Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Frontdoor, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In millions, except per share data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Revenue
$
540
$
524
$
1,461
$
1,414
Cost of services rendered
235
256
655
706
Gross Profit
306
268
806
708
Selling and administrative expenses
154
152
456
439
Depreciation and amortization expense
10
9
28
28
Restructuring charges
3
5
5
6
Interest expense
10
10
29
30
Interest and net investment income
( 5
)
( 4
)
( 15
)
( 12
)
Income before Income Taxes
134
96
303
217
Provision for income taxes
34
24
77
54
Net Income
$
100
$
71
$
226
$
163
Other Comprehensive (Loss) Income, Net of Income Taxes:
Unrealized (loss) gain on derivative instruments, net of income taxes
( 4
)
—
( 3
)
2
Total Other Comprehensive (Loss) Income, Net of Income Taxes
( 4
)
—
( 3
)
2
Comprehensive Income
$
97
$
72
$
223
$
164
Earnings per Share:
Basic
$
1.32
$
0.89
$
2.92
$
2.01
Diluted
$
1.30
$
0.89
$
2.90
$
2.00
Weighted-average Common Shares Outstanding:
Basic
76.2
80.1
77.4
81.0
Diluted
77.1
80.6
78.0
81.3
See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
3
Frontdoor, Inc.
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions, except share data)
As of
September 30,
December 31,
2024
2023
Assets:
Current Assets:
Cash and cash equivalents
$
375
$
325
Receivables, less allowance of $ 5 and $ 5 , respectively
6
6
Prepaid expenses and other current assets
28
32
Contract assets
75
—
Total Current Assets
484
363
Other Assets:
Property and equipment, net
68
60
Goodwill
503
503
Intangible assets, net
141
143
Operating lease right-of-use assets
8
3
Deferred customer acquisition costs
10
12
Other assets
3
5
Total Assets
$
1,217
$
1,089
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable
$
91
$
76
Accrued liabilities:
Payroll and related expenses
29
38
Home warranty claims
73
76
Other
42
22
Deferred revenue
89
102
Current portion of long-term debt
17
17
Total Current Liabilities
341
331
Long-Term Debt
565
577
Other Long-Term Liabilities:
Deferred tax liabilities, net
24
25
Operating lease liabilities
21
16
Other long-term liabilities
6
5
Total Other Long-Term Liabilities
50
46
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 87,193,682 shares issued and 75,782,534 shares outstanding as of September 30, 2024 and 86,553,387 shares issued and 78,378,511 shares outstanding as of December 31, 2023
1
1
Additional paid-in capital
139
117
Retained earnings
522
296
Accumulated other comprehensive income
2
6
Less treasury stock, at cost; 11,411,148 shares as of September 30, 2024 and 8,174,876 shares as of December 31, 2023
( 403
)
( 283
)
Total Shareholders' Equity
261
136
Total Liabilities and Shareholders' Equity
$
1,217
$
1,089
See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
4
Frontdoor, Inc.
Condensed Consolidated Statement of Changes in Equity (Unaudited)
(In millions)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2024
2023
2024
2023
Common Stock:
Balance at beginning of period
$
1
$
1
$
1
$
1
Balance at end of period
1
1
1
1
Additional Paid-in Capital:
Balance at beginning of period
127
101
117
90
Stock-based compensation expense
6
8
20
21
Exercise of stock options
6
2
7
3
Taxes paid related to net share settlement of equity awards
—
—
( 6
)
( 4
)
Balance at end of period
139
110
139
110
Retained Earnings:
Balance at beginning of period
422
216
296
124
Net income
100
71
226
163
Balance at end of period
522
287
522
287
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of period
6
9
6
8
Other comprehensive (loss) income, net of tax
( 4
)
—
( 3
)
2
Balance at end of period
2
10
2
10
Treasury Stock:
Balance at beginning of period
( 341
)
( 196
)
( 283
)
( 162
)
Repurchase of common stock
( 62
)
( 42
)
( 120
)
( 76
)
Balance at end of period
( 403
)
( 238
)
( 403
)
( 238
)
Total Shareholders' Equity
$
261
$
171
$
261
$
171
See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
5
Frontdoor, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Nine Months Ended
September 30,
2024
2023
Cash and Cash Equivalents at Beginning of Period
$
325
$
292
Cash Flows from Operating Activities:
Net Income
226
163
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense
28
28
Deferred income tax benefit
—
( 12
)
Stock-based compensation expense
20
21
Restructuring charges
5
6
Payments for restructuring charges
( 3
)
( 3
)
Other
2
5
Changes in working capital:
Receivables
—
( 1
)
Prepaid expenses and other current assets
( 74
)
( 70
)
Accounts payable
14
7
Deferred revenue
( 12
)
( 22
)
Accrued liabilities
( 11
)
( 2
)
Current income taxes
18
22
Net Cash Provided from Operating Activities
212
139
Cash Flows from Investing Activities:
Purchases of property and equipment
( 31
)
( 23
)
Net Cash Used for Investing Activities
( 31
)
( 23
)
Cash Flows from Financing Activities:
Repayments of debt
( 13
)
( 13
)
Repurchase of common stock
( 120
)
( 76
)
Other financing activities
2
—
Net Cash Used for Financing Activities
( 131
)
( 88
)
Cash Increase During the Period
50
28
Cash and Cash Equivalents at End of Period
$
375
$
320
See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
6
Frontdoor, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
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 Frontdoor app empowers homeowners by connecting them in real time through video chat with qualified experts to diagnose and solve their problems. As of September 30, 2024 , we had approximately two million active home warranties across all brands in the United States.
