Frontdoor, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto included in our 2024 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2024 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2024 Form 10-K. Overview 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 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, prices of goods and services 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. 22 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. • Consumer sentiment remains mixed as a result of a broad range of current macroeconomic conditions, including pressure on consumer prices and high interest rates. We believe this environment continues to impact demand for home warranties. • Our labor, parts and equipment costs continue to be impacted by inflation. The ultimate implications of the current macroeconomic conditions on our results of operations and overall financial performance remain uncertain. It remains difficult to predict the overall continuing impact these conditions will have on our business as they may reduce demand for our services, increase our costs or otherwise adversely impact our business. Seasonality 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 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, 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. Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance, as opposed to the home warranties that we offer. Tariff and Import/Export Regulations Changes in U.S. tariff and import/export regulations may impact the costs of parts, appliances and home systems. 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, 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. 23 Competition We compete in the U.S. home warranty category and the broader U.S. home services industry. The home warranty category is highly competitive. While we have a broad range of competitors in each locality and region, we are one of the few companies that provide home warranties nationwide. The broader U.S. home services industry is also highly competitive. 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 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, 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 To supplement our results presented in accordance with U.S. GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items. We present within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measures of Adjusted EBITDA and Free Cash Flow. See “—Results of Operations—Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “—Liquidity and Capital Resources—Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow. Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period, and Adjusted EBITDA is also a component of our incentive compensation program. We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance. While we believe these non-GAAP financial measures are useful in evaluating our business, they should be considered as supplemental in nature and are not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies, limiting their usefulness as comparative measures. Key Business Metrics We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include: • revenue, • operating expenses, • gross profit, • gross profit margin, • net income, • earnings per share, • Adjusted EBITDA, • Adjusted EBITDA margin, • net cash provided from operating activities, 24 • Free Cash Flow, • number of home warranties, and • customer retention rate. 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 recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new home warranty sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the United States. Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as: salaries and wages, employee benefits and healthcare; contractor costs; parts, appliances and home systems costs; tariffs; insurance premiums; and various regulatory compliance costs. Gross Profit and Gross Profit Margin. The presentation of gross profit and gross profit margin provides measures of performance which are primarily a function of the revenue drivers discussed above and contract claims costs drivers, primarily contractor costs and parts, appliances and home systems costs. Gross profit is computed by deducting cost of services rendered from revenue. Gross profit margin is computed as gross profit as a percentage of revenue. Net Income and Earnings Per Share . The presentation of net income and basic and diluted earnings per share provides measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. 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, 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. We evaluate our operating and financial performance primarily based on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; goodwill and intangibles impairment; restructuring charges; acquisition-related costs; provision for income taxes; non-cash stock-based compensation expense; interest expense; loss on extinguishment of debt; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring and acquisition initiatives and equity-based, long-term incentive plans. Net Cash Provided from Operating Activities and Free Cash Flow. We focus on measures designed to monitor cash flow, including net cash provided from operating activities and Free Cash Flow. Free Cash Flow is a financial measure that is not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions. Number of Home Warranties and Customer Retention Rate. We report on our number of home warranties and customer retention rate as measurements of our operating performance. These measurements are presented on a rolling 12-month basis in order to avoid seasonal anomalies. The number of home warranties is representative of our recurring home warranty customer base and is measured as the number of customers with active contracts as of the respective period-end date. Our customer retention rate is calculated as the ratio of the number of end-of-period home warranty contracts to the sum of the number of beginning-of-period home warranty contracts and the number of new home warranty sales and acquired accounts during the respective period. Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2024 Form 10-K. There have been no material changes to our critical accounting policies during the three months ended March 31, 2025. 25 Results of Operations % of Revenue Three Months Ended Increase Three Months Ended March 31, (Decrease) March 31, (In millions) 2025 2024 % 2025 2024 Revenue $ 426 $ 378 13 % 100 % 100 % Cost of services rendered 191 184 4 45 49 Gross Profit 235 195 21 55 51 Selling and administrative expenses 151 135 12 35 36 Depreciation and amortization expense 23 9 157 5 2 Restructuring charges 1 — 54 — — Interest expense 19 10 99 5 3 Interest and net investment income (6 ) (5 ) 35 (1 ) (1 ) Income before Income Taxes 48 45 6 11 12 Provision for income taxes 11 11 (3 ) 2 3 Net Income $ 37 $ 34 9 % 9 % 9 % Revenue 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 March 31, Increase (Decrease) (In millions) 2025 (2) 2024 $ % Renewals $ 333 $ 298 $ 35 12 % Real estate (1) 27 27 — — Direct-to-consumer (1) 32 36 (3 ) (9 ) Other 33 17 16 95 Total $ 426 $ 378 $ 48 13 % (1) First-year revenue only. (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: As of March 31, (In millions) 2025 (1) 2024 Number of home warranties 2.10 1.96 Growth (reduction) in number of home warranties 7 % (6 ) % Customer retention rate 79.9 % 76.3 % (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. 26 Cost of Services Rendered 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) Three Months Ended March 31, 2024 $ 184 Impact of change in revenue 16 Contract claims costs (8 ) Other (1 ) Three Months Ended March 31, 2025 $ 191 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 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 March 31, (In millions) 2025 2024 Sales and marketing costs $ 65 $ 66 Customer service costs 28 25 General and administrative costs 58 45 Total $ 151 $ 135 The following table provides a summary of the changes in selling and administrative expenses: (In millions) Three Months Ended March 31, 2024 $ 135 Customer service costs 4 Stock-based compensation expense 1 Acquisition-related costs 2 Other general and administrative costs 10 Three Months Ended March 31, 2025 $ 151 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 $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 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. 27 Interest Expense 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 $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 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 Net income was $37 million and $34 million for the three months ended March 31, 2025 and 2024, respectively. Adjusted EBITDA 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) Net Income Adjusted EBITDA Three Months Ended March 31, 2024 $ 34 $ 71 Impact of change in revenue 32 32 Contract claims costs 8 8 Customer service costs (4 ) (4 ) Stock-based compensation expense (1 ) — Acquisition-related costs (2 ) — Other general and administrative costs (10 ) (10 ) Depreciation and amortization expense (14 ) — Interest expense (10 ) — Interest and net investment income 2 2 Other 1 1 Three Months Ended March 31, 2025 $ 37 $ 100 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. 28 Reconciliation of Net Income to Adjusted EBITDA A reconciliation of Net Income to Adjusted EBITDA is as follows: Three Months Ended March 31, (In millions) 2025 2024 Net Income $ 37 $ 34 Depreciation and amortization expense 23 9 Restructuring charges (1) 1 — Acquisition-related costs (1) 2 — Provision for income taxes 11 11 Non-cash stock-based compensation expense (2) 8 7 Interest expense 19 10 Adjusted EBITDA $ 100 $ 71 (1) We exclude restructuring charges and acquisition-related costs from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability. (2) We exclude non-cash stock-based compensation expense from Adjusted EBITDA because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability. Liquidity and Capital Resources Liquidity A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of March 31, 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 $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 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. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles. We have a diversified investment strategy for our cash investments and give priority to the major financial institutions that serve as lenders under the Credit Agreement. Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although our holdings exceed insured limits in substantially all of our accounts. We may, from time to time, issue new debt, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, gross and net leverage, results of operations or cash flows. These actions may include new debt issuance, open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be issued, repurchased or otherwise retired or refinanced, if any, and the price of such issuances, repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. 29 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 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 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 We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions. Our subsidiaries are permitted under the terms of the Credit Agreement and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. Furthermore, there are regulatory restrictions on the ability of certain of our subsidiaries to transfer funds to us. The payments of ordinary and extraordinary dividends by certain of our subsidiaries (through which we conduct our business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. We expect that such limitations will be in effect for the foreseeable future. None of our subsidiaries are obligated to make funds available to us through the payment of dividends. Cash Flows Cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this Quarterly Report on Form 10-Q are summarized in the following table: Three Months Ended March 31, (In millions) 2025 2024 Net cash provided from (used for): Operating activities $ 124 $ 84 Investing activities 47 (10 ) Financing activities (85 ) (21 ) Cash increase during the period $ 85 $ 53 Operating Activities 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. 30 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 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 $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 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 The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable U.S. GAAP measure, to Free Cash Flow using data derived from the condensed consolidated statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q: Three Months Ended March 31, (In millions) 2025 2024 Net cash provided from operating activities $ 124 $ 84 Property additions (7 ) (10 ) Free Cash Flow $ 117 $ 73 Contractual Obligations Our 2024 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2024. We continue to make the contractually required payments associated with these commitments. There are no significant additions to our obligations and commitments since those reported in the 2024 Form 10-K. 31 Financial Position 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. 32