30, 2022.

There was no such impairment for the three and nine months ended September 30, 2023.

See Critical Accounting Policies and Estimates – Goodwill and Intangible Assets for further information.

Depreciation expense was $8 million for each of the three months ended March 31, 2024 and 2023.

Amortization expense was $1 million for each of the three months ended March 31, 2024 and 2023.

Restructuring Charges

Restructuring charges were $5 million for each of the three months ended September 30, 2023 and 2022 and $6 million and $18 million for the nine months ended September 30, 2023 and 2022, respectively.

For the three and nine months ended September 30, 2023, restructuring charges primarily comprised a $2 million impairment charge related to our Phoenix, AZ customer service center’s operating lease right-of-use asset and the related fixed assets and $2 million of professional fees, with the balance comprised of severance costs.

The impairment charge was the result of our decision to exit the leased property.

For the three months ended September 30, 2022, restructuring charges primarily comprised a $2 million impairment of certain internally developed software and $3 million of severance and other costs.

Severance costs of $2 million related to a reduction in workforce of seven percent as part of our completed strategic review of our selling, general and administrative expenses.

For the nine months ended September 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our prior corporate headquarters facility operating lease right-of-use asset and leasehold improvements, a $2 million impairment of certain internally developed software and $5 million of severance and other costs.

Severance costs of $2 million related to a reduction in workforce of seven percent as part of our completed strategic review of our selling, general and administrative expenses.

During the fourth quarter of 2023, we will continue the evaluation of our long-term plan for our owned and leased properties.

If a decision is made to exit additional properties, an impairment of certain right-of-use assets, leasehold improvements and other related assets is reasonably possible.

We had restructuring charges of less than $1 million and $1 million during the three months ended March 31, 2024 and 2023, respectively.

For the three months ended March 31, 2024, these charges primarily include expenses related to the exit of certain operating leases and severance costs.

For the three months ended March 31, 2023, these charges primarily include severance costs.

Interest Expense

Interest expense was $10 million and $8 million for the three months ended September 30, 2023 and 2022 , respectively, and $30 million and $22 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase was driven by higher interest rates on our variable rate debt.

Interest expense was $10 million for each of the three months ended March 31, 2024 and 2023.

Interest and Net Investment Income

Interest and net investment income was $4 million and $1 million for the three months ended September 30, 2023 and 2022, respectively, and $12 million and $1 million for the nine months ended September 30, 2023 and 2022, respectively.

Interest and net investment income was $5 million and $3 million for the three months ended March 31, 2024 and 2023, respectively.

The increase driven was by higher interest rates on our cash and cash equivalent balances.

Provision for Income Taxes

The effective tax rate on income before income taxes was 25.3 percent and 28.2 percent for the three months ended September 30, 2023 and 2022 , respectively, and 25.1 percent and 26.5 percent for the nine months ended September 30, 2023 and 2022, respectively.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to 2022 was primarily due to the impact of the goodwill and intangibles impairment recorded in the third quarter of 2022 and the impact of a lower pre-tax income in 2022, offset, in part, by a reduction in income tax credits in 2023 as compared to 2022.

Net income was $71 million and $28 million for the three months ended September 30, 2023 and 2022 , respectively, and $163 million and $63 million for the nine months ended September 30, 2023 and 2022, respectively.

The effective tax rate on income before income taxes was 24.4 percent and 25.2 percent for the three months ended March 31, 2024 and 2023, respectively.

The decrease in the effective tax rate for the three months ended March 31, 2024 compared to 2023 was primarily due to the impact of share-based awards, offset, in part, by a decrease in income tax credits.

Net income was $34 million and $22 million for the three months ended March 31, 2024 and 2023, respectively.

The increase was primarily driven by the operating results discussed throughout “—Results of Operations” above.

Adjusted EBITDA

Adjusted EBITDA was $128 million and $79 million for the three months ended September 30, 2023 and 2022 , respectively, $302 million and $181 million for the nine months ended September 30, 2023 and 2022, respectively.

Adjusted EBITDA was $71 million and $54 million for the three months ended March 31, 2024 and 2023, respectively.

The following table provides a summary of the changes in our Adjusted EBITDA:

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

(In millions)

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

Impact of change in revenue

4 unchanged sentences

Interest and net investment income

Three Months Ended September 30, 2023

The impact of change in revenue reflects improved price realization and growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

Three Months Ended March 31, 2024

The impact of change in revenue is driven by the reduction in number of home warranties.

The decrease in contract claims costs primarily reflects the impact of higher trade service fees, which drove a lower number of service requests per customer and a lower net cost per service request.

