What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-05 · 107 added, 181 removed, 352 unchanged (45% of the section changed)

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Cost of services rendered

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Restructuring charges

Spin-off charges

Interest expense

Interest and net investment (income) loss

Interest and net investment income

Loss on extinguishment of debt

Income before Income Taxes

2 unchanged sentences

Net unrealized gain (loss) on derivative instruments

Other Comprehensive Income (Loss), Net of Income Taxes

Total Comprehensive Income

Total Comprehensive Income (Loss)

Earnings per Share:

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(In millions, except share data)

September 30,

Current Assets:

Cash and cash equivalents

Marketable securities

Receivables, less allowance of $ 2 in each period

Contract asset

Prepaid expenses and other assets

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2,000,000,000 shares authorized;

85,444,714 shares issued and outstanding at September 30, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019

85,680,630 shares issued and 85,679,700 shares outstanding at March 31, 2021 and 85,477,779 shares issued and outstanding at December 31, 2020

Additional paid-in capital

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Three Months Ended

Nine Months Ended

September 30,

Balance at beginning of period

2 unchanged sentences

Balance at beginning of period

Issuance of common stock

Exercise of stock options

Taxes paid related to net share settlement of equity awards

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(In millions)

Nine Months Ended

September 30,

Three Months Ended

Cash and Cash Equivalents at Beginning of Period

2 unchanged sentences

Depreciation and amortization expense

Deferred income tax provision

Stock-based compensation expense

1 unchanged sentence

Payments for restructuring charges

Spin-off charges

Payments for spin-off charges

Loss on extinguishment of debt

Change in working capital, net of acquisitions:

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Purchases of property and equipment

Business acquisitions, net of cash received

Purchases of available-for-sale securities

Sales and maturities of available-for-sale securities

Other investing activities

Net Cash Used for Investing Activities

Cash Flows from Financing Activities:

Payments of debt and finance lease obligations

Payments of debt

Other financing activities

Net Cash Used for Financing Activities

Cash Increase During the Period

Cash (Decrease) Increase During the Period

Cash and Cash Equivalents at End of Period

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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.

Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates 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, 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 customers across all 50 states and the District of Columbia.

Our home service plan customers subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than 20 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps.

Our operations also include our ProConnect on-demand home services business and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, help home service professionals more quickly and accurately diagnose breakdowns and complete repairs.

At March 31, 2021, we had over two million active home service plans 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 2020 Form 10-K.

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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.

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization (“WHO”) characterized the novel coronavirus disease (“COVID-19”) as a pandemic, and on March 13, 2020, the United States declared a national emergency concerning the outbreak.

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

In response to the COVID-19 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 and third quarters 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.

While we did not experience a material impact on our results of operations and overall financial performance during the first quarter of 2020, during the first quarter of 2021, our financial condition and results of operations were adversely impacted by the COVID-19 pandemic as follows:

 Revenue in the first-year real estate channel has continued to be adversely impacted by the decline in U.S.

existing home sales in the second quarter of 2020.

Due to the annual nature of our home service plan agreements, the impact of this decline carried forward into the first quarter of 2021.

Additionally, a strong existing home seller’s market has constrained demand for home service plans in this channel.

 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.

 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.

In addition, industry-wide availability challenges in the appliance trade have caused increased cost pressure, and, more specifically, appliance parts availability challenges drove additional replacements, contributing to the increased costs.

 We incurred incremental wages at our customer care centers due to a higher number of service requests in the appliance and plumbing trades, which is primarily a result of customers sheltering at home in response to COVID-19.

Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2020 Form 10-K.

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

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.

This standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed.

Our Term Loan Facility and related interest rate swap that utilize LIBOR have not discontinued its use, and, therefore, this standard is not yet effective for us.

We are currently evaluating the impact of adopting this standard and do not expect its adoption to have a material impact on our consolidated financial statements and related disclosures.

We enter into annual service plan agreements with our customers.

There have been no material changes to the significant accounting policies for the three months ended March 31, 2021.

We enter into annual home 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.

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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 derive substantially all of our revenue from customers in the United States.

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

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Three Months Ended

Nine Months Ended

September 30,

(In millions)

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We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period.

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

Amortization of these deferred acquisition costs was $ 6 million for each of the three months ended September 30, 2020 and 2019 and $ 15 million and $ 16 million for the nine months ended September 30, 2020 and 2019, respectively.