Note 2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2023 Form 10-K. There have been no material changes to our significant accounting policies during the nine months ended September 30, 2024.
Basis of Presentation
We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2023 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results that might be achieved for the respective full year.
Newly Issued Accounting Standards
In 2023, the FASB issued ASU 2023-07 , Segment Reporting (Topic 280), which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the guidance should be applied retrospectively to all periods presented in the financial statements, unless it is impracticable. We intend to adopt the provisions of this guidance in conjunction with our 2024 Annual Report on Form 10-K for the year ended December 31, 2024. We are currently evaluating the impact of this ASU on our enhanced disclosures.
In 2023, the FASB issued ASU 2023-09 , Income Taxes (Topic 740), which improves income tax disclosure requirements, primarily through enhanced disclosures related to the rate reconciliation and income taxes paid information. This guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and the guidance should be applied on a prospective basis. Retrospective application is permitted. We are currently evaluating the impact of this ASU on our enhanced disclosures.
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Note 3. Revenue
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. We derive substantially all of our revenue from customers in the United States.
We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenue by major customer acquisition channel is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2024
2023
2024
2023
Renewals
$
422
$
406
$
1,141
$
1,083
Real estate (1)
36
40
99
115
Direct-to-consumer (1)
49
54
135
157
Other
34
24
86
59
Total
$
540
$
524
$
1,461
$
1,414
(1) First-year revenue only.
Our home warranty contracts have one primary performance obligation, which is to provide for the repair or replacement of essential home systems and appliances, as applicable per the contract. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative fair value of the services provided to the customer. As the costs to fulfill the obligations of the home warranties are incurred on an other-than-straight-line basis, we utilize historical evidence to estimate the expected claims expense and related timing of such costs and make a corresponding adjustment each period to the timing of our related revenue recognition. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract Assets and Liabilities” below. We regularly review our estimates of claims costs and adjust these estimates when appropriate.
Renewals
Revenue from customer renewals of home warranty contracts, which were previously initiated in the real estate or direct-to-consumer channel are classified as renewal revenue above. Renewals relate to consecutive contract periods and take place at the end of the first year of a real estate or direct-to-consumer home warranty contract. Customer payments for renewals are primarily received in installments over the new contract period.
Real estate
Real estate home warranties are sold through annual contracts which occur in connection with a real estate sale. These plans are typically paid in full at closing on the real estate transaction. First-year revenue from the real estate channel is classified as real estate above. At the option of the customer, upon renewal of the contract, the future revenue derived from home warranties sold in this channel is classified as renewal revenue as described above.
Direct-to-consumer
Direct-to-consumer home warranties are sold through annual contracts which occur in response to our marketing efforts. Customer payments for direct-to-consumer sales are primarily received in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above. At the option of the customer, upon renewal of the contract, the future revenue derived from home warranties sold in this channel is classified as renewal revenue as described above.
Other
Other revenue primarily includes revenue generated by on-demand home services, as well as administrative fees and ancillary services attributable to our home warranty contracts.