Sales and marketing costs increased primarily due to our investment in marketing associated with our direct-to-consumer channel.

The decrease in customer service costs was primarily driven by a lower number of service requests.

General and administrative costs increased primarily due to increased personnel costs.

The increase in interest and net investment income was driven by higher interest rates on our cash and cash equivalent balances.

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

(In millions)

Nine Months Ended September 30, 2022

Impact of change in revenue

Contract claims costs

Sales and marketing costs

Customer service costs

General and administrative costs

Interest and net investment income

Nine Months Ended September 30, 2023

The impact of change in revenue reflects improved price realization and growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs primarily reflects a favorable weather impact of $21 million as mild weather drove a lower number of service requests per customer.

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

Customer service costs decreased primarily due to lower labor costs driven by a lower number of service requests.

General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

The increase in interest and net investment income was driven by higher interest rates on our cash and cash equivalent balances.

A reconciliation of Net Income to Adjusted EBITDA is as follows:

Three Months Ended

Nine Months Ended

September 30,

(In millions)

Depreciation and amortization expense

Goodwill and intangibles impairment (1)

Restructuring charges (1)

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Adjusted EBITDA

_________________________________

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

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

(2) We exclude non-cash stock-based compensation expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance.

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The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates.

As of September 30, 2023, we were in compliance with the covenants under the Credit Agreement.

As of March 31, 2024, we were in compliance with the covenants under the Credit Agreement.

We do not believe current macroeconomic conditions will affect our ongoing ability to meet our debt covenants.

Cash and cash equivalents totaled $320 million and $292 million as of September 30, 2023 and December 31, 2022, respectively.

Cash and cash equivalents totaled $378 million and $325 million as of March 31, 2024 and December 31, 2023, respectively.

Our cash and cash equivalents include balances associated with regulatory requirements in our business.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of September 30, 2023 and December 31, 2022, the total net assets subject to these third-party restrictions were $152 million and $145 million, respectively.

As of September 30, 2023, there was $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and the available borrowing capacity under the Revolving Credit Facility was $248 million.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of March 31, 2024 and December 31, 2023, the total net assets subject to these third-party restrictions were $165 million and $157 million, respectively.

As of March 31, 2024, there was $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and the available borrowing capacity under the Revolving Credit Facility was $248 million.

The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of September 30, 2023 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement.

This change was effective in March 2023 for Term Loan A and the Revolving Credit Facility and in June 2023 for Term Loan B.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of March 31, 2024 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We closely monitor the performance of our investment portfolio, primarily cash deposits.

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The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles.

We have a diversified investment strategy for our cash investments, and look for opportunities to improve their performance, by diversifying these financial instruments among various counterparties, with priority given for the major financial institutions that serve as lenders under the Credit Agreement.

We have a diversified investment strategy for our cash investments and give priority to the major financial institutions that serve as lenders under the Credit Agreement.

Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although our holdings exceed insured limits in substantially all of our accounts.

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.

We may, from time to time, issue new debt, 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 new debt issuance, open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt.

The amount of debt that may be issued, repurchased or otherwise retired or refinanced, if any, and the price of such issuances, repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock.

We expect to fund the share repurchases from net cash provided from operating activities.

As of September 30, 2023, we have repurchased a total of 6,793,266 outstanding shares at an aggregate cost of $236 million, which is included in treasury stock on the condensed consolidated statements of financial position , and we had $164 million remaining available for future repurchases under this program.

As of March 31, 2024, we have repurchased a total of 8,483,316 outstanding shares at a cost of $294 million, which is included in treasury stock on the condensed consolidated statements of financial position, and we had $106 million remaining available for future repurchases under this program.

Purchases under the repurchase program may be made from time to time by the company in the open market at prevailing market prices (including through a Rule 10b5-1 Plan), in privately negotiated transactions, or through any combination of these methods, through September 3, 2024.

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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.

Furthermore, there are regulatory restrictions on the ability of certain of our subsidiaries to transfer funds to us.

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.

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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 from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this Quarterly Report on Form 10-Q are summarized in the following table:

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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Operating Activities

Net cash provided from operating activities was $139 million and $80 million for the nine months ended September 30, 2023 and 2022 , respectively.

Net cash provided from operating activities for the nine months ended September 30, 2023 comprised $207 million in earnings adjusted for non-cash charges, offset, in part, by $68 million in cash used for working capital.

Cash used for working capital was primarily driven by seasonality, favorable development of prior period claims and a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale .

Net cash provided from operating activities for the nine months ended September 30, 2022 comprised $121 million in earnings adjusted for non-cash charges, offset, in part, by $41 million in cash used for working capital.

