What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-01 compared with 2024-11-04 · 124 added, 213 removed, 216 unchanged (61% 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” 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.

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 2024 Form 10-K.

Frontdoor is the leading provider of home warranties and new home structural warranties in the United States, as measured by revenue, and operates primarily under the American Home Shield and 2-10 HBW brands.

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.

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 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

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.

Our home warranty customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of up to 29 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.

Our new home structural warranty business provides value to home builders and owners of new homes by providing coverage, including insurance-backed coverage for workmanship, systems and/or structural failures, as well as other post-construction services.

We also offer non-warranty home services via our website and app to our home warranty customers directly and others through partnerships and our subscription-based Frontdoor app.

As of March 31, 2025, we had approximately 2.1 million active home warranties across all brands in the United States.

For the three months ended March 31, 2025 and 2024, we generated revenue, net income and Adjusted EBITDA of $426 million, $37 million and $100 million, respectively, and $378 million, $34 million and $71 million, respectively.

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

For the three months ended March 31, 2025, our total operating revenue included 78 percent of revenue derived from existing customer renewals, while six percent and eight percent were derived from new home warranty sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and eight percent was derived from other revenue channels.

For the three months ended March 31, 2024, our total operating revenue included 79 percent of revenue derived from existing customer renewals, while seven percent and nine percent were derived from new home service plan 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.

Key Factors and Trends Affecting Our Results of Operations

Macroeconomic Conditions

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 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:

Our financial condition and results of operations for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024 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.

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Our business is subject to seasonal fluctuations, which drive variations in our revenue, net income and Adjusted EBITDA for interim periods.

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

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

Seasonal fluctuations are primarily driven by a higher number of HVAC work orders with respect to our home warranty business in the summer months.

In 2024, 21 percent, 29 percent, 29 percent and 21 percent of our revenue, 14 percent, 39 percent, 43 percent and four percent of our net income, and 16 percent, 36 percent, 37 percent and 11 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

The demand for our services, and our results of operations, are affected by weather conditions.

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

For example, favorable weather trends in the 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.

The demand for our services, particularly in our home warranty business, and our results of operations, are affected by weather conditions.

Extreme temperatures, typically in the winter and summer months, can lead to an increase in home warranty 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 2024 as compared to 2023 resulted in a lower number of home warranty 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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Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs.

For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems.

For example, rising costs due to blanket tariffs on imported steel and aluminum, or blanket tariffs on goods from countries that are key suppliers of replacement parts for appliances and home systems, could increase the costs of our parts, appliances and home systems.

Recently, the United States has proposed, and in some cases has imposed, significant increases to tariffs on goods imported into the U.S., including from countries where we have sourced replacement parts for appliances and home systems covered by our home warranties.

We cannot predict how or what tariffs will be imposed or what retaliatory measures other countries may take in response to tariffs proposed or imposed by the U.S.

There is uncertainty as to further actions that may be taken by the U.S.

with respect to U.S.

trade policy, including with respect to the proposed tariffs.

Such uncertainty and/or tariffs or countermeasures could further increase our costs, decrease our margins or reduce the competitiveness of our products and services.

We compete in the U.S.

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home services industry is also highly competitive.

We compete against businesses providing on-demand home services directly and those offering leads to contractors seeking to provide on-demand home services.

We compete against businesses providing non-warranty home services directly and those offering leads to contractors seeking to provide non-warranty home services.

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

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

Our new home structural warranty business faces competition from other providers of new home structural warranties and builders that self-insure.

Acquisition Activity

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

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

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

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

Most recently, we acquired 2-10 HBW, which provides us more home warranty customers and increased revenue, in addition to opportunities for a new sales channel and a more diversified business portfolio.

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.

We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry, such as new home structural warranties acquired as part of 2-10 HBW.

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

Non-GAAP Financial Measures

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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), 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 non-qualified 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 deferred share equivalents are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA Margin.

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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 2024 Form 10-K.

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

There have been no material changes to our critical accounting policies during the three months ended March 31, 2025.

Results of Operations

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

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

Nine Months Ended

September 30,

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

We reported revenue of $426 million and $378 million for the three months ended March 31, 2025 and 2024, respectively.

The following table provides a summary of our revenue by major customer acquisition channel for our home warranties and other revenue:

Three Months Ended

September 30,

Increase (Decrease)

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(1) First-year revenue only.

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.

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.

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

Nine Months Ended

September 30,

Increase (Decrease)

(In millions)

Real estate (1)

Direct-to-consumer (1)

(1) First-year revenue only.

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.

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

(2) For the three months ended March 31, 2025, includes approximately $41 million as a result of the 2-10 HBW Acquisition on December 19, 2024.

Revenue increased 13 percent for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

The increase in renewal revenue reflects improved price realization resulting from our prior pricing actions and the impact of the 2-10 HBW Acquisition, offset, in part, by a decline in number of renewed home warranties.

The decrease in direct-to-consumer revenue reflects lower price realization resulting from our efforts to drive incremental sales, offset, in part, by the impact of the 2-10 HBW Acquisition.

The increase in other revenue was primarily driven by the impact of new home structural warranties from the 2-10 HBW Acquisition and growth in non-warranty home services.

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)

Number of home warranties

Reduction in number of home warranties

Growth (reduction) in number of home warranties

Customer retention rate

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.

(1) As of March 31, 2025, excluding the 2-10 HBW home warranties acquired on December 19, 2024, the number of home warranties was 1.9 million, the reduction in home warranties was two percent and the customer retention rate was 78.5 percent.

The growth in the number of home warranties as of March 31, 2025 was primarily driven by the 2-10 HBW acquisition, offset, in part, by the challenging real estate market.

Cost of Services Rendered

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

(In millions)

Three Months Ended September 30, 2023

Impact of change in revenue

Contract claims costs

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

We reported cost of services rendered of $191 million and $184 million for the three months ended March 31, 2025 and 2024, respectively.

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

(In millions)

Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

Impact of change in revenue

Contract claims costs

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.

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 nine months of 2023.

Three Months Ended March 31, 2025

The decrease in contract claims costs primarily reflects continued process improvement initiatives, specifically relating to better cost management across our contractor network and higher trade service fees, which drove a lower number of home warranty service requests per customer.

This was offset, in part, by an unfavorable weather impact of $5 million, driven by a higher number of home warranty service requests in the HVAC trade, and ongoing inflationary cost pressures.

Additionally, contract claims costs reflects a $7 million favorable adjustment in the first quarter of 2025 related to the development of prior period claims, compared to a $1 million favorable adjustment in the first quarter of 2024.

Selling and Administrative Expenses

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.

We reported selling and administrative expenses of 151 million and $135 million for the three months ended March 31, 2025 and 2024, respectively.

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

Three Months Ended

Nine Months Ended

September 30,

(In millions)

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General and administrative costs

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

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

(In millions)

Three Months Ended September 30, 2023

Sales and marketing costs

Stock-based compensation expense

Acquisition-related costs

Other general and administrative costs

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.

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

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

(In millions)

Nine Months Ended September 30, 2023

Sales and marketing costs

Three Months Ended March 31, 2024

Customer service costs

Stock-based compensation expense

Acquisition-related costs

Other general and administrative costs

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.

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.

Three Months Ended March 31, 2025

Customer service costs increased primarily due to growth in our non-warranty home services.

Acquisition-related costs are driven by 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 from the 2-10 HBW acquisition.

Depreciation and Amortization Expense

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.

Depreciation expense was $10 million and $8 million for the three months ended March 31, 2025 and 2024, respectively.

Amortization expense was $13 million and $1 million for the three months ended March 31, 2025 and 2024, respectively, with the increase primarily driven by the amortization of intangible assets acquired as part of the 2-10 HBW Acquisition.

Restructuring Charges

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.

Restructuring charges were $1 million and less than $1 million for the three months ended March 31, 2025 and 2024, respectively.

For the three months ended March 31, 2025, restructuring charges primarily include severance costs.

Interest Expense

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 expense was $19 million and $10 million for the three months ended March 31, 2025 and 2024, respectively, with the increase driven by the higher debt balance as compared to prior year.

Interest and Net Investment Income

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.

Interest and net investment income was $6 million and $5 million for the three months ended March 31, 2025 and 2024, respectively.

Provision for Income Taxes

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.

The effective tax rate on income before income taxes was 22.3 percent and 24.4 percent for the three months ended March 31, 2025 and 2024, respectively.

The decrease in the effective tax rate was primarily due to share-based compensation.

Net income was $37 million and $34 million for the three months ended March 31, 2025 and 2024, respectively.

Adjusted EBITDA

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

(In millions)

Three Months Ended September 30, 2023

Impact of change in revenue

Contract claims costs

Sales and marketing costs

General and administrative costs

Interest and net investment income

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

Adjusted EBITDA was $100 million and $71 million for the three months ended March 31, 2025 and 2024, respectively.

Summary of Changes in Net Income and Adjusted EBITDA

The following table provides a summary of the changes in net income and Adjusted EBITDA:

(In millions)

Nine Months Ended September 30, 2023

Adjusted EBITDA

Three Months Ended March 31, 2024

Impact of change in revenue

Contract claims costs

Sales and marketing costs

Customer service costs

General and administrative costs

Stock-based compensation expense

Acquisition-related costs

Other general and administrative costs

Depreciation and amortization expense

Interest expense

Interest and net investment income

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

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

Three Months Ended March 31, 2025

The impact of change in revenue was primarily driven by improved price realization and the impact of the 2-10 HBW Acquisition, offset, in part, by a reduction in the number of organic home warranties.

For more information on changes in net income or Adjusted EBITDA, see discussion above.

Reconciliation of Net Income to Adjusted EBITDA

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

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

As of March 31, 2025, 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 $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 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.

Cash and cash equivalents totaled $506 million and $421 million as of March 31, 2025 and December 31, 2024, respectively, and short- and long-term marketable securities totaled less than $1 million and $53 million as of March 31, 2025 and December 31, 2024.

Our cash and cash equivalents and short- and long-term marketable securities include balances associated with regulatory requirements in our business.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of March 31, 2025 and December 31, 2024, the total net assets subject to these third-party restrictions were $185 million and $184 million, respectively.

As of March 31, 2025, 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 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.

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, 2025 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We closely monitor the performance of our investment portfolio, primarily cash deposits and short- and long-term marketable securities.

We regularly review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements.

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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, 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 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.

Purchases under this 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 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.

As of March 31, 2025, we repurchased a total of 2,149,160 outstanding shares at an aggregate cost of $111 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.

As of March 31, 2025, we had $539 million remaining available for future repurchases under this program.

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

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:

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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Operating Activities

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.

Net cash provided from operating activities was $124 million and $84 million for the three months ended March 31, 2025 and 2024, respectively.

Net cash provided from operating activities for the three months ended March 31, 2025 comprised $68 million in earnings adjusted for non-cash charges and $61 million in cash provided from working capital and long-term insurance-related accounts, offset, in part, by $4 million in payments for restructuring charges.

Cash provided from working capital was primarily driven by seasonality, offset, in part, by payments of accrued bonuses.

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

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

Investing Activities

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.

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 $40 million.

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

Net cash provided from investing activities was $47 million for the three months ended March 31, 2025 as compared to net cash used for investing activities of $10 million for the three months ended March 31, 2024.

For the three months ended March 31, 2025, cash provided from sales and maturities of available-for-sale securities was $60 million, and purchases of available-for-sale securities was $6 million.

There were no sales and maturities or purchases of available-for-sale securities for the three months ended March 31, 2024.

Capital expenditures were $7 million and $10 million for three months ended March 31, 2025 and 2024, respectively, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2025 relating to committed, recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $45 million.

We have no additional material capital commitments at this time.

Financing Activities

Net cash used for financing activities was $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.

Net cash used for financing activities was $85 million and $21 million for the three months ended March 31, 2025 and 2024, respectively.

For the three months ended March 31, 2025, we made scheduled principal payments of debt of $7 million and purchased outstanding shares of our common stock at an aggregate cost of $71 million.

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

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.

Free Cash Flow

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

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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

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.

There are no significant additions to our obligations and commitments since those reported in the 2024 Form 10-K.

Financial Position

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.

A summary of the significant changes in our financial position from December 31, 2024 to March 31, 2025 is as follows:

• Cash and cash equivalents increased during the three months ended March 31, 2025, reflecting cash provided from operating activities, offset, in part, by capital expenditures, scheduled principal payments of debt and purchases of outstanding shares.

• Marketable securities decreased during the three months ended March 31, 2025, reflecting the sale of available-for-sale securities.

• Intangible assets decreased during the three months ended March 31, 2025, reflecting the amortization of intangible assets acquired as part of the 2-10 HBW Acquisition.

• Long-term marketable securities decreased during the three months ended March 31, 2025, reflecting the sale of available-for-sale securities.

• Accrued liabilities—Payroll and related expenses decreased during the three months ended March 31, 2025, reflecting payments of accrued bonuses.

• Accrued liabilities—Home warranty claims decreased during the three months ended March 31, 2025, reflecting favorable claims costs.

• Accrued liabilities—Other increased during the three months ended March 31, 2025, reflecting an increase in income tax payable.

• Deferred revenue increased during the three months ended March 31, 2025, reflecting recognition of revenue on an other-than-straight-line basis to match the timing of cost recognition.

• Other long-term liabilities increased during the three months ended March 31, 2025, reflecting a change in our interest rate swap valuation.

• Total shareholders’ equity was $198 million as of March 31, 2025 compared to $239 million as of December 31, 2024.

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

See the condensed consolidated statements of changes in equity 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