8
Deferred Customer Acquisition Costs
We capitalize the incremental costs of obtaining a contract with a customer and recognize the related expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $ 10 million and $ 12 million as of September 30, 2024 and December 31, 2023, respectively. Amortization of deferred customer acquisition costs was $ 3 million and $ 5 million for the three months ended September 30, 2024 and 2023, respectively, and $ 10 million and $ 13 million for the nine months ended September 30, 2024 and 2023 , respectively. There were no impairment losses related to these capitalized costs during the nine months ended September 30, 2024 and 2023.
Receivables, Less Allowance
We record a receivable due from customers once we have an unconditional right to invoice and receive payment in the future related to the services provided and anticipate the collection of amounts due to us. Contracts for home warranties may be invoiced upfront or monthly in straight-line installment payments over the contract period. The payment terms are determined prior to the execution of the contract.
Contract Assets and Liabilities
Contract assets arise when we recognize revenue for our home warranty contracts prior to a customer being invoiced. These timing differences are created when the recognition of revenue in proportion to the costs expected to be incurred in performing the services under the contract are accelerated as compared to the recognition of revenue on a straight-line basis over the contract period. Contract assets were $ 75 million as of September 30, 2024.
Our contract liabilities consist of deferred revenue which is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts.
A summary of the changes in deferred revenue for the nine months ended September 30, 2024 is as follows:
(In millions)
Balance at December 31, 2023
$
102
Deferral of revenue
154
Recognition of deferred revenue
( 167
)
Balance at September 30, 2024
$
89
There was approximately $ 22 million and $ 102 million of revenue recognized during the three and nine months ended September 30, 2024 that was included in the deferred revenue balance as of December 31, 2023.
Note 4. Goodwill and Intangible Assets
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. We perform our annual assessment for impairment on October 1 of every year.
The balance of goodwill was $ 503 million as of September 30, 2024 and December 31, 2023. There were no goodwill impairment charges recorded in the nine months ended September 30, 2024 and 2023.
9
The following table provides a summary of the components of our intangible assets:
As of September 30, 2024
As of December 31, 2023
Accumulated
Accumulated
(In millions)
Gross
Amortization
Net
Gross
Amortization
Net
Trade names (1)
$
141
$
—
$
141
$
141
$
—
$
141
Customer relationships
173
( 173
)
—
173
( 173
)
—
Developed technology
19
( 18
)
—
19
( 17
)
2
Other
32
( 32
)
—
32
( 32
)
—
Total
$
365
$
( 223
)
$
141
$
365
$
( 221
)
$
143
(1) Not subject to amortization.
Amortization expense was $ 1 million for each of the three months ended September 30, 2024 and 2023 and $ 2 and $ 3 million for the nine months ended September 30, 2024 and 2023 , respectively. There were no intangible asset impairment charges for the nine months ended September 30, 2024 and 2023.
Note 5. Leases
We have operating leases for our corporate headquarters located in Memphis, Tennessee, a collaboration center located in Scottsdale, Arizona and a technology collaboration center in Pune, India. We also continue to lease certain office space in other geographies which we have either exited or subleased. Our leases have remaining lease terms ranging from four years to 10 years , some of which include options to extend the leases for up to five years .
The weighted-average remaining lease term and weighted-average discount rate related to our operating leases are as follows:
As of
September 30,
December 31,
2024
2023
Weighted-average remaining lease term (years)
9
9
Weighted-average discount rate
6.5
%
6.5
%
We recognized operating lease expense of less than $ 1 million and $ 1 million for the three months ended September 30, 2024 and 2023, respectively, and $ 1 million and $ 2 million for the nine months ended September 30, 2024 and 2023, respectively. These expenses are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.
Supplemental statement of financial position information related to our operating lease liabilities is as follows:
As of
September 30,
December 31,
(In millions)
2024
2023
Other accrued liabilities
$
2
$
2
Operating lease liabilities
21
16
Total operating lease liabilities
$
23
$
18
Supplemental cash flow information related to our operating leases is as follows:
Nine Months Ended
September 30,
(In millions)
2024
2023
Cash paid on operating lease liabilities (1)
$
3
$
3
Right-of-use assets obtained in exchange for lease obligations
7
—
(1) Amount is presented net of cash provided from sublease income.
In conjunction with the operating leases of our corporate headquarters located in Memphis, Tennessee, and our collaboration center located in Scottsdale, Arizona, we recog nized $ 2 million in tenant improvement allowances for the nine months ended September 30, 2024, which is a non-cash investing activity.
