What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 85 added, 64 removed, 425 unchanged (26% of the section changed)

3 unchanged sentences

Three Months Ended

Six Months Ended

Cost of services rendered

4 unchanged sentences

Interest expense

Interest and net investment income

Interest and net investment loss (income)

Income before Income Taxes

2 unchanged sentences

Net unrealized loss on derivative instruments

Total Comprehensive (Loss) Income

Total Comprehensive Income

Earnings per Share:

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2,000,000,000 shares authorized;

85,381,109 shares issued and outstanding at March 31, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019

85,425,009 shares issued and outstanding at June 30, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019

Additional paid-in capital

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Three Months Ended

Six Months Ended

Balance at beginning of period

2 unchanged sentences

Balance at beginning of period

Issuance of common stock

Taxes paid related to net share settlement of equity awards

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(In millions)

Three Months Ended

Six Months Ended

Cash and Cash Equivalents at Beginning of Period

2 unchanged sentences

Depreciation and amortization expense

Deferred income tax provision

Stock-based compensation expense

8 unchanged sentences

Accrued liabilities

Accrued interest payable

Current income taxes

2 unchanged sentences

Purchases of property and equipment

Business acquisitions, net of cash received

Purchases of available-for-sale securities

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The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain.

In response to the pandemic, we took several steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business.

In response to the pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business.

The COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

While we did not experience a material impact on our results of operations and overall financial performance during the first quarter, during the second quarter of 2020, our results of operations and financial performance were adversely impacted by COVID-19 as follows:

 We experienced a decline in first-year real estate sales attributable, in part, to the adverse impact COVID-19 had on U.S.

existing home sales.

Due to the annual nature of our service plan agreements, the impact of this decline will carry forward into future periods.

 We experienced an increase in appliance and plumbing claims primarily due to the increased usage of home systems and appliances driven by state and local shelter at home orders and recommendations.

 We increased our marketing spend in the first-year direct-to-consumer channel to help mitigate the decline in first-year real estate sales.

 We incurred incremental wages at our contact centers due to increased demand driven by temporary closures at our offshore business process outsourcers.

 We incurred incremental direct costs in response to COVID-19, which were temporary in nature and primarily related to incremental health and childcare benefits for our employees and hoteling costs related to our offshore business process outsourcers.

Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2019 Form 10-K.

There have been no material changes to the significant accounting policies for the three months ended March 31, 2020.

There have been no material changes to the significant accounting policies for the six months ended June 30, 2020.

Adoption of New Accounting Standards

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The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

We adopted ASC 326 prospectively, effective January 1, 2020.

We adopted ASC 326 using the modified retrospective approach, effective January 1, 2020.

The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

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We disaggregate revenue from contracts with customers into major customer acquisition channels.

We determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

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

Six Months Ended

(In millions)

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We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the 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 $ 18 million as of March 31, 2020 and December 31, 2019.

Amortization of these deferred acquisition costs was $ 4 million for each of the three months ended March 31, 2020 and 2019.

Deferred customer acquisition costs were $ 18 million as of June 30, 2020 and December 31, 2019.

Amortization of these deferred acquisition costs was $ 6 million for each of the three months ended June 30, 2020 and 2019 and $ 10 million for each of the six months ended June 30, 2020 and 2019.

There were no impairment losses in relation to these capitalized costs.

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Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts.

Deferred revenue was $ 227 million and $ 188 million as of March 31, 2020 and December 31, 2019, respectively, and as of March 31, 2020, includes a net contract liability of $ 44 million related to the recognition of monthly pay-customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the three months ended March 31, 2020 were as follows:

Deferred revenue was $ 173 million and $ 188 million as of June 30, 2020 and December 31, 2019, respectively, and, as of June 30, 2020, includes a net contract liability of $ 3 million related to the recognition of monthly pay-customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the six months ended June 30, 2020 were as follows:

(In millions)

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Recognition of deferred revenue

Balance as of March 31, 2020

There was approximately $ 72 million of revenue recognized in the three months ended March 31, 2020 that was included in the deferred revenue balance as of December 31, 2019.

Balance as of June 30, 2020

There was approximately $ 73 million and $ 145 million of revenue recognized in the three and six months ended June 30, 2020, respectively, that was included in the deferred revenue balance as of December 31, 2019.

Goodwill and Intangible Assets

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An assessment for impairment is performed on October 1 of every year.

The balance of goodwill was $ 501 million as of March 31, 2020 and December 31, 2019.

There were no goodwill or trade name impairment charges recorded in the three months ended March 31, 2020 and 2019.

There were no accumulated impairment losses recorded as of March 31, 2020 and December 31, 2019.

The balance of goodwill was $ 502 million and $ 501 million as of June 30, 2020 and December 31, 2019, respectively.

There were no goodwill or trade name impairment charges recorded in the six months ended June 30, 2020 and 2019.

There were no accumulated impairment losses recorded as of June 30, 2020 and December 31, 2019.

During the second quarter of 2020, we completed a business acquisition for $ 5 million, which was primarily allocated to developed technology and other intangible assets.

The table below summarizes the other intangible asset balances:

As of March 31, 2020

As of June 30, 2020

As of December 31, 2019

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(1) Not subject to amortization.

Amortization expense was $ 3 million and $ 2 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization expense was $ 4 million and $ 1 million for the three months ended June 30, 2020 and 2019, respectively, and $ 7 million and $ 3 million for the six months ended June 30, 2020 and 2019, respectively.

The following table outlines expected amortization expense for existing intangible assets for the remainder of 2020 and the next five years :

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Weighted-average discount rate

We recognized operating lease expense of $ 1 million for each of the three months ended March 31, 2020 and 2019, respectively.

We recognized operating lease expense of $ 1 million for each of the three months ended June 30, 2020 and 2019 and $ 1 million and $ 2 million for the six months ended June 30, 2020 and 2019, respectively.

These expenses are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

For the three months ended March 31, 2020, and 2019, cash paid for amounts included in the measurement of lease liabilities were $ 3 million and $ 1 million, respectively, and are reflected in the accompanying condensed consolidated statements of cash flows.

For the three months ended March 31, 2020, amounts i nclude $ 2 million of lease termination costs related to the decision to consolidate the operations of Landmark Home Warranty, LLC (“Landmark”) with those of OneGuard Home Warranties (“OneGuard”) .

For the six months ended June 30, 2020, and 2019, cash paid for amounts included in the measurement of lease liabilities were $ 3 million and $ 2 million, respectively, and are reflected in the accompanying condensed consolidated statements of cash flows.

For the six months ended June 30, 2020, amounts i nclude $ 2 million of lease termination costs related to the decision to consolidate the operations of Landmark Home Warranty, LLC (“Landmark”) with those of OneGuard Home Warranties (“OneGuard”) .

See Note 8 to the accompanying condensed consolidated financial statements for further information.

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Total operating lease liabilities

The following table presents maturities of our operating lease liabilities as of March 31, 2020.

The following table presents maturities of our operating lease liabilities as of June 30, 2020.

(In millions)

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Less imputed interest

As of June 30, 2020, we have entered into additional leases as a lessee for real estate that have not yet commenced.

These leases will result in operating lease right-of-use assets and corresponding lease liabilities of approximately $ 8 million.

These leases are expected to commence during the second half of 2020 and first half of 2021, with lease terms between three years and seven years .

As required by ASC 740, 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.

Our estimated tax rate is adjusted each quarter in accordance with ASC 740.

The effective tax rate on income was 25.0 percent and 26.9 percent for the three months ended March 31, 2020 and 2019, respectively.

The decrease in the effective tax rate is due to a decrease in non-deductible transaction costs.

The effective tax rate on income was 25.5 percent and 25.1 percent for the three months ended June 30, 2020 and 2019, respectively, and 25.4 percent for each of the six months ended June 30, 2020 and 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic.

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We are not subject to state and local income tax examinations by tax authorities in jurisdictions where separate income tax returns are filed for the years prior to 2015.

Substantially all of our income before income taxes for the three months ended March 31, 2020 and 2019 was generated in the U.S.

Substantially all of our income before income taxes for the six months ended June 30, 2020 and 2019 was generated in the U.S.

Our policy is to recognize potential interest and penalties related to our tax positions within the tax provision.

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As discussed in our 2019 Form 10-K, we completed the acquisition of Streem in the fourth quarter of 2019.

During the three months ended March 31, 2020, there were no changes to the purchase price allocation disclosed in our 2019 Form 10-K.

As of March 31, 2020, the purchase price allocation for this acquisition has not been finalized.

In particular, we are still evaluating the fair value of certain intangible assets.

As we finalize the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period in 2020.

No acquisitions occurred during the three months ended March 31, 2020.

During the six months ended June 30, 2020, we updated our preliminary allocation and reclassified $ 1 million from other intangibles, primarily customer relationships, to goodwill.

As of June 30, 2020, the purchase price allocation for this acquisition has not been finalized.

During the second quarter of 2020, we acquired a business for a cash purchase price of $ 5 million to expand the Candu on-demand offering via their technology platform.

The purchase price was primarily allocated to developed technology and other intangible assets.

As of June 30, 2020, the purchase price allocation for this acquisition has not been finalized.

Regarding the two acquisitions discussed above, we are still evaluating the fair value of certain intangible assets.

As we finalize the fair value of assets acquired and liabilities assumed for each acquisition, additional purchase price adjustments may be recorded during the measurement period in 2020.

Restructuring Charges

We incurred restructuring charges of $ 3 million ($ 2 million, net of tax) and less than $ 1 million (less than $ 1 million, net of tax) for the three months ended March 31, 2020 and 2019, respectively.

For the three months ended March 31, 2020, restructuring charges comprised $ 2 million of lease termination costs and $ 1 million of severance and other costs related to the decision to consolidate the operations of Landmark with those of OneGuard, which was completed during the first quarter of 2020.

For the three months ended March 31, 2019, restructuring charges comprised severance costs.

We incurred restructuring charges of $ 1 million ($ 1 million, net of tax) and less than $ 1 million (less than $ 1 million, net of tax) for the three months ended June 30, 2020 and 2019, respectively, and $ 4 million ($ 3 million, net of tax) and less than $ 1 million (less than $ 1 million, net of tax) for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020, restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

For the three months ended June 30, 2019, restructuring charges comprised severance costs.

For the six months ended June 30, 2020, restructuring charges comprised $ 2 million of lease termination costs and $ 1 million of severance and other costs related to the decision to consolidate the operations of Landmark with those of OneGuard, which was completed during the first quarter of 2020, as well as $ 1 million of accelerated depreciation of certain technology systems.

For the six months ended June 30, 2019, restructuring charges comprised severance costs.

The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying condensed consolidated statements of operations and comprehensive income.

As of December 31, 2019, there was less than $ 1 million of restructuring charges accrued, which were paid or otherwise settled during the three months ended March 31, 2020.

As of March 31, 2020, there was no remaining balance in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

As of December 31, 2019, there was less than $ 1 million of restructuring charges accrued, which were paid or otherwise settled during the six months ended June 30, 2020.

As of June 30, 2020, there was less than $ 1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

Commitments and Contingencies

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Stock-Based Compensation

We recognized stock-based compensation expense of $ 3 million ($ 3 million, net of tax) and $ 2 million ($ 1 million, net of tax) for the three months ended March 31, 2020 and 2019, respectively.

We recognized stock-based compensation expense of $ 5 million ($ 4 million, net of tax) and $ 3 million ($ 2 million, net of tax) for the three months ended June 30, 2020 and 2019, respectively, and $ 8 million ($ 7 million, net of tax) and $ 4 million ($ 4 million, net of tax) for the six months ended June 30, 2020 and 2019, respectively.

These charges are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

As of March 31, 2020, there was $ 46 million of total unrecognized compensation costs, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards.

As of June 30, 2020, there was $ 40 million of total unrecognized compensation costs, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards.

These remaining costs are expected to be recognized over a weighted-average period of 2.7 4 years.

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(1) As of March 31, 2020 and December 31, 2019, presented net of $ 6 million and $ 7 million, respectively, in unamortized debt issuance costs and $ 1 million in unamortized original issue discount paid.

(2) As of March 31, 2020 and December 31, 2019, presented net of $ 5 million in unamortized debt issuance costs.

(1) As of June 30, 2020 and December 31, 2019, presented net of $ 6 million and $ 7 million, respectively, in unamortized debt issuance costs and $ 1 million in unamortized original issue discount paid.

(2) As of June 30, 2020 and December 31, 2019, presented net of $ 5 million in unamortized debt issuance costs.

Supplemental Cash Flow Information

Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table:

Three Months Ended

Six Months Ended

(In millions)

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Cash, money market funds and certificates of deposit with maturities of three months or less when purchased are included in Cash and cash equivalents in the accompanying condensed consolidated statements of financial position.

As of March 31, 2020 and December 31, 2019, marketable securities primarily consisted of treasury bills with maturities of less than one year and are classified as available-for-sale securities.

As of March 31, 2020 and December 31, 2019, the amortized cost of our short-term investments was $ 2 million and $ 7 million, respectively, and the estimated fair value of these investments was $ 2 million and $ 7 million, respectively.

There were no unrealized losses which had been in a loss position for more than one year as of March 31, 2020 and December 31, 2019.

As of June 30, 2020 and December 31, 2019, marketable securities primarily consisted of treasury bills with maturities of less than one year and are classified as available-for-sale securities.

As of June 30, 2020 and December 31, 2019, the amortized cost of our short-term investments was $ 2 million and $ 7 million, respectively, and the estimated fair value of these investments was $ 2 million and $ 7 million, respectively.

Gains and losses on sales of investments, as determined on a specific identification basis, are included in investment income in the period they are realized.

For the three months ended March 31, 2020 and 2019, there were no gross realized gains, gross realized losses or proceeds resulting from sales of available-for-sale securities.

Maturities of available-for-sale securities were $ 7 million and $ 3 million for the three months ended March 31, 2020 and 2019, respectively.

We periodically review our portfolio of investments to determine whether there has been an other-than-temporary decline in the value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer competes.

There were no impairment charges due to declines in the value of these investments for the three months ended March 31, 2020 and 2019.

For the each of the three and six months ended June 30, 2020 and 2019, there were no gross realized gains, gross realized losses or proceeds resulting from sales of available-for-sale securities.

Maturities of available-for-sale securities were $ 7 million and $ 4 million for the six months ended June 30, 2020 and 2019, respectively.

We periodically review our portfolio of investments to determine whether an allowance for credit losses is necessary.

There was a $ 3 million loss on an investment recognized in the three and six months ended June 30, 2020, which is included in Interest and net investment loss (income) in the accompanying condensed consolidated statements of operations and comprehensive income.

There were no credit losses due to declines in the value of our investments recognized for the three and six months ended June 30, 2019.

Comprehensive Income (Loss)

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Net current period other comprehensive income (loss)

Balance as of March 31, 2020

Balance as of June 30, 2020

Balance as of December 31, 2018

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Net current period other comprehensive income (loss)

Balance as of March 31, 2019

Balance as of June 30, 2019

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4 unchanged sentences

Other Comprehensive Income (Loss)

As of March 31,

Six Months Ended

Consolidated Statements of

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See Note 14 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.

As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $ 7 million, net of tax, as of March 31, 2020.

As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $ 8 million, net of tax, as of June 30, 2020.

The amounts that are ultimately reclassified into earnings will be based on actual interest rates at the time the positions are settled and may differ materially from the amount noted above.

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Unrealized gains and losses are reported net of tax as a component of AOCI in the accompanying condensed consolidated statements of financial position.

Any unrealized losses where the decline in value is other than temporary are reported in Interest and net investment income in the accompanying condensed consolidated statements of operations and comprehensive income.

There were no other-than-temporary declines in value for the three months ended March 31, 2020 and 2019.

The carrying amount of total debt was $ 979 million and $ 980 million, and the estimated fair value was $ 944 million and $ 1,031 million as of March 31, 2020 and December 31, 2019, respectively.

There were no allowances for credit losses for the six months ended June 30, 2020 and 2019.

The carrying amount of total debt was $ 977 million and $ 980 million, and the estimated fair value was $ 993 million and $ 1,031 million as of June 30, 2020 and December 31, 2019, respectively.

The fair value of our debt is 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.

The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

The fair value estimates presented in this report are based on information available to us as of March 31, 2020 and December 31, 2019.

The fair value estimates presented in this report are based on information available to us as of June 30, 2020 and December 31, 2019.

We value our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider.

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Transfers between levels, if any, are recognized at the end of the reporting period.

There were no transfers between levels during the three months ended March 31, 2020 and 2019.

There were no transfers between levels during the six months ended June 30, 2020 and 2019.

The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented are as follows:

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‎ Unobservable

As of March 31, 2020:

As of June 30, 2020:

Financial Assets:

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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 potential dilutive shares of common stock been issued.

The dilutive effect of stock options, RSUs , performance shares and restricted stock awards are reflected in diluted net income per share by applying the treasury stock method.

The dilutive effect of stock options, RSUs , performance shares and restricted stock awards are reflected in diluted earnings per share by applying the treasury stock method.

Basic and diluted earnings per share are calculated as follows:

Three Months Ended

Six Months Ended

(In millions, except per share data)

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(1) Options to purchase 0.3 million shares and 0.2 million shares for the three months ended March 31, 2020 and 2019, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

(1) Options to purchase 0.9 million shares and 0.6 million shares for the three and six months ended June 30, 2020, respectively, and 0.5 million shares and 0.3 million shares for the three and six months ended 2019, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control.

Factors, risks, trends and uncertainties that could cause actual results or events to differ materially from those anticipated include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in this report, in addition to the following other factors, risks, trends and uncertainties:

Risk Factors in our 2019 Annual Report on Form 10-K filed with the SEC and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in addition to the following other factors, risks, trends and uncertainties:

 risks related to the COVID-19 pandemic;

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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, as well as the disclosure included in Item 1A.

Risk Factors in our 2019 Form 10-K.

Risk Factors in our 2019 Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Available Information

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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 1. Financial Statements