What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 195 added, 94 removed, 225 unchanged (56% of the section changed)

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Our actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as the risk factors discussed in Part I, Item 1A.

“Risk Factors” in our 2023 Form 10-K.

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” and “Risk Factors” as well as the risk factors discussed in Part I, Item 1A.

“Risk Factors” in our 2023 Form 10-K and Part II, Item 1A.

“Risk Factors” of this Quarterly Report on Form 10-Q.

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.

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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.

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

As of June 30, 2024, we had 2.0 million active home warranties across all brands in the United States.

For the three months ended June 30, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $542 million, $92 million and $158 million, respectively, and $523 million, $70 million and $121 million, respectively.

For the six months ended June 30, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $920 million, $126 million and $229 million, respectively, and $890 million, $91 million and $174 million, respectively.

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

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.

For the six months ended June 30, 2024, our total operating revenue included 78 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 six percent was derived from other revenue channels.

For the six months ended June 30, 2023, our total operating revenue included 76 percent of revenue derived from existing customer renewals, while eight percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and four percent was derived from other revenue channels.

Acquisition of 2-10 HBW

On June 3, 2024, we entered into the Purchase Agreement to acquire 2-10 HBW for aggregate cash consideration of $585 million, subject to certain customary adjustments based on, among other things, the amount of cash, debt, transaction expenses, working capital and regulatory capital in the business as of the closing of the transaction.

2-10 HBW is a leading provider of new home structural warranty protection plans, which are insurance-backed offerings that provide builders’ coverage for structural failures.

2-10 HBW also provides direct-to-consumer home warranties.

The transaction is supported by a fully committed bridge facility under our existing Credit Agreement and cash.

Permanent financing is expected to consist of new term loan borrowings.

The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired on July 17, 2024, at 11:59 p.m.

Eastern Time.

The transaction is anticipated to close in the fourth quarter of 2024, subject to additional regulatory approval and other customary closing conditions.

Key Factors and Trends Affecting Our Results of Operations

Macroeconomic Conditions

Current macroeconomic conditions, including inflation, higher interest rates, the challenging real estate market and rising global geopolitical issues, may affect existing home sales, consumer sentiment or labor availability.

Current macroeconomic conditions, including inflation, higher interest rates, the challenging real estate market, upcoming federal elections and rising global geopolitical issues, may affect existing home sales, consumer sentiment or labor availability.

These conditions may reduce demand for our services, increase our costs or otherwise adversely impact our business.

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 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.

During the six months ended June 30, 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 six months ended June 30, 2023, primarily resulting from higher interest rates, combined with low home inventory levels, continue to constrain demand for home warranties.

• 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.

We believe this environment continues to impact demand for home warranties.

• Our contractor network continues to be impacted by inflation as compared to the six months ended June 30, 2023, including higher labor, parts and equipment costs.

We continue to take actions to mitigate these impacts, including increasing trade service fees and the percent of service requests completed by lower-cost preferred contractors.

The ultimate implications of the current macroeconomic conditions on our results of operations and overall financial performance remain uncertain.

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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 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.

For example, unfavorable weather trends in the second quarter of 2024 as compared to the second quarter of 2023 resulted in a higher number of service requests per customer in the HVAC trade, which unfavorably 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 hurricanes, tornadoes, typhoons, 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.

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

For example, on June 3, 2024, we entered into the Purchase Agreement to acquire 2-10 HBW, a leading provider of new home structural warranty protection plans.

Non-GAAP Financial Measures

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• operating expenses,

• gross profit,

• gross profit margin,

• net income,

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• customer retention rate.

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

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

Home warranty contracts are typically one year in duration.

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and various regulatory compliance costs.

Gross Profit and Gross Profit Margin.

The presentation of gross profit and gross profit margin provides measures of performance which are primarily a function of the revenue drivers discussed above and contract claims costs drivers, primarily contractor costs and parts, appliances and home systems costs.