Deferred customer acquisition costs were $ 20 million and $ 19 million as of March 31, 2021 and December 31, 2020, respectively.

Amortization of these deferred acquisition costs was $ 4 million for each of the three months ended March 31, 2021 and 2020.

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

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As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed.

As of September 30, 2020, a contract asset of $ 47 million was recorded related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

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 $ 179 million and $ 188 million as of September 30, 2020 and December 31, 2019, respectively.

Changes in deferred revenue for the nine months ended September 30, 2020 were as follows:

Deferred revenue was $ 227 million and $ 187 million as of March 31, 2021 and December 31, 2020, respectively, and as of March 31, 2021, includes a net contract liability of $ 45 million related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the three months ended March 31, 2021 were as follows:

(In millions)

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Recognition of deferred revenue

Balance as of September 30, 2020

There was approximately $ 42 million and $ 187 million of revenue recognized in the three and nine months ended September 30, 2020, respectively, that was included in the deferred revenue balance as of December 31, 2019.

Balance as of March 31, 2021

There was approximately $ 71 million of revenue recognized in the three months ended March 31, 2021 that was included in the deferred revenue balance as of December 31, 2020.

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.

Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment 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 $ 512 million and $ 501 million as of September 30, 2020 and December 31, 2019, respectively.

The increase in goodwill reflects adjustments related to our acquisition of Streem.

See Note 7 to the accompanying condensed consolidated financial statements for further information.

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

There were no accumulated impairment losses recorded as of September 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 balance of goodwill was $ 512 million as of March 31, 2021 and December 31, 2020.

There were no goodwill or trade name impairment charges recorded in the three months ended March 31, 2021 and 2020.

There were no accumulated impairment losses recorded as of March 31, 2021 and December 31, 2020.

The table below summarizes the other intangible asset balances:

As of September 30, 2020

As of March 31, 2021

As of December 31, 2020

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(1) Not subject to amortization.

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.

Amortization expense was $ 3 million for each of the three months ended March 31, 2021 and 2020.

The following table outlines expected amortization expense for existing intangible assets for the remainder of 2021 and the next five years :

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2021 (remainder)

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 14 years, some of which include options to extend the leases for up to five years .

We have operating leases primarily for our corporate offices, customer care centers and engineering and technology campuses.

Our leases have remaining lease terms of two years to 14 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.

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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:

September 30,

Weighted-average remaining lease term (years)

Weighted-average discount rate

We recognized operating lease expense of $ 1 million for each of the three months ended September 30, 2020 and 2019, and $ 2 million and $ 3 million for the nine months ended September 30, 2020 and 2019, respectively.

We recognized operating lease expense of $ 1 million for each of the three months ended March 31, 2021 and 2020.

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

Supplemental cash flow information related to operating leases is as follows:

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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_____________________________

(1) For the nine months ended September 30, 2020, amounts include $ 2 million of lease termination costs related to the decision to consolidate certain operations of Landmark Home Warranty, LLC (“Landmark”) with those of OneGuard Home Warranties (“OneGuard”).

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

See Note 7 to the accompanying condensed consolidated financial statements for further information.

Supplemental balance sheet information related to operating leases is as follows:

September 30,

(In millions)

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Total operating lease liabilities

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

The following table presents maturities of our operating lease liabilities as of March 31, 2021.

(In millions)

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Less imputed interest

As of September 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 $ 7 million.

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

As required by ASC 740, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items.

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

The effective tax rate on income was 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.

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.

The effective tax rate on income was 9.8 percent and 25.0 percent for the three months ended March 31, 2021 and 2020, respectively.

The decrease in the effective tax rate for the three months ended March 31, 2021 compared to 2020 is primarily due to excess tax benefits for share-based awards.

We are subject to taxation in the United States, various states and foreign jurisdictions.

Pursuant to the terms of the tax matters agreement entered into with Terminix 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 2016.

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

Substantially all of our income before income taxes for the three months ended March 31, 2021 and 2020 was generated in the United States.

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.

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 nine months ended September 30, 2020, we updated our preliminary purchase price allocation and reclassified $ 14 million from intangible assets, primarily developed technology, to goodwill.

The purchase price allocation for this acquisition was completed during the third quarter of 2020, resulting in goodwill of $ 35 million and other intangible assets of $ 24 million, consisting of developed technology and patents, offset, in part, by a deferred tax liability of $ 4 million.