Cash used for working capital was primarily driven by seasonality and the impacts on deferred revenue of a decline in the number of first-year real estate home service plans.

Net cash provided from operating activities was $84 million and $60 million for the three months ended March 31, 2024 and 2023, respectively.

Net cash provided from operating activities for the three months ended March 31, 2024 comprised $51 million in earnings adjusted for non-cash charges and $34 million in cash provided from working capital, offset, in part, by $1 million in payments for restructuring charges.

Cash provided from working capital was primarily driven by seasonality, offset, in part, by payments of accrued bonuses and a decline in the number of first-year real estate home warranties, which are typically paid for upfront at the time of closing on the home sale.

Net cash provided from operating activities for the three months ended March 31, 2023 comprised $35 million in earnings

adjusted for non-cash charges and $26 million in cash provided from working capital, offset, in part, by $1 million in payments for restructuring charges.

Cash provided from working capital was primarily driven by seasonality.

Investing Activities

Net cash used for investing activities was $23 million and $25 million for the nine months ended September 30, 2023 and 2022, respectively .

Capital expenditures were $23 million and $30 million for the nine months ended September 30, 2023 and 2022 , respectively, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2023 relating to committed, recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million.

Net cash used for investing activities was $10 million and $8 million for the three months ended March 31, 2024 and 2023, respectively.

Capital expenditures were $10 million and $8 million for the three months ended March 31, 2024 and 2023, respectively, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2024 relating to committed, recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $45 million.

We have no additional material capital commitments at this time.

Financing Activities

Net cash used for financing activities was $88 million and $74 million for the nine months ended September 30, 2023 and 2022 , respectively.

For the nine months ended September 30, 2023, we made scheduled principal payment of debt of $13 million and purchased outstanding shares at an aggregate cost of $76 million.

For the nine months ended September 30, 2022, we made scheduled principal payments of debt and finance lease obligations of $13 million and purchased outstanding shares at an aggregate cost of $59 million .

Net cash used for financing activities was $21 million and $7 million for the three months ended March 31, 2024 and 2023, respectively.

For the three months ended March 31, 2024, we made scheduled principal payments of debt of $4 million and purchased outstanding shares of our common stock at an aggregate cost of $13 million.

Repurchases of common stock included associated commissions and taxes of less than $1 million.

For the three months ended March 31, 2023, we made scheduled principal payments of debt of $4 million.

Free Cash Flow

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GAAP measure, to Free Cash Flow using data derived from the condensed consolidated statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q:

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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Financial Position

A summary of the significant changes in our financial position from December 31, 2022 to September 30, 2023 is as follows:

 Contract asset increased during the nine months ended September 30, 2023, reflecting the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

 Home service plan claims decreased during the nine months ended September 30, 2023, primarily reflecting the impact of a $9 million favorable adjustment recorded in 2023 related to the development of prior period claims.

 Other accrued liabilities increased during the nine months ended September 30, 2023, reflecting an increase in federal income tax payable.

 Deferred revenue decreased during the nine months ended September 30, 2023, reflecting a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale.

 Long-term debt decreased during the nine months ended September 30, 2023, reflecting scheduled debt payments.

 Deferred taxes decreased during the nine months ended September 30, 2023, reflecting timing differences associated with depreciation of fixed assets and certain incentive compensation expense.

 Total shareholders’ equity was $171 million as of September 30, 2023 compared to $61 million as of December 31, 2022.

A summary of the significant changes in our financial position from December 31, 2023 to March 31, 2024 is as follows:

• Cash and cash equivalents increased during the three months ended March 31, 2024, primarily reflecting cash provided from operating activities, offset, in part, by capital expenditures, scheduled principal payments of debt and purchases of outstanding shares.

• Accrued liabilities—Payroll and related expenses decreased during the three months ended March 31, 2024, primarily reflecting payments of accrued bonuses.

• Accrued liabilities—Home warranty claims decreased during the three months ended March 31, 2024, primarily reflecting a lower number of service requests.

• Accrued liabilities—Other increased during the three months ended March 31, 2024, reflecting an increase in federal income tax payable.

• Deferred revenue increased during the three months ended March 31, 2024, reflecting a net contract liability related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition, offset, in part, by a decline in the number of first-year real estate home warranties, which are typically paid for upfront at the time of closing on the home sale.

• Total shareholders’ equity was $162 million as of March 31, 2024 compared to $136 million as of December 31, 2023.

The increase was primarily driven by net income, offset, in part, by repurchases of our common stock.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis