What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 131 added, 114 removed, 287 unchanged (46% of the section changed)

3 unchanged sentences

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 those factors discussed in “Risk Factors” included in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

“Risk Factors” in our 2019 Form 10-K and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Frontdoor is the largest provider of home service plans in the U.S., as measured by revenue, and operates under the American Home Shield, HSA, OneGuard and Landmark brands.

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Our home service plan customers subscribe to an annual service plan agreement that covers the repair or replacement of major components of up to 21 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops.

In 2019, we launched Candu, our on-demand home services brand, and 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.

In 2019, we launched our new on-demand home services business, just recently rebranded as ProConnect, 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 over two million customers annually across all 50 states and the District of Columbia.

For the three months ended June 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $417 million, $49 million and $100 million, respectively, and $388 million, $60 million and $105 million, respectively.

For the six months ended June 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $711 million, $62 million and $147 million, respectively, and $658 million, $73 million and $149 million, respectively.

For the six months ended June 30, 2020, our total operating revenue included 69 percent of revenue derived from existing customer renewals, while 18 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

For the six months ended June 30, 2019, our total operating revenue included 67 percent of revenue derived from existing customer renewals, while 20 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

For the three months ended September 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $440 million, $49 million and $91 million, respectively, and $407 million, $61 million and $106 million, respectively.

For the nine months ended September 30, 2020 and 2019, we generated revenue, net income and Adjusted EBITDA of $1,151 million, $111 million and $238 million, respectively, and $1,065 million, $134 million and $255 million, respectively.

For the nine months ended September 30, 2020, our total operating revenue included 69 percent of revenue derived from existing customer renewals, while 18 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

For the nine months ended September 30, 2019, our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 19 percent and 12 percent were derived from new unit sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and one percent was derived from other revenue streams.

Key Factors and Trends Affecting Our Results of Operations

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Nevertheless, we are managing customer responses on a case-by-case basis, and actions may vary by location.

To address virus-related concerns and ensure that we are handling the most critical service requests first, we have established a special COVID-19 response team, increased customer communication and implemented safety screening protocols during the service initiation and delivery process.

To address virus-related concerns and ensure that we are handling the most critical service requests first, we established a special COVID-19 response team, increased customer communication and implemented safety screening protocols during the service initiation and delivery process.

Accelerated the Deployment of Streem’s Augmented Reality Technology .

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To further these efforts, we introduced our Streem technology platform to our contractors at no cost during this time, enabling social distancing for customers and contractors through remote diagnostics and reduced in-person interactions to resolve customers’ issues.

While our supply chain has not experienced significant disruptions to date, we are closely monitoring the transportation and distribution of parts and replacement units.

Managing Supply Chain.

We are navigating through industry-wide appliance availability trends and the resulting disruptions in our supply chain.

We are closely monitoring the distribution of parts and replacement units and working with our suppliers to increase availability to us.

We believe our multi-vendor strategy will help mitigate the impact on our business.

Financial Impact to our Business.

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

While we did not experience a material impact on our results of operations and overall financial performance during the first quarter, during the second and third quarters of 2020, our financial condition and results of operations 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.

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 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.

In addition, industry-wide availability challenges in the appliance trade have caused increased cost pressure.

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

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

It remains difficult to predict the overall impact COVID-19 will have on our business through the remainder of the year.

We anticipate that U.S.

existing home sales and our first-year real estate sales will continue to be adversely impacted by COVID-19.

In addition, we anticipate a continued increase in claims and incremental investments in marketing due to the factors noted above.

It remains difficult to predict the overall impact COVID-19 will have on our business.

We anticipate a continued increase in claims and incremental wages at our contact centers due to the factors noted above.

Macroeconomic Conditions

Macroeconomic conditions that may affect customer spending patterns, and thereby our results of operations, include home sales, consumer confidence and employment rates.

During the second quarter of 2020, the COVID-19 pandemic increased economic uncertainty in these areas and adversely impacted U.S.

existing home sales.

The COVID-19 pandemic has increased economic uncertainty in these areas.

We believe our ability to acquire customers through the direct-to-consumer channel helps to mitigate the effects of downturns in the real estate market, while our nationwide presence limits the risk of poor economic conditions in any particular geography.

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Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

There have been no material changes to our critical accounting policies for the six months ended June 30, 2020, certain of which are described below.

There have been no material changes to our critical accounting policies for the nine months ended September 30, 2020, certain of which are described below.

Goodwill and Intangible Assets

In accordance with applicable accounting standards, 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.

As of June 30, 2020, we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets.

As of September 30, 2020, we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets.

We will continue to monitor the macroeconomic impacts on our business in our ongoing evaluation of potential impairments.

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Results of Operations

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Three Months Ended

September 30,

(In millions)

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Depreciation and amortization expense

Restructuring charges

Interest expense

Interest and net investment loss (income)

Interest and net investment income

Income before Income Taxes

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* not meaningful

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Six Months Ended

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Nine Months Ended

September 30,

(In millions)

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* not meaningful

We reported revenue of $417 million and $388 million for the three months ended June 30, 2020 and 2019, respectively, and $711 million and $658 million for the six months ended June 30, 2020 and 2019, respectively.

We reported revenue of $440 million and $407 million for the three months ended September 30, 2020 and 2019, respectively, and $1,151 million and $1,065 million for the nine months ended September 30, 2020 and 2019, respectively.

Revenue by major customer acquisition channel is as follows:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Three Months Ended

September 30,

(In millions)

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(1) First-year revenue only.

Revenue increased eight percent for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, driven by higher renewal revenue due to growth in the number of renewed home service plans, partly as a result of customer retention improvement initiatives, and improved price realization.

Revenue increased eight percent for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily driven by higher renewal revenue due to growth in the number of renewed home service plans, partly a result of customer retention improvement initiatives, and improved price realization.

The decrease in real estate revenue reflects a decline in the number of first-year real estate home service plans, due, in part, to the adverse impact COVID-19 had on U.S.

existing home sales, offset, in part, by improved price realization.

existing home sales during the second quarter, offset, in part, by improved price realization.

The increase in direct-to-consumer revenue reflects growth in the number of first-year direct-to-consumer home service plans, mostly driven by increased investments in marketing, and improved price realization.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Six Months Ended

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Nine Months Ended

September 30,

(In millions)

6 unchanged sentences

(1) First-year revenue only.

Revenue increased eight percent for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans, partly as a result of customer retention improvement initiatives.

Real estate revenue was relatively flat, as improved price realization was offset by a decline in the number of first-year real estate home service plans, due, in part, to the adverse impact COVID-19 had on U.S.

existing home sales.

Revenue increased eight percent for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily driven by higher renewal revenue due to growth in the number of renewed home service plans, partly a result of customer retention improvement initiatives, and improved price realization.

The decrease in real estate revenue reflects a decline in the number of first-year real estate home service plans, due, in part, to the adverse impact COVID-19 had on U.S.

existing home sales during the second quarter, offset, in part, by improved price realization.

Growth in number of home service plans and customer retention rate are presented below.

September 30,

Growth in number of home service plans

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Cost of Services Rendered

We reported cost of services rendered of $200 million and $183 million for the three months ended June 30, 2020 and 2019, respectively, and $347 million and $326 million for the six months ended June 30, 2020 and 2019, respectively.

We reported cost of services rendered of $225 million and $201 million for the three months ended September 30, 2020 and 2019, respectively, and $572 million and $526 million for the nine months ended September 30, 2020 and 2019, respectively.

The following tables provide a summary of changes in cost of services rendered:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

(In millions)

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Impact of change in revenue

Contract claims costs

Three Months Ended June 30, 2020

The increase in contract claims costs reflects higher incidence in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, and normal inflation.

Three Months Ended September 30, 2020

The increase in contract claims costs primarily reflects higher incidence in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, increased cost pressures in the appliance trade due to industry-wide availability challenges and normal inflation.

Contract claims costs also reflects a favorable weather impact of approximately $1 million and process improvement benefits.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

(In millions)

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Impact of change in revenue

Contract claims

Six Months Ended June 30, 2020

The increase in contract claims costs reflects higher incidence in the second quarter of 2020 in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, and normal inflation.

Contract claims costs

Nine Months Ended September 30, 2020

The increase in contract claims costs reflects higher incidence in the second and third quarters of 2020 in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19, increased cost pressures in the appliance trade due to industry-wide availability challenges and normal inflation.

Contract claims costs also reflects a favorable weather impact of approximately $6 million, process improvement benefits and lower incidence in the heating trade in the first quarter of 2020.

Selling and Administrative Expenses

We reported selling and administrative expenses of $125 million and $104 million for the three months ended June 30, 2020 and 2019, respectively, and $229 million and $193 million for the six months ended June 30, 2020 and 2019, respectively.

For the three months ended June 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $90 million and $74 million, respectively, and general and administrative expenses of $35 million and $30 million, respectively.

For the six months ended June 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $164 million and $138 million, respectively, and general and administrative expenses of $65 million and $55 million, respectively.

We reported selling and administrative expenses of $129 million and $104 million for the three months ended September 30, 2020 and 2019, respectively, and $358 million and $297 million for the nine months ended September 30, 2020 and 2019, respectively.

For the three months ended September 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $97 million and $75 million, respectively, and general and administrative expenses of $32 million and $29 million, respectively.

For the nine months ended September 30, 2020 and 2019, selling and administrative expenses comprised sales, marketing and customer service costs of $261 million and $213 million, respectively, and general and administrative expenses of $97 million and $84 million, respectively.

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

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

(In millions)

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Sales and marketing costs

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General and administrative costs

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel.

The increase in customer service costs was primarily driven by investments to enhance customer service.

General and administrative costs increased compared to prior year primarily due to investments in technology and incremental direct costs related to COVID-19 of $1 million.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

The increase in customer service costs was primarily related to managing a higher number of service requests and investments in customer retention initiatives.

General and administrative costs increased compared to prior year primarily due to investments in technology.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

(In millions)

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Sales and marketing costs

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General and administrative costs

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel.

The increase in customer service costs was primarily driven by investments to enhance customer service.

General and administrative costs increased compared to prior year primarily due to higher personnel costs, investments in technology and incremental direct costs related to COVID-19 of $1 million.

The increase in customer service costs was primarily related to managing a higher number of service requests and investments in customer retention initiatives.

General and administrative costs increased compared to prior year primarily due to investments in technology and higher personnel costs, offset, in part, by lower professional fees.

Depreciation Expense

Depreciation expense was $5 million and $4 million for the three months ended June 30, 2020 and 2019, respectively, and $10 million and $9 million for the six months ended June 30, 2020 and 2019, respectively.

Depreciation expense was $5 million for each of the three months ended September 30, 2020 and 2019 and $16 million and $13 million for the nine months ended September 30, 2020 and 2019, respectively.

Amortization Expense

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 .

For the three and six months ended June 30, 2020, the increase was primarily due to amortization of intangible assets recognized from our acquisition of Streem.

Amortization expense was $2 million and $1 million for the three months ended September 30, 2020 and 2019, respectively, and $9 million and $5 million for the nine months ended September 30, 2020 and 2019, respectively .

For the nine months ended September 30, 2020, the increase was primarily due to amortization of intangible assets recognized from our acquisition of Streem.

Restructuring Charges

Restructuring charges were $1 million and less than $1 million for the three months ended June 30, 2020 and 2019, respectively, and $4 million and less than $1 million 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.

Restructuring charges were less than $1 million for each of the three months ended September 30, 2020 and 2019, and $4 million and less than $1 million for the nine months ended September 30, 2020 and 2019, respectively .

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

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

For the three and nine months ended September 30, 2019, restructuring charges comprised severance costs.

Interest Expense

Interest expense was $14 million and $16 million for the three months ended June 30, 2020 and 2019, respectively, and $29 million and $31 million for the six months ended June 30, 2020 and 2019, respectively.

Interest and Net Investment Loss (Income)

Interest and net investment loss (income) reflects a loss of $3 million for the three months ended June 30, 2020 and income of $2 million for the three months ended June 30, 2019 and a loss of $1 million for the six months ended June 30, 2020 and income of $3 million for the six months ended June 30, 2019.

For the three and six months ended June 30, 2020, amounts primarily comprised a $3 million loss on investment, offset, in part, by interest on our investment portfolio.

For the three and six months ended June 30, 2019, amounts primarily comprised interest on our investment portfolio.

Interest expense was $14 million and $16 million for the three months ended September 30, 2020 and 2019, respectively, and $43 million and $47 million for the nine months ended September 30, 2020 and 2019, respectively.

For the three and nine months ended September 30, 2020, the decrease was due to a decline in interest rates on the unhedged portion of our variable rate debt.

Interest and Net Investment (Income) Loss

Interest and net investment (income) loss reflects income of less than $1 million and $2 million for the three months ended September 30, 2020 and 2019, respectively, and a loss of $1 million for the nine months ended September 30, 2020 and income of $5 million for the nine months ended September 30, 2019.

For the three months ended September 30, 2020 and 2019 and the nine months ended September 30, 2019, amounts primarily comprised interest on our investment portfolio.

For the nine months ended September 30, 2020, amounts primarily comprised a $3 million loss on investment, offset, in part, by interest on our investment portfolio.

Provision for Income Taxes

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.

Net income was $49 million and $60 million for the three months ended June 30, 2020 and 2019, respectively, and $62 million and $73 million for the six months ended June 30, 2020 and 2019, respectively.

For the three and six months ended June 30, 2020 compared to 2019, the decrease was driven by the aforementioned operating results, offset, in part, by a decrease in the provision for income taxes as a result of lower income before income taxes.

The effective tax rate on income was 24.8 percent and 25.7 percent for the three months ended September 30, 2020 and 2019, respectively, and 25.1 percent and 25.5 percent for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in the effective tax rates for the three and nine months ended September 30, 2020 compared to 2019 is primarily due to a decrease in our state and local effective tax rates.

Net income was $49 million and $61 million for the three months ended September 30, 2020 and 2019, respectively, and $111 million and $134 million for the nine months ended September 30, 2020 and 2019, respectively.

For the three and nine months ended September 30, 2020 compared to 2019, the decrease was driven by the aforementioned operating results, offset, in part, by a decrease in the provision for income taxes as a result of lower income before income taxes.

Adjusted EBITDA

Adjusted EBITDA was $100 million and $105 million for the three months ended June 30, 2020 and 2019, respectively, and $147 million and $149 million for the six months ended June 30, 2020 and 2019, respectively.

Adjusted EBITDA was $91 million and $106 million for the three months ended September 30, 2020 and 2019, respectively, and $238 million and $255 million for the nine months ended September 30, 2020 and 2019, respectively.

The following tables provide a summary of changes in our Adjusted EBITDA:

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

(In millions)

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Impact of change in revenue

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General and administrative costs

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Contract claims costs also reflects a favorable weather impact of approximately $1 million and process improvement benefits.

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel.

The increase in customer service costs was primarily driven by investments to enhance customer service.

The increase in customer service costs was primarily related to managing a higher number of service requests and investments in customer retention initiatives.

General and administrative costs increased compared to prior year primarily due to investments in technology.

Other primarily consists of interest and net investment income.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

(In millions)

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Impact of change in revenue

Contract claims

Contract claims costs

Sales and marketing costs

1 unchanged sentence

General and administrative costs

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Contract claims costs also reflects a favorable weather impact of approximately $6 million, process improvement benefits and lower incidence in the heating trade in the first quarter of 2020.

The increase in sales and marketing costs was primarily driven by higher targeted marketing spend to drive sales growth in the direct-to-consumer channel.

The increase in customer service costs was primarily driven by investments to enhance customer service.

General and administrative costs increased compared to prior year primarily due to higher personnel costs and investments in technology.

The increase in customer service costs was primarily related to managing a higher number of service requests and investments in customer retention initiatives.

General and administrative costs increased compared to prior year primarily due to investments in technology and higher personnel costs, offset, in part, by lower professional fees.

Other primarily consists of interest and net investment income.