10
The following table presents the maturities of our operating lease liabilities as of September 30, 2024:
(In millions)
2024 (remainder) (1)
$
1
2025 (1)
2
2026 (1)
3
2027
4
2028
3
2029
3
Thereafter
13
Total future lease payments (1)
28
Less imputed interest
( 7
)
Total operating lease liabilities (1)
$
21
(1) Amount is presented net of future sublease income totaling $ 2 million, which relates to the remainder of the year ending December 31, 2024 and the years ending December 31, 2025 through December 31, 2026.
Note 6. Income Taxes
We are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the three and nine months ended September 30, 2024 and 2023 was generated in the United States.
We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. As a result, our estimated tax rate is adjusted each quarter. 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.
Note 7. Acquisitions
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, 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.
In conjunction with the 2-10 HBW Acquisition, we recognized acquisition-related costs of $ 3 million and $ 9 million for the three and nine months ended September 30, 2024, respectively. These charges represent direct third-party costs, including legal, accounting and financial advisory fees. These charges are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.
Note 8. Restructuring Charges
We incurred restructuring charges of $ 3 million ($ 2 million, net of tax) and $ 5 million ($ 4 million, net of tax) for the three months ended September 30, 2024 and 2023 , respectively, and $ 5 million ($ 3 million, net of tax) and $ 6 million ($ 5 milli on, net of tax) 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 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.
11
The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying consolidated statements of operations and comprehensive income.
As of September 30, 2024, there was $ 3 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position. As of December 31, 2023, accrued restructuring charges were less than $ 1 million.
Note 9. Commitments and Contingencies
Accruals for home warranty claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home warranty claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe that utilizing actuarial methods in our estimation process to account for these liabilities provides a consistent and effective way to measure these judgmental accruals.
We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.
Due to the nature of our business activities, we are also at times subject to pending and threatened legal and regulatory actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected, individually or in the aggregate, to have a material adverse effect on our business, financial position, results of operations or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our business, financial position, results of operations or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Note 10. Stock-Based Compensation
We recognized stock-based compensation expense of $ 6 million ($ 5 million, net of tax) and $ 8 million ($ 7 million, net of tax) for the three months ended September 30, 2024 and 2023, respectively, and $ 20 million ($ 17 million, net of tax) and $ 21 million ($ 18 million, net of tax) for the nine months ended September 30, 2024 and 2023, respectively. These charges are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.
A summary of awards granted under the Omnibus Plan during the nine months ended September 30, 2024 is as follows:
Weighted-
Weighted-
Weighted-
Number of
Average
Average
Average
Awards
Exercise
Grant Date
Vesting
Granted
Price
Fair Value
Period
Stock options
570,349
31.94
14.81
4.0
Restricted stock units
805,321
32.00
3.0
Performance shares (1)
217,527
31.95
3.0
(1) The information related to performance shares above assumes 100 % of the performance condition, which is based on revenue and Adjusted EBITDA targets, is met. The ultimate number of performance shares that may be earned depends on the achievement of this performance condition .
As of September 30, 2024, there was $ 40 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, performance options, restricted stock units (“RSUs”) and other performance shares. These costs are expected to be recognized over a weighted-average period of 2.23 years.
12
Note 11. Long-Term Debt
Long-term debt is summarized in the following table:
As of
September 30,
December 31,
(In millions)
2024
2023
Term Loan A maturing in 2026 (1)
$
217
$
226
Term Loan B maturing in 2028 (2)
365
367
Revolving Credit Facility maturing in 2026
—
—
Total debt
582
593
Less current portion
( 17
)
( 17
)
Total long-term debt
$
565
$
577
(1) Term Loan A is presented net of unamortized debt issuance costs of $ 1 million as of September 30, 2024 and December 31, 2023.
(2) Term Loan B is presented net of unamortized debt issuance costs of $ 2 million as of September 30, 2024 and December 31, 2023 and unamortized discount of $ 1 million as of September 30, 2024 and December 31, 2023.
As of September 30, 2024 , we had $ 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. As of September 30, 2024, we were in compliance with the covenants under the Credit Agreement.