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

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

The purchase price allocation for this acquisition was completed during the third quarter of 2020.

No acquisitions occurred during the three months ended September 30, 2020.

Restructuring Charges

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

We incurred restructuring charges of $ 1 million ($ 1 million, net of tax) and $ 3 million ($ 2 million, net of tax) for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 , restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

For the three months ended March 31, 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.

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 nine months ended September 30, 2020.

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

As of December 31, 2020, there were $ 1 million of restructuring charges accrued, which were paid or otherwise settled during the three months ended March 31, 2021.

As of March 31, 2021, there were less than $ 1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

Commitments and Contingencies

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Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.

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 January 2021, a lawsuit was filed in the Superior Court of the State of Arizona by the Arizona Attorney General (the "AZ Attorney General") against Landmark, alleging, among other things, that Landmark violated the Arizona Consumer Fraud Act by engaging in deceptive, misleading or unfair practices with respect to the provision of expedited services to its customers during extreme temperatures from January 2017 to July 2020.

The AZ Attorney General sought $ 14.7 million in damages plus penalties, costs, interest and attorneys’ fees in this matter.

Although Landmark disagreed with the allegations that it violated Arizona law, as litigation is inherently unpredictable, Landmark fully settled this matter with the AZ Attorney General in March 2021 for $ 1.8 million.

As we recorded an estimate of loss with respect to this matter during the year ended December 31, 2020 equal to the amount of the settlement, no additional expense was recognized in the three months ended March 31, 2021.

Due to the nature of our business activities, we are also 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.

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Stock-Based Compensation

We recognized stock-based compensation expense of $ 4 million ($ 4 million, net of tax) and $ 2 million ($ 2 million, net of tax) for the three months ended September 30, 2020 and 2019, respectively, and $ 13 million ($ 11 million, net of tax) and $ 7 million ($ 5 million, net of tax) for the nine months ended September 30, 2020 and 2019, respectively.

We recognized stock-based compensation expense of $ 6 million ($ 4 million, net of tax) and $ 3 million ($ 3 million, net of tax) for the three months ended March 31, 2021 and 2020, respectively.

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

As of September 30, 2020, there was $ 36 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.

A summary of awards granted under the Omnibus Plan during the three months ended March 31, 2021 is presented below:

Weighted Avg.

Stock options

Restricted stock units

Performance shares (1)

_____________________________

(1) The number of performance shares granted during the three months ended March 31, 2021 represents the target value of the awards.

The performance shares contain a performance condition that is based on our revenue target, and the ultimate number of performance shares to be earned depends on the achievement of this performance condition.

As of March 31, 2021, there was $ 61 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards (“RSAs”).

These remaining costs are expected to be recognized over a weighted-average period of 2.68 years.

Long-Term Debt

Long-term debt is summarized in the following table:

September 30,

(In millions)

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___________________________________

(1) As of September 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 September 30, 2020 and December 31, 2019, presented net of $ 4 million and $ 5 million, respectively, in unamortized debt issuance costs.

(1) As of March 31, 2021 and December 31, 2020, presented net of $ 4 million and $ 5 million, respectively, in unamortized debt issuance costs and $ 1 million in unamortized original issue discount paid.

(2) As of March 31, 2021 and December 31, 2020, presented net of $ 4 million in unamortized debt issuance costs.

On February 17, 2021, we repaid $ 100 million of the outstanding principal amount of the Term Loan Facility.

In connection with the repayment, we recorded a loss on extinguishment of debt of $ 1 million, which included the write-off of debt issuance costs and original issue discount.

Supplemental Cash Flow Information

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

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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Interest income

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 September 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 September 30, 2020 and December 31, 2019, the amortized cost of our short-term investments was less than $ 1 million and $ 7 million, respectively, and the estimated fair value of these investments was less than $ 1 million and $ 7 million, respectively.

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

For each of the three and nine months ended September 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 $ 9 million for each of the nine months ended September 30, 2020 and 2019.

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 nine months ended September 30, 2020, which is included in Interest and net investment (income) loss 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 months ended September 30, 2020 or the three and nine months ended September 30, 2019.

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.

Comprehensive income (loss), which includes net income (loss) and unrealized gain (loss) on derivative instruments, 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.

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Net current period other comprehensive income (loss)

Balance as of September 30, 2020

Balance as of March 31, 2021

Balance