Gross profit is computed by deducting cost of services rendered from revenue.

Gross profit margin is computed as gross profit as a percentage of revenue.

Net Income and Earnings Per Share .

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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 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), 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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restructuring charges;

acquisition-related costs;

provision for income taxes;

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We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.

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 and acquisition initiatives and equity-based, long-term incentive plans.

Net Cash Provided from Operating Activities and Free Cash Flow.

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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 three months ended March 31, 2024.

There have been no material changes to our critical accounting policies for the six months ended June 30, 2024.

Results of Operations

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Three Months Ended

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Provision for income taxes

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:

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Six Months Ended

(In millions)

Cost of services rendered

Selling and administrative expenses

Depreciation and amortization expense

Restructuring charges

Interest expense

Interest and net investment income

Income before Income Taxes

Provision for income taxes

We reported revenue of $542 million and $523 million for the three months ended June 30, 2024 and 2023, respectively, and $920 million and $890 million for the six months ended June 30, 2024 and 2023, respectively.

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Three Months Ended

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(1) First-year revenue only.

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.

Revenue increased four percent for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

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

The decreases in real estate revenue and direct-to-consumer revenue primarily reflect a decline in the number of home warranties driven by the challenging real estate market and the impact of inflation on consumer sentiment.

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

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Six Months Ended

Increase (Decrease)

(In millions)

Real estate (1)

Direct-to-consumer (1)

(1) First-year revenue only.

Revenue increased three percent for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

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

The increase in other revenue was 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:

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Customer retention rate

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.

The reduction in the number of home warranties as of June 30, 2024 was primarily impacted by the challenging real estate market and the impact of inflation on consumer sentiment.

Cost of Services Rendered

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:

We reported cost of services rendered of $237 million and $253 million for the three months ended June 30, 2024 and 2023, respectively, and $420 million and $449 million for the six months ended June 30, 2024 and 2023, respectively.

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

(In millions)

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Impact of change in revenue

Contract claims costs

Three Months Ended March 31, 2024

Three Months Ended June 30, 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.

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, and continued process improvement initiatives, specifically relating to better cost management across our contractor network.

The decrease was offset, in part, by an unfavorable weather impact of $4 million, as warmer weather drove a higher number of service requests in the HVAC trade, and ongoing inflationary cost pressures.

Additionally, contract claims costs reflects a $5 million favorable adjustment related to the development of prior period claims, compared to a $4 million favorable adjustment in the second quarter of 2023.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

(In millions)

Six Months Ended June 30, 2023

Impact of change in revenue

Contract claims costs

Six Months Ended June 30, 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.

Additionally, contract claims costs reflects a $4 million favorable adjustment related to the development of prior period claims, compared to a $9 million favorable adjustment in the first six months of 2023.

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.

We reported selling and administrative expenses of $167 million and $162 million for the three months ended June 30, 2024 and 2023, respectively, and $302 million and $287 million for the six months ended June 30, 2024 and 2023, respectively.

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

Three Months Ended

Six Months Ended

(In millions)

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General and administrative costs

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

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

(In millions)

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Sales and marketing costs

Stock-based compensation expense

Acquisition-related costs

Other general and administrative costs

Three Months Ended June 30, 2024

Sales and marketing costs decreased primarily due to sales optimization efforts.

Other general and administrative costs increased primarily due to increased personnel costs, offset, in part by, a decrease in professional fees.

Acquisition-related costs are related to the 2-10 HBW Acquisition and represent direct third-party costs, including legal, accounting and financial advisory fees.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

(In millions)

Six Months Ended June 30, 2023

Sales and marketing costs

Customer service costs

Stock-based compensation expense

Acquisition-related costs

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.

Six Months Ended June 30, 2024

Sales and marketing costs increased primarily due to our investment in marketing associated with our direct-to-consumer channel, offset, in part by, a reduction in costs driven by sales optimization efforts.