Scheduled Debt Payments
The following table presents future scheduled debt payments as of September 30, 2024:
(In millions)
2024 (remainder)
$
4
2025
17
2026
205
2027
4
2028
355
Total future scheduled debt payments
585
Less unamortized debt issuance costs
( 3
)
Less unamortized discount
( 1
)
Total debt
$
582
Note 12. Supplemental Cash Flow Information
Supplemental information relating to our accompanying condensed consolidated statements of cash flows is as follows:
Nine Months Ended
September 30,
(In millions)
2024
2023
Cash paid for (received from):
Interest expense
$
28
$
28
Interest income
( 15
)
( 12
)
Income tax payments, net of refunds
59
44
13
Note 13. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and the unrealized gains (losses) on our derivative instrument. We disclose comprehensive income (loss) in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity.
A summary of the changes in AOCI is as follows:
Balance at December 31, 2023
$
6
Other comprehensive income before reclassifications:
Pre-tax amount
2
After-tax amount
2
Amounts reclassified from AOCI (1)
( 5
)
Total other comprehensive loss
( 3
)
Balance at September 30, 2024
$
2
(1) Amounts are net of income taxes. See the table below on reclassifications out of AOCI for additional information.
A summary of reclassifications out of AOCI is as follows:
Nine Months Ended
September 30,
(In millions)
2024
2023
Gain on interest rate swap contract (1)
$
6
$
5
Impact of income taxes (2)
( 1
)
( 1
)
Total reclassifications during the period
$
5
$
4
(1) Included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income.
(2) Included in provision for income taxes in the accompanying condensed consolidated statements of operations and comprehensive income.
Note 14. Derivative Financial Instruments
We currently use a derivative financial instrument to manage risks associated with changes in interest rates by hedging the interest payments on a portion of our variable rate debt through the use of an interest rate swap contract. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected cash flows of the associated forecasted transaction.
Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded in the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with changes in fair value recorded in AOCI. Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows.
The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 13 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and for the amounts reclassified out of AOCI and into earnings during the periods presented. As the underlying forecasted transactions occur during the next 12 months, we estimate the unrealized hedging gain in AOCI expected to be recognized in earnings is $ 3 million, net of tax, as of September 30, 2024. The amounts ultimately reclassified into earnings during the next 12 months will be determined based on the actual interest rates in effect at the time the positions are settled, and as a result, they could differ materially from our estimate noted above.
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Note 15. Fair Value Measurements
We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that we categorize into a three-level hierarchy, from highest to lowest level of observable inputs, as follows: unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1"); direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets ("Level 2"); and unobservable inputs that require significant judgment for which there is little or no market data ("Level 3"). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement, even though we may have also utilized significant inputs that are more readily observable.
The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these financial instruments. As of September 30, 2024 and December 31, 2023, the carrying amounts of our total debt were $ 582 million and $ 593 million, respectively, and the estimated fair values were $ 582 million and $ 598 million, respectively. The fair value of our debt was estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy and was based on information available to us as of the respective period end dates.
We determine the fair value of our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between these two rates to the notional amount of debt in the interest rate swap contract.
We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the nine months ended September 30, 2024. Transfers between hierarchy levels, if any, are recognized at the end of the reporting period. There were no transfers between hierarchy levels during the nine months ended September 30, 2024.
Our interest rate swap contract is currently our only financial instrument remeasured at fair value on a recurring basis. A summary of the carrying value and fair value of this financial instrument is as follows:
Estimated Fair Value Measurements
Quoted
Significant
Prices
Other
Significant
in Active
Observable
Unobservable
Carrying
Markets
Inputs
Inputs
(In millions)
Value
(Level 1)
(Level 2)
(Level 3)
As of September 30, 2024:
Prepaid expenses and other current assets
$
3
$
—
$
3
$
—
Other assets
—
—
—
—
Total assets
$
3
$
—
$
3
$
—
As of December 31, 2023:
Prepaid expenses and other current assets
$
5
$
—
$
5
$
—
Other assets
2
—
2
—
Total assets
$
7
$
—
$
7
$
—
Note 16. Share Repurchase Program
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. As of September 30, 2024 , we have no t made any repurchases under this program.
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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 accompanying condensed consolidated statements of financial position.
A summary of repurchases of outstanding shares is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions, except per share data)
2024
2023
2024
2023
Number of shares purchased
1,475,797
1,241,213
3,236,272
2,315,072
Average price paid per share (1)
$
41.33
$
33.23
$
36.62
$
32.39
Cost of shares purchased (1)
$
61
$
41
$
119
$
75
(1) The average price paid per share and the cost of shares purchased are calculated on a trade date basis and exclude associated commissions and taxes of $ 1 million and less than $ 1 million for the three months ended September 30, 2024 and 2023, respectively, and $ 1 million for each of the nine months ended September 30, 2024 and 2023 .
