What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-04 compared with 2024-08-01 · 129 added, 120 removed, 300 unchanged (45% of the section changed)

11 unchanged sentences

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.

As of September 30, 2024, we had approximately two million active home warranties across all brands in the United States.

For the three months ended September 30, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $540 million, $100 million and $165 million, respectively, and $524 million, $71 million and $128 million, respectively.

For the nine months ended September 30, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $1,461 million, $226 million and $394 million, respectively, and $1,414 million, $163 million and $302 million, respectively.

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

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.

For the nine months ended September 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 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.

Acquisition of 2-10 HBW

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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.

Eastern Time, and applicable regulators in Florida and the District of Columbia have approved the transaction subject to customary regulatory conditions.

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

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Macroeconomic Conditions

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.

Current macroeconomic conditions, including inflation, high interest rates, the challenging real estate market, and ongoing 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 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.

During the nine months ended September 30, 2024 as compared to 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 high 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 high interest rates.

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.

• Our labor, parts and equipment costs continue to be impacted by inflation.

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, 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.

For example, favorable weather trends in the third quarter of 2024 as compared to the third quarter of 2023 resulted in a lower number of service requests per customer in the HVAC trade, 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 hurricanes, tornadoes, typhoons, wildfires or earthquakes, typically do not increase our obligations to provide service.

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

We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry.

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

We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry.

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.

See “—Acquisition of 2-10 HBW” for additional information related to the pending acquisition.

Non-GAAP Financial Measures

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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 six months ended June 30, 2024.

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

Results of Operations

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

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

Three Months Ended

September 30,

(In millions)

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Provision for income taxes

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

Six Months Ended

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Nine Months Ended

September 30,

(In millions)

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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.

We reported revenue of $540 million and $524 million for the three months ended September 30, 2024 and 2023, respectively, and $1,461 million and $1,414 million for the nine months ended September 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 September 30, 2024 Compared to Three Months Ended September 30, 2023

Three Months Ended

September 30,

Increase (Decrease)

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(1) First-year revenue only.

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

Revenue increased three percent for the three months ended September 30, 2024 compared to the three months ended September 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.

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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

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Nine Months Ended

September 30,

Increase (Decrease)

3 unchanged sentences

(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.

Revenue increased three percent for the nine months ended September 30, 2024 compared to the nine months ended September 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.

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

September 30,

(In millions)

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Customer retention rate

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.

The reduction in the number of home warranties as of September 30, 2024 was primarily driven 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 $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.

We reported cost of services rendered of $235 million and $256 million for the three months ended September 30, 2024 and 2023, respectively, and $655 million and $706 million for the nine months ended September 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

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

(In millions)

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Impact of change in revenue

Contract claims costs

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, 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

Three Months Ended September 30, 2024

The decrease in contract claims costs primarily reflects a lower number of service requests per customer, which was primarily driven by a favorable weather impact of $14 million, as milder weather drove a lower number of service requests in the HVAC trade.

The decrease also included the impact of higher trade service fees, which favorably impacted the net cost per service request, and continued process improvements, specifically relating to better cost management across our contractor network.

The decrease was offset, in part, by ongoing inflationary cost pressures.

Additionally, contract claims costs reflects a $3 million favorable adjustment related to the development of prior period claims, compared to a $9 million favorable adjustment in the third quarter of 2023.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

(In millions)

Six Months Ended June 30, 2023

Nine Months Ended September 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.

Nine Months Ended September 30, 2024

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, a favorable weather impact of $10 million, as milder weather drove a lower number of service requests in the HVAC trade, and continued process improvement initiatives, specifically relating to better cost management across our contractor network.

The decrease was offset, in part, by ongoing inflationary cost pressures.

Selling and Administrative Expenses

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.

We reported selling and administrative expenses of $154 million and $152 million for the three months ended September 30, 2024 and 2023, respectively, and $456 million and $439 million for the nine months ended September 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

Nine Months Ended

September 30,

(In millions)

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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

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

(In millions)

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Sales and marketing costs

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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.

Three Months Ended September 30, 2024

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

Other general and administrative costs increased primarily due to increased professional fees and personnel costs.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

(In millions)

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Sales and marketing costs

Customer service costs

Stock-based compensation expense

Acquisition-related costs

Other general and administrative costs

Six Months Ended June 30, 2024

Nine Months Ended September 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.

Other general and administrative costs increased primarily due to increased personnel costs.

Depreciation and Amortization Expense

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.

Depreciation expense was $9 million and $8 million for the three months ended September 30, 2024 and 2023, respectively, and $26 million and $24 million for the nine months ended September 30, 2024 and 2023, respectively.

Amortization expense was $1 million for each of the three months ended September 30, 2024 and 2023 and $2 million and $3 million for the nine months ended September 30, 2024 and 2023, respectively.

Restructuring Charges

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.