A reconciliation of Net Income to Adjusted EBITDA is presented below.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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________________________________

(1) Other non-operating expenses for the three and six months ended June 30, 2020 includes (a) a loss on investment of $3 million, (b) incremental direct costs related to COVID-19 of $1 million, 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 and (c) acquisition-related transaction costs of less than $1 million.

(1) Other non-operating expenses for the nine months ended September 30, 2020 includes (a) a loss on investment of $3 million, (b) incremental direct costs related to COVID-19 of $1 million, 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 and (c) acquisition-related transaction costs of $1 million.

There were no such charges for the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.

Liquidity and Capital Resources

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The Credit Agreement, as well as the Indenture, contain 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 June 30, 2020, we were in compliance with the covenants under the agreements that were in effect on such date.

As of September 30, 2020, we were in compliance with the covenants under the agreements that were in effect on such date.

We do not believe that COVID-19 will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement and Indenture.

Cash and short-term marketable securities totaled $548 million and $434 million as of June 30, 2020 and December 31, 2019, respectively.

Cash and short-term marketable securities totaled $551 million and $434 million as of September 30, 2020 and December 31, 2019, respectively.

Cash and short-term marketable securities include balances associated with regulatory requirements in our business.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of June 30, 2020 and December 31, 2019, the total net assets subject to these third-party restrictions was $176 million and $168 million, respectively.

As of June 30, 2020, there were no letters of credit outstanding and there was $250 million of available borrowing capacity under the Revolving Credit Facility.

Available liquidity was $622 million at June 30, 2020, consisting of $372 million of cash not subject to third-party restrictions and $250 million of available borrowing capacity under the Revolving Credit Facility.

We currently believe that cash generated by operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at June 30, 2020 will provide us with sufficient liquidity to meet our obligations for the foreseeable future.

Our investment portfolio has been invested in high-quality debt securities.

We closely monitor the performance of these investments.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of September 30, 2020 and December 31, 2019, the total net assets subject to these third-party restrictions was $176 million and $168 million, respectively.

As of September 30, 2020, there were no letters of credit outstanding and there was $250 million of available borrowing capacity under the Revolving Credit Facility.

Available liquidity was $624 million at September 30, 2020, consisting of $374 million of cash not subject to third-party restrictions and $250 million of available borrowing capacity under the Revolving Credit Facility.

We currently believe that cash generated by operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at September 30, 2020 will provide us with sufficient liquidity to meet our obligations for the foreseeable future.

We closely monitor the performance of our investment portfolio.

From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements.

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Cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this report, are summarized in the following table.

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Operating Activities

Net cash provided from operating activities was $140 million for each of the six months ended June 30, 2020 and 2019.

Net cash provided from operating activities in 2020 comprised $94 million in earnings adjusted for non-cash charges and a $46 million decrease in cash required for working capital.

The decrease in cash required for working capital was driven by growth in our underlying business.

Net cash provided from operating activities in 2019 comprised $93 million in earnings adjusted for non-cash charges and a $47 million decrease in cash required for working capital.

The decrease in cash required for working capital was driven by growth in our underlying business.

Net cash provided from operating activities was $154 million for each of the nine months ended September 30, 2020 and 2019.

Net cash provided from operating activities in 2020 comprised $155 million in earnings adjusted for non-cash charges, offset, in part, by a $1 million increase in cash required for working capital.

See “Liquidity—Financial Position” for further details.

Net cash provided from operating activities in 2019 comprised $165 million in earnings adjusted for non-cash charges, offset, in part, by a $12 million increase in cash required for working capital.

The increase in cash required for working capital was driven by the seasonality of our business, which resulted in a contract asset that was offset, in part, by higher amounts due to suppliers and contractors.

Investing Activities

Net cash used for investing activities was $19 million and $12 million for the six months ended June 30, 2020 and 2019, respectively.

Capital expenditures increased to $18 million for the six months ended June 30, 2020, compared to $10 million for the six months ended June 30, 2019, and included recurring capital needs and technology projects.

Net cash used for investing activities was $25 million and $19 million for the nine months ended September 30, 2020 and 2019, respectively.

Capital expenditures increased to $26 million for the nine months ended September 30, 2020, compared to $15 million for the nine months ended September 30, 2019, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2020 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $40 million.