Note 17. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, performance options, RSUs, performance shares and restricted stock awards ("RSAs") are reflected in diluted earnings per share by applying the treasury stock method.
A summary of the calculations of our basic and diluted earnings per share is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions, except per share data)
2024
2023
2024
2023
Net Income
$
100
$
71
$
226
$
163
Weighted-average common shares outstanding:
76.2
80.1
77.4
81.0
Effect of dilutive securities:
RSUs (1)
0.8
0.5
0.5
0.3
Stock options (2)
0.2
—
0.1
—
Weighted-average common shares outstanding - assuming dilution:
77.1
80.6
78.0
81.3
Basic earnings per share
$
1.32
$
0.89
$
2.92
$
2.01
Diluted earnings per share
$
1.30
$
0.89
$
2.90
$
2.00
(1) RSUs of 2,706 shares and 59,880 shares for the three months ended September 30, 2024 and 2023, respectively, and 461,600 shares and 471,836 shares for the nine months ended September 30, 2024 and 2023 , respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
(2) Stock options to purchase 538,962 shares and 1,338,410 shares for the three months ended September 30, 2024 and 2023, respectively, and 1,015,848 shares and 1,279,130 shares for the nine months ended September 30, 2024 and 2023 , respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. There were no anti-dilutive performance options in the three months ended September 30, 2024. Performance options to purchase 710,323 shares for the three months ended September 30, 2023, and 191,438 shares and 605,483 shares for the nine months ended September 30, 2024 and 2023 , respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance, the 2-10 HBW Acquisition and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control.
You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the 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.
SUMMARY OF MATERIAL RISKS
Factors, risks, trends and uncertainties that make an investment in us speculative or risky and that could cause actual results or events to differ materially from those anticipated in our forward-looking statements include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in this report as well as Item 1A. Risk Factors in our 2023 Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:
• changes in macroeconomic conditions, including inflation and global supply chain challenges, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability;
• our ability to successfully implement our business strategies;
• the ability of our marketing efforts to be successful and cost-effective;
• our dependence on our first-year real estate and direct-to-consumer acquisition channels and our renewal channel;
• changes in the source and intensity of competition in our market;
• our ability to attract, retain and maintain positive relations with third-party contractors and vendors;
• increases in parts, appliance and home system prices, and other operating costs;
• our ability to attract and retain qualified key employees and labor availability in our customer service operations;
• our dependence on third-party vendors, including business process outsourcers, and third-party component suppliers;
• cybersecurity breaches, disruptions or failures in our technology systems;
• our ability to protect the security of personal information about our customers;
• compliance with, or violation of, laws and regulations, including consumer protection laws, or lawsuits or other claims by third parties, increasing our legal and regulatory expenses;
• evolving corporate governance and disclosure regulations and expectations related to environmental, social and governance matters;
• physical effects of climate change, including adverse weather conditions and Acts of God, along with the increased focus on sustainability;
• increases in tariffs or changes to import/export regulations;
• our ability to protect our intellectual property and other material proprietary rights;
• negative reputational and financial impacts resulting from acquisitions or strategic transactions;
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• a requirement to recognize impairment charges;
• third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;
• inappropriate use of social media by us or other parties to harm our reputation;
• special risks applicable to operations outside the United States by us or our business process outsource providers;
• a return on investment in our common stock is dependent on appreciation in the price;
• inclusion in our certificate of incorporation includes a forum selection clause that could discourage an acquisition of our company or litigation against us and our directors and officers;
• the effects of our significant indebtedness, our ability to incur additional debt and the limitations contained in the agreements governing such indebtedness;
• increases in interest rates increasing the cost of servicing our indebtedness and counterparty credit risk due to instruments designed to minimize exposure to market risks;
• increased borrowing costs due to lowering or withdrawal of the credit ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;
• our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
• risks related to the 2-10 HBW Acquisition, including risks that we may not complete the 2-10 HBW Acquisition or that the 2-10 HBW Acquisition may not achieve its intended results; and
• other factors described in this report and from time to time in documents that we file with the SEC.
Available Information
Our corporate website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our corporate website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained on our website to be part of this Quarterly Report on Form 10-Q.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.