We had restructuring charges of $3 million and $5 million during the three months ended September 30, 2024 and 2023, respectively, and $5 million and $6 million for the nine months ended September 30, 2024 and 2023, respectively.

For the three months ended September 30, 2024, restructuring charges include $3 million of severance costs.

For the nine months ended September 30, 2024, restructuring charges include $4 million of severance costs and $1 million of expenses related to the exit of certain operating leases.

For the three and nine months ended September 30, 2023, restructuring charges primarily include a $2 million impairment charge related to our Phoenix, Arizona 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.

Interest Expense

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 expense was $10 million for each of the three months ended September 30, 2024 and 2023 and $29 million and $30 million for the nine months ended September 30, 2024 and 2023, respectively.

Interest and Net Investment Income

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.

Interest and net investment income was $5 million and $4 million for the three months ended September 30, 2024 and 2023, respectively, and $15 million and $12 million for the nine months ended September 30, 2024 and 2023, respectively.

The increases were driven 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 25.8 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.

The effective tax rate on income before income taxes was 25.1 percent and 25.3 percent for the three months ended September 30, 2024 and 2023, respectively, and 25.3 percent and 25.1 percent for the nine months ended September 30, 2024 and 2023, respectively.

Net income was $100 million and $71 million for the three months ended September 30, 2024 and 2023, respectively, and $226 million and $163 million for the nine months ended September 30, 2024 and 2023, respectively.

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

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.

Adjusted EBITDA was $165 million and $128 million for the three months ended September 30, 2024 and 2023, respectively, and $394 million and $302 million for the nine months ended September 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

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

(In millions)

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Impact of change in revenue

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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

Three Months Ended September 30, 2024

The impact of change in revenue is primarily driven by improved price realization, offset, in part, by the reduction in number of home warranties.

The decrease was offset, in part, by ongoing inflationary cost pressures.

Other general and administrative costs increased primarily due to increased professional fees and personnel costs.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

(In millions)

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Impact of change in revenue

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Interest and net investment income

Six Months Ended June 30, 2024

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

Nine Months Ended September 30, 2024

The impact of change in revenue is primarily driven by improved price realization, offset, in part, 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, a favorable weather impact of $10 million, as milder weather drove a lower number of service requests in the HVAC trade, and continued process improvement initiatives, specifically relating to better cost management across our contractor network.

The decrease was offset, in part, by ongoing inflationary cost pressures.

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

Other general and administrative costs increased primarily due to increased personnel costs.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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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 June 30, 2024, we were in compliance with the covenants under the Credit Agreement.

As of September 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 $419 million and $325 million as of June 30, 2024 and December 31, 2023, respectively.

Cash and cash equivalents totaled $375 million and $325 million as of September 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 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.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of September 30, 2024 and December 31, 2023, the total net assets subject to these third-party restrictions were $161 million and $157 million, respectively.

As of September 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, 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 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 September 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.

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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, 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.

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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.

Eastern Time, and applicable regulators in Florida and the District of Columbia have approved the transaction subject to customary regulatory conditions.

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 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.

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.

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.

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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.

As of September 30, 2024, we have not made any repurchases under this program.

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

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024.

At the time of expiration, we repurchased a total of 11,319,091 outstanding shares at an aggregate cost of $400 million under this program, 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.

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:

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Operating Activities

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

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

Net cash provided from operating activities was $212 million and $139 million for the nine months ended September 30, 2024 and 2023, respectively.

Net cash provided from operating activities for the nine months ended September 30, 2024 comprised $281 million in earnings adjusted for non-cash charges, offset, in part, by $66 million in cash used for working capital and $3 million in payments for restructuring charges.

Cash used for working capital was primarily driven by seasonality, 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 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.

Investing Activities

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.

We have no additional material capital commitments at this time.

Net cash used for investing activities was $31 million and $23 million for the nine months ended September 30, 2024 and 2023, respectively.

Capital expenditures were $31 million and $23 million for nine months ended September 30, 2024 and 2023, respectively, and included recurring capital needs and technology projects.

Other than the pending acquisition of 2-10 HBW, we have no additional material capital commitments at this time.

Financing Activities

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.

Net cash used for financing activities was $131 million and $88 million for the nine months ended September 30, 2024 and 2023, respectively.

For the nine months ended September 30, 2024, we made scheduled principal payments of debt of $13 million and purchased outstanding shares of our common stock at an aggregate cost of $120 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.

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

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Financial Position

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.

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

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

• Contract assets increased during the nine months ended September 30, 2024, reflecting the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

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

• Accrued liabilities—Other increased during the nine months ended September 30, 2024, reflecting an increase in federal income tax payable.

• Deferred revenue decreased during the nine months ended September 30, 2024, reflecting recognition of revenue on an other-than-straight-line basis to match the timing of cost recognition 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.

• Long-term debt decreased during the nine months ended September 30, 2024, reflecting scheduled debt payments.

• Total shareholders’ equity was $261 million as of September 30, 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.

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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis