Frontdoor, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (In millions, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue $ 417 $ 388 $ 711 $ 658 Cost of services rendered 200 183 347 326 Gross Profit 218 205 364 333 Selling and administrative expenses 125 104 229 193 Depreciation and amortization expense 10 6 18 12 Restructuring charges 1 — 4 — Spin-off charges — — — 1 Interest expense 14 16 29 31 Interest and net investment loss (income) 3 ( 2 ) 1 ( 3 ) Income before Income Taxes 65 81 83 98 Provision for income taxes 17 20 21 25 Net Income $ 49 $ 60 $ 62 $ 73 Other Comprehensive Loss, Net of Income Taxes: Net unrealized loss on derivative instruments ( 1 ) ( 7 ) ( 16 ) ( 12 ) Total Comprehensive Income $ 48 $ 53 $ 45 $ 61 Earnings per Share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.57 $ 0.71 $ 0.73 $ 0.87 Diluted ​ $ 0.57 $ 0.71 $ 0.72 $ 0.87 Weighted-average Common Shares Outstanding: Basic 85.2 84.6 85.2 84.6 Diluted 85.5 84.8 85.4 84.7 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 3 Condensed Consolidated Statements of Financial Position (Unaudited) (In millions, except share data) As of June 30, December 31, 2020 2019 Assets: Current Assets: Cash and cash equivalents $ 545 $ 428 Marketable securities 2 7 Receivables, less allowance of $ 2 in each period 9 11 Prepaid expenses and other assets 20 16 Total Current Assets 577 461 Other Assets: Property and equipment, net 59 51 Goodwill 502 501 Intangible assets, net 187 191 Operating lease right-of-use assets 14 17 Deferred customer acquisition costs 18 18 Other assets 4 11 Total Assets $ 1,361 $ 1,250 Liabilities and Shareholders' Equity: Current Liabilities: Accounts payable $ 74 $ 48 Accrued liabilities: Payroll and related expenses 17 17 Home service plan claims 95 66 Interest payable 9 9 Other 41 29 Deferred revenue 173 188 Current portion of long-term debt 7 7 Total Current Liabilities 416 364 Long-Term Debt 971 973 Other Long-Term Liabilities: Deferred taxes 41 45 Operating lease liabilities 17 20 Other long-term obligations 41 27 Total Other Long-Term Liabilities 99 92 Commitments and Contingencies (Note 9) Shareholders' Equity: Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 85,425,009 shares issued and outstanding at June 30, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019 1 1 Additional paid-in capital 37 29 Accumulated deficit ( 126 ) ( 188 ) Accumulated other comprehensive loss ( 37 ) ( 21 ) Total Deficit ( 125 ) ( 179 ) Total Liabilities and Shareholders' Equity $ 1,361 $ 1,250 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 4 Condensed Consolidated Statement of Changes in (Deficit) Equity (Unaudited) (In millions) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Common Stock Balance at beginning of period $ 1 $ 1 $ 1 $ 1 Balance at end of period 1 1 1 1 Additional Paid-in Capital Balance at beginning of period 31 3 29 1 Issuance of common stock 1 — 1 — Taxes paid related to net share settlement of equity awards — — ( 1 ) — Stock-based employee compensation 5 3 8 4 Balance at end of period 37 6 37 6 Accumulated Deficit Balance at beginning of period ( 174 ) ( 323 ) ( 188 ) ( 336 ) Net income 49 60 62 73 Balance at end of period ( 126 ) ( 263 ) ( 126 ) ( 263 ) Accumulated Other Comprehensive Loss Balance at beginning of period ( 36 ) ( 14 ) ( 21 ) ( 9 ) Other comprehensive loss, net of tax ( 1 ) ( 7 ) ( 16 ) ( 12 ) Balance at end of period ( 37 ) ( 21 ) ( 37 ) ( 21 ) Total Deficit $ ( 125 ) $ ( 278 ) $ ( 125 ) $ ( 278 ) See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 5 Condensed Consolidated Statements of Cash Flows (Unaudited) (In millions) Six Months Ended June 30, 2020 2019 Cash and Cash Equivalents at Beginning of Period $ 428 $ 296 Cash Flows from Operating Activities: Net Income 62 73 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization expense 18 12 Deferred income tax provision 1 1 Stock-based compensation expense 8 4 Restructuring charges 4 — Payments for restructuring charges ( 3 ) — Spin-off charges — 1 Payments for spin-off charges — ( 1 ) Other 4 2 Change in working capital, net of acquisitions: Receivables 2 3 Prepaid expenses and other current assets ( 1 ) 1 Accounts payable 26 17 Deferred revenue ( 15 ) ( 1 ) Accrued liabilities 30 16 Current income taxes 4 11 Net Cash Provided from Operating Activities 140 140 Cash Flows from Investing Activities: Purchases of property and equipment ( 18 ) ( 10 ) Business acquisitions, net of cash received ( 5 ) ( 3 ) Purchases of available-for-sale securities ( 2 ) — Sales and maturities of available-for-sale securities 7 4 Other investing activities — ( 3 ) Net Cash Used for Investing Activities ( 19 ) ( 12 ) Cash Flows from Financing Activities: Payments of debt and finance lease obligations ( 3 ) ( 4 ) Other financing activities ( 1 ) — Net Cash Used for Financing Activities ( 4 ) ( 4 ) Cash Increase During the Period 118 124 Cash and Cash Equivalents at End of Period $ 545 $ 420 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 6 frontdoor, inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Basis of Presentation References in this Quarterly Report on Form 10-Q to “Frontdoor,” “we,” “our,” or “us” refer to frontdoor, inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee. Certain amounts presented in the tables in this report are subject to rounding adjustments and, as a result, the totals in such tables may not sum. We are the largest provider of home service plans in the U.S., as measured by revenue, and operate under the American Home Shield, HSA, OneGuard and Landmark brands. Our customizable home service plans 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 service plans cover the repair or replacement of major components of up to 21 household systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. In 2019, we launched our new on-demand home services business under the brand name Candu, and we acquired Streem, a technology startup that uses augmented reality, computer vision and machine learning to help home service professionals more quickly and accurately diagnose breakdowns and complete repairs and to help real estate professionals consult with and provide virtual tours to potential buyers and agents. We serve customers across all 50 states and the District of Columbia. We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated and combined financial statements and the notes thereto included in our 2019 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year. Impact of COVID-19 On March 11, 2020, the World Health Organization (“WHO”) characterized the recent novel coronavirus disease (“COVID-19”) as a pandemic, and on March 13, 2020, the U.S. declared a national emergency concerning the outbreak. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. 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. f Note 2. 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 six months ended June 30, 2020. 7 Adoption of New Accounting Standards In June 2016, the FASB issued ASU 2016-13, which was amended in parts by subsequent accounting standards updates (collectively ASC 326). This standard requires earlier recognition of credit losses while also providing additional transparency about credit risk. Further, the new credit loss model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. 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. In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard prospectively, effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures. Accounting Standards Issued Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022, when the reference rate replacement activity is expected to be completed. We are currently evaluating its impact on our consolidated financial statements and related disclosures. Note 3. Revenue We enter into annual service plan agreements with our customers. We have one performance obligation, which is to provide for the repair or replacement of essential home systems and appliances, as applicable per the contract. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer. As the costs to fulfill the obligations of the home service plans are incurred on an other-than-straight-line basis, we utilize historical evidence to estimate the expected claims expense and related timing of such costs. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract balances” below. We regularly review our estimates of claims costs and adjust our estimates when appropriate. We derive substantially all of our revenue from customers in the U.S. We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenue by major customer acquisition channel is as follows: ___ Three Months Ended Six Months Ended June 30, June 30, (In millions) 2020 2019 2020 2019 Renewals $ 289 $ 263 $ 489 $ 444 Real estate (1) 74 75 130 129 Direct-to-consumer (1) 51 48 87 81 Other 3 2 6 4 Total $ 417 $ 388 $ 711 $ 658 _____________________________ (1) First-year revenue only. Renewals Revenue from all customer renewals, whether initiated via the real estate or direct-to-consumer channel, are classified as renewals above. Customer payments for renewals are received either at the commencement of the renewal period or in installments over the contract period. Real estate Real estate home service plans are sold through annual contracts in connection with a real estate sale, and payments are typically paid in full at closing. First-year revenue from the real estate channel is classified as real estate above. 8 Direct-to-consumer Direct-to-consumer home service plans are sold through annual contracts when customers request a service plan in response to marketing efforts or when third-party resellers make a sale. Customer payments are received either at the commencement of the contract or in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above. Costs to obtain a contract with a customer 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 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. Contract balances Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers, including contracts resulting from customer renewals, are generally for a period of one year. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivable are recorded within Receivables, less allowances, in the accompanying condensed consolidated statements of financial position. We invoice our monthly-pay customers on a straight-line basis over the contract term. As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed. Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. 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) Deferred revenue Balance as of December 31, 2019 $ 188 Deferral of revenue 195 Recognition of deferred revenue ( 210 ) Balance as of June 30, 2020 $ 173 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. 9 Note 4. Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value-based test on an annual basis or more frequently if circumstances indicate a potential impairment. An assessment for impairment is performed on October 1 of every year. 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 June 30, 2020 As of December 31, 2019 (In millions) Gross Accumulated ‎ Amortization Net Gross Accumulated ‎ Amortization Net Trade names (1) $ 141 $ — $ 141 $ 141 $ — $ 141 Customer relationships 173 ( 169 ) 3 173 ( 168 ) 5 Developed technology 38 ( 5 ) 33 34 ( 1 ) 33 Other 37 ( 26 ) 10 37 ( 25 ) 12 Total $ 388 $ ( 201 ) $ 187 $ 385 $ ( 193 ) $ 191 ___________________________________ (1) Not subject to amortization. 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 : (In millions) 2020 (remainder) $ 7 2021 13 2022 10 2023 9 2024 7 2025 — Total $ 46 Note 5. Leases We have operating leases primarily for corporate offices and call centers and finance leases for vehicles. Our leases have remaining lease terms of one year to 1 5 years, some of which include options to extend the leases for up to five years . Renewal options that are reasonably certain to be exercised are included in the lease term. An incremental borrowing rate is used in determining the present value of lease payments unless an implicit rate is readily determinable. Incremental borrowing rates are determined based on our secured borrowing rating and the lease term. Disclosures related to finance lease obligations are immaterial and, as such, are not included in the discussion below. The weighted-average remaining lease term and weighted-average discount rate related to operating leases is as follows: As of June 30, December 31, 2020 2019 Weighted-average remaining lease term (years) 10 10 Weighted-average discount rate 6.2 % 6.1 % 10 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 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. Supplemental balance sheet information related to operating leases is as follows: As of June 30, December 31, (In millions) 2020 2019 Operating lease right-of-use assets $ 19 $ 23 Less lease incentives ( 6 ) ( 6 ) Operating lease right-of-use assets, net $ 14 $ 17 Other accrued liabilities $ 2 $ 3 Operating lease liabilities 17 20 Total operating lease liabilities $ 19 $ 23 The following table presents maturities of our operating lease liabilities as of June 30, 2020. (In millions) 2020 (remainder) $ 2 2021 3 2022 3 2023 3 2024 2 2025 1 Thereafter 12 Total lease payments 27 Less imputed interest ( 7 ) Total $ 19 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 . Note 6. Income Taxes 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 25.5 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. We do not expect the provisions of the legislation to have a significant impact on our effective tax rate or our income tax payable and deferred income tax positions. We are subject to taxation in the U.S., various states and foreign jurisdictions. Pursuant to the terms of the tax matters agreement entered into with ServiceMaster in connection with the Spin-off, we are not subject to federal examination by the IRS or examination by state taxing authorities where a unitary or combined state income tax return is filed for the years prior to 2018. 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 six months ended June 30, 2020 and 2019 was generated in the U.S. 11 Our policy is to recognize potential interest and penalties related to our tax positions within the tax provision. Total interest and penalties included in the accompanying condensed consolidated statements of operations and comprehensive income are immaterial. Note 7. Acquisitions Business combinations have been accounted for using the acquisition method, and, accordingly, the results of operations of the acquired businesses have been included in the accompanying condensed consolidated financial statements since their dates of acquisition. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates. As discussed in our 2019 Form 10-K, we completed the acquisition of Streem in the fourth quarter of 2019. 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. Note 8. Restructuring Charges 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 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. Note 9. Commitments and Contingencies Accruals for home service plan claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home service plan claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these judgmental accruals. We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. 