We have no additional material capital commitments at this time.

Cash flows provided from purchases, sales and maturities of securities, net, for the six months ended June 30, 2020 and 2019 were $5 million and $4 million, respectively, and were driven by the maturities of marketable securities.

There were no sales of marketable securities in the six months ended June 30, 2020 and 2019.

Cash payments for business acquisitions, net of cash acquired, were $5 million for the six months ended June 30, 2020, compared to $3 million for the six months ended June 30, 2019, and represent ongoing strategic investments in our business.

The business acquisition in the six months ended June 30, 2020 was made to expand the Candu on-demand offering.

Cash flows used for other investing activities for the six months ended June 30, 2019 were $3 million and represent ongoing strategic investments in our business.

Cash flows provided from purchases, sales and maturities of securities, net, for the nine months ended September 30, 2020 and 2019 were $7 million and $3 million, respectively, and were driven by the maturities of marketable securities.

There were no sales of marketable securities in the nine months ended September 30, 2020 and 2019.

Cash payments for business acquisitions, net of cash acquired, were $5 million for the nine months ended September 30, 2020, compared to $3 million for the nine months ended September 30, 2019, and represent ongoing strategic investments in our business.

The business acquisition in the nine months ended September 30, 2020 was made to expand our on-demand offering.

Cash flows used for other investing activities for the nine months ended September 30, 2019 were $3 million and represent ongoing strategic investments in our business.

Financing Activities

Net cash used for financing activities was $4 million for each of the six months ended June 30, 2020 and 2019 and primarily consisted of payments on debt and finance lease obligations.

Net cash used for financing activities was $6 million for each of the nine months ended September 30, 2020 and 2019 and primarily consisted of payments on debt and finance lease obligations.

Contractual Obligations

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We continue to make the contractually required payments, and, therefore, the 2020 obligations and commitments described in our 2019 Form 10-K have been reduced by the required payments.

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

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

As of September 30, 2020, we have entered into additional leases as a lessee for real estate, some of which have not yet commenced, with lease terms between three and seven years.

Remaining rent payments are expected to commence during the fourth quarter of 2020 and first quarter of 2021.

These leases will result in future non-cancelable operating lease payments of $2 million in 2021 and $9 million in the years thereafter (2022-2028).

Financial Position

The following discussion describes changes in our financial position from December 31, 2019 to June 30, 2020.

The following discussion describes changes in our financial position from December 31, 2019 to September 30, 2020:

 Cash and cash equivalents increased from prior year levels, primarily due to cash provided from operating activities.

Accounts payable increased from prior year levels, reflecting the timing of payments due to the seasonality of our business.

Home service plan claims increased from prior year levels, primarily due to the seasonality of contract claims, which increased amounts due to contractors and suppliers.

Other accrued liabilities and other long-term liabilities each increased from prior year levels, primarily due to the change in the valuation of our interest rate swap.

 The Contract asset is due to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

 Intangible Assets, net decreased from prior year levels, primarily due to changes in the valuations of certain intangible assets related to our acquisition of Streem.

See Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report for further information regarding acquisitions.

 Accounts payable increased from prior year levels, reflecting the timing of trade payables due to the seasonality of our business.

 Home service plan claims increased from prior year levels, reflecting the seasonality of contract claims, which increased amounts due to contractors and suppliers, as well as the timing of claims due to industry-wide availability challenges in the appliance trade.

 Other long-term liabilities increased from prior year levels, primarily due to the change in the valuation of our interest rate swap.

See Note 16 to the condensed consolidated financial statements included in Part I, Item 1 of this report for more information.

 Total shareholders’ equity was a deficit of $71 million as of September 30, 2020 compared to a deficit of $179 million as of December 31, 2019.

The increase was primarily driven by the $111 million of net income generated during the nine months ended September 30, 2020 which reduced our accumulated deficit.

See the condensed consolidated statements of changes in (deficit) equity included in Part I, Item 1 of this report for further information.

Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any significant off-balance sheet arrangements.

As of September 30, 2020, we did not have any significant off-balance sheet arrangements.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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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 2. Management’s Discussion and Analysis