Other general and administrative costs increased primarily due to increased personnel costs, offset, in part by, a decrease in professional fees.

Acquisition-related costs are related to the 2-10 HBW Acquisition and represent direct third-party costs, including legal, accounting and financial advisory fees.

Depreciation and Amortization Expense

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.

Depreciation expense was $8 million for each of the three months ended June 30, 2024 and 2023 and $17 million and $16 million for the six months ended June 30, 2024 and 2023, respectively.

Amortization expense was $1 million for each of the three months ended June 30, 2024 and 2023 and $1 million and $2 million for the six months ended June 30, 2024 and 2023, respectively.

Restructuring Charges

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.

We had restructuring charges of $1 million and less than $1 million during the three months ended June 30, 2024 and 2023, respectively, and $1 million for each of the six months ended June 30, 2024 and 2023.

For the three and six months ended June 30, 2024, these charges primarily include expenses related to the exit of certain operating leases and severance costs.

For the three and six months ended June 30, 2023, these charges primarily include severance costs.

Interest Expense

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

Interest expense was $10 million for each of the three months ended June 30, 2024 and 2023 and $20 million for each of the six months ended June 30, 2024 and 2023.

Interest and Net Investment Income

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

Interest and net investment income was $5 million and $4 million for the three months ended June 30, 2024 and 2023, respectively, and $10 million and $8 million for the six months ended June 30, 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 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.

The effective tax rate on income before income taxes was 25.8 percent and 24.8 percent for the three months ended June 30, 2024 and 2023, respectively, and 25.4 percent and 24.9 percent for the six months ended June 30, 2024 and 2023, respectively.

The increase in the effective tax rate for the three and six months ended June 30, 2024 compared to 2023 was primarily due to the capitalization for tax purposes of acquisition-related costs.

Net income was $92 million and $70 million for the three months ended June 30, 2024 and 2023, respectively, and $126 million and $91 million for the six months ended June 30, 2024 and 2023, respectively.

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

Adjusted EBITDA

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:

Adjusted EBITDA was $158 million and $121 million for the three months ended June 30, 2024 and 2023, respectively, and $229 million and $174 million for the six months ended June 30, 2024 and 2023, respectively.

The following tables provide a summary of the changes in our Adjusted EBITDA:

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

(In millions)

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Impact of change in revenue

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Sales and marketing costs

General and administrative costs

Interest and net investment income

Three Months Ended June 30, 2024

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

Sales and marketing costs decreased primarily due to sales optimization efforts.

Other general and administrative costs increased primarily due to increased personnel costs, offset, in part by, a decrease in professional fees.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

(In millions)

Six Months Ended June 30, 2023

Impact of change in revenue

Contract claims costs

Sales and marketing costs

Customer service costs

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Interest and net investment income

Three Months Ended March 31, 2024

Six Months Ended June 30, 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.

Other general and administrative costs increased primarily due to increased personnel costs, offset, in part by, a decrease in professional fees.

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

Three Months Ended

Six Months Ended

(In millions)

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Restructuring charges (1)

Acquisition-related costs (1)

Provision for income taxes

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Adjusted EBITDA

(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.

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

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

We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

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

As of June 30, 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 $378 million and $325 million as of March 31, 2024 and December 31, 2023, respectively.

Cash and cash equivalents totaled $419 million and $325 million as of June 30, 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 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.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of June 30, 2024 and December 31, 2023, the total net assets subject to these third-party restrictions were $167 million and $157 million, respectively.

As of June 30, 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 March 31, 2024 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We currently believe that cash generated from operations, our cash on hand, cash available from our committed financing arrangements and available borrowing capacity under the Revolving Credit Facility as of June 30, 2024 will provide us with sufficient liquidity to meet our obligations in the short- and long-term, including the 2-10 HBW Acquisition.

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

From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements.

We regularly 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.

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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.

Acquisition of 2-10 HBW

2-10 HBW is a leading provider of new home structural warranty protection plans, which are insurance-backed offerings that provide builders’ coverage for structural failures.

2-10 HBW also provides direct-to-consumer home warranties.

The transaction is supported by a fully committed bridge facility under our existing Credit Agreement and cash.

Permanent financing is expected to consist of new term loan borrowings.

The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired on July 17, 2024, at 11:59 p.m.

Eastern Time.

The transaction is anticipated to close in the fourth quarter of 2024, subject to additional regulatory approval and other customary closing conditions.

Share Repurchase Program

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

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

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.

As of June 30, 2024, we have repurchased a total of 9,843,294 outstanding shares at a cost of $339 million, which is included in treasury stock on the condensed consolidated statements of financial position included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of June 30, 2024, we had $61 million remaining available for future repurchases under this program through September 3, 2024.

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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The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion.

On July 26, 2024, our Board of Directors approved a new share repurchase authorization of up to $650 million of our common stock over the three-year period from September 4, 2024 through September 4, 2027.

Purchases under this new $650 million 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 4, 2027.

The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of the company’s stock, general market and economic conditions, the company’s liquidity requirements, applicable legal requirements and other business considerations.

The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion.

Limitations on Distributions and Dividends by Subsidiaries

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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:

Three Months Ended

Six Months Ended

(In millions)

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Operating Activities

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.

Net cash provided from operating activities was $187 million and $112 million for the six months ended June 30, 2024 and 2023, respectively.

Net cash provided from operating activities for the six months ended June 30, 2024 comprised $161 million in earnings adjusted for non-cash charges and $28 million in cash provided from working capital, offset, in part, by $3 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.

Net cash provided from operating activities for the six months ended June 30, 2023 comprised $117 million in earnings adjusted for non-cash charges, offset, in part, by $5 million in cash used for working capital.

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

Investing Activities

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.

Net cash used for investing activities was $22 million and $15 million for the six months ended June 30, 2024 and 2023, respectively.

Capital expenditures were $22 million and $15 million for six months ended June 30, 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.

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Financing Activities

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.

Net cash used for financing activities was $71 million and $44 million for the six months ended June 30, 2024 and 2023, respectively.

For the six months ended June 30, 2024, we made scheduled principal payments of debt of $8 million and purchased outstanding shares of our common stock at an aggregate cost of $58 million.

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

For the six months ended June 30, 2023, we made scheduled principal payments of debt of $8 million and purchased outstanding shares at an aggregate cost of $34 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:

Three Months Ended

Six Months Ended

(In millions)

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We continue to make the contractually required payments associated with these commitments.

There are no significant additions to our obligations and commitments since those reported in the 2023 Form 10-K.

The transaction is supported by a fully committed bridge facility under our existing Credit Agreement and cash.

Permanent financing is expected to consist of new term loan borrowings.

The transaction is anticipated to close in the fourth quarter of 2024, subject to regulatory approval and other customary closing conditions.

Financial Position

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.

A summary of the significant changes in our financial position from December 31, 2023 to June 30, 2024 is as follows:

• Cash and cash equivalents increased during the six months ended June 30, 2024, reflecting cash provided from operating activities, offset, in part, by capital expenditures, scheduled principal payments of debt and purchases of outstanding shares.

• Accounts payable increased during the six months ended June 30, 2024, reflecting the timing of trade payables driven by seasonality.

• Accrued liabilities—Payroll and related expenses decreased during the six months ended June 30, 2024, reflecting payments of accrued bonuses.

• Accrued liabilities—Home warranty claims increased during the six months ended June 30, 2024, reflecting a higher number of service requests driven by seasonality.

• Accrued liabilities—Other increased during the six months ended June 30, 2024, reflecting an increase in federal income tax payable and an increase in our on-demand home service costs.

• Total shareholders’ equity was $214 million as of six months ended June 30, 2024 compared to $136 million as of December 31, 2023.

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

See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

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