12 Due to the nature of our business activities, we are at times subject to pending and threatened legal and regulatory actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected, individually or in the aggregate, to have a material adverse effect on our business, financial position, results of operations or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our business, financial position, results of operations or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions. Note 10. Stock-Based Compensation We recognized stock-based compensation expense of $ 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 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. Note 11. Long-Term Debt Long-term debt is summarized in the following table: As of June 30, December 31, (In millions) 2020 2019 Term Loan Facility maturing in 2025 (1) $ 631 $ 634 Revolving Credit Facility maturing in 2023 — — 2026 Notes (2) 345 345 Other 1 1 Less current portion ( 7 ) ( 7 ) Total long-term debt $ 971 $ 973 ___________________________________ (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. Note 12. Supplemental Cash Flow Information Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table: Six Months Ended June 30, (In millions) 2020 2019 Cash paid for (received from): Interest expense $ 28 $ 30 Income tax payments, net of refunds 16 13 Interest income ( 2 ) ( 3 ) Note 13. Cash and Marketable Securities 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 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. 13 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 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. Note 14. Comprehensive Income (Loss) Comprehensive income (loss), which includes net income (loss), unrealized gain (loss) on derivative instruments and unrealized gain (loss) on marketable securities, is disclosed in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity. The following tables summarize the activity in AOCI, net of the related tax effects. Unrealized Loss (In millions) on Derivatives Total Balance as of December 31, 2019 $ ( 21 ) $ ( 21 ) Other comprehensive income (loss) before reclassifications: Pre-tax amount ( 24 ) ( 24 ) Tax provision (benefit) ( 5 ) ( 5 ) After-tax amount ( 19 ) ( 19 ) Amounts reclassified from accumulated ‎ other comprehensive income (loss) (1) 3 3 Net current period other comprehensive income (loss) ( 16 ) ( 16 ) Balance as of June 30, 2020 $ ( 37 ) $ ( 37 ) Balance as of December 31, 2018 $ ( 9 ) $ ( 9 ) Other comprehensive income (loss) before reclassifications: Pre-tax amount ( 17 ) ( 16 ) Tax provision (benefit) ( 4 ) ( 4 ) After-tax amount ( 13 ) ( 13 ) Amounts reclassified from accumulated ‎ other comprehensive income (loss) (1) 1 1 Net current period other comprehensive income (loss) ( 12 ) ( 12 ) Balance as of June 30, 2019 $ ( 21 ) $ ( 21 ) ___________________________________ (1) Amounts are net of tax. See reclassifications out of AOCI below for further details. Reclassifications out of AOCI included the following components for the periods indicated. Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) Six Months Ended June 30, Consolidated Statements of (In millions) 2020 2019 Operations and Comprehensive Income Location Loss on interest rate swap contract $ ( 4 ) $ ( 1 ) Interest expense Impact of income taxes 1 — Provision for income taxes Total reclassifications related to derivatives $ ( 3 ) $ ( 1 ) Total reclassifications for the period $ ( 3 ) $ ( 1 ) 14 Note 15. Derivative Financial Instruments We currently use a derivative financial instrument to manage risks associated with changes in interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected cash flows of the associated forecasted transaction. We hedge the interest payments on a portion of our variable rate debt through the use of an interest rate swap agreement. Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded on the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks recorded in AOCI. Any change in the fair value of the hedging instrument resulting from ineffectiveness, as defined by accounting standards, is recognized in current period earnings. Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows. The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 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 $ 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. Note 16. Fair Value Measurements We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that the business categorizes using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1"); direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets ("Level 2"); and unobservable inputs that require significant judgment for which there is little or no market data ("Level 3"). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement, even though we may have also utilized significant inputs that are more readily observable. The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period-end carrying amount of short-term marketable securities also approximates fair value and consists of available-for-sale debt securities. Unrealized gains and losses are reported net of tax as a component of AOCI in the accompanying condensed consolidated statements of financial position. 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 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. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contract. We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no transfers between levels during the six months ended June 30, 2020 and 2019. 15 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: Estimated Fair Value Measurements (In millions) Statement of Financial ‎ Position Location Carrying ‎ Value Quoted ‎ Prices ‎ In Active ‎ Markets ‎ (Level 1) Significant ‎ Other ‎ Observable ‎ Inputs ‎ (Level 2) Significant ‎ Unobservable ‎ Inputs ‎ (Level 3) As of June 30, 2020: Financial Assets: Investments in marketable securities Marketable securities $ 2 $ 2 $ — $ — Total financial assets $ 2 $ 2 $ — $ — Financial Liabilities: Interest rate swap contract Other accrued liabilities $ 10 $ — $ 10 $ — Other long-term obligations 37 — 37 — Total financial liabilities $ 48 $ — $ 48 $ — As of December 31, 2019: Financial Assets: Investments in marketable securities Marketable securities $ 7 $ 7 $ — $ — Total financial assets $ 7 $ 7 $ — $ — Financial Liabilities: Interest rate swap contract Other accrued liabilities $ 5 $ — $ 5 $ — Other long-term obligations 22 — 22 — Total financial liabilities $ 27 $ — $ 27 $ — Note 17. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had 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 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 June 30, June 30, (In millions, except per share data) 2020 2019 2020 2019 Net Income $ 49 $ 60 $ 62 $ 73 Weighted-average common shares outstanding 85.2 84.6 85.2 84.6 Effect of dilutive securities: RSUs 0.2 0.1 0.2 0.1 Stock options (1) 0.1 0.1 0.1 — Weighted-average common shares outstanding - assuming dilution 85.5 84.8 85.4 84.7 Basic earnings per share $ 0.57 $ 0.71 $ 0.73 $ 0.87 Diluted earnings per share $ 0.57 $ 0.71 $ 0.72 $ 0.87 ___________________________________ (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. 16 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance, the impact of COVID-19 on our business and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. 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” included in this report as well as Item 1A. 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;  changes in the source and intensity of competition in our market;  weakening general economic conditions, especially as they may affect existing home sales, unemployment and consumer confidence or spending levels;  our ability to successfully implement our business strategies;  our ability to attract, retain and maintain positive relations with third-party contractors and vendors;  adverse credit and financial markets impeding access and leading to increased financing costs;  adverse weather conditions and Acts of God;  our ability to attract and retain key personnel;  our dependence on labor availability, third-party vendors, including business process outsourcers, and third-party component suppliers;  compliance with, or violation of, laws and regulations, including consumer protection laws, increasing our legal and regulatory expenses;  adverse outcomes in litigation or other legal proceedings;  increases in tariffs or changes to import/export regulations;  cybersecurity breaches, disruptions or failures in our technology systems and our failure to protect the security of personal information about our customers;  increases in appliance, parts and system prices, and other operating costs;  our ability to protect our intellectual property and other material proprietary rights;  negative reputational and financial impacts resulting from acquisitions or strategic transactions;  requirement to recognize and record impairment charges;  failure to maintain our strategic relationships with the real estate brokerages and agents that comprise our real estate customer acquisition channel;  failure of our marketing efforts to be successful or cost-effective;  third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;  inappropriate use of social media by us or other parties to harm our reputation;  special risks applicable to operations outside the U.S. by us or our business process outsource providers;  our limited history of operating as an independent company;  inability to achieve some or all of the benefits that we expected to achieve from the Spin-off;  tax liabilities and potential indemnification of ServiceMaster for material taxes if the distribution fails to qualify as tax-free;  the effects of our substantial indebtedness and the limitations contained in the agreements governing such indebtedness;  increases in interest rates increasing the cost of servicing our substantial indebtedness; 17  increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;  our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations; and  other factors described in this report and from time to time in documents that we file with the SEC. You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the disclosure included in Item 1A. 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 Our website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our 2019 Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained in our website to be part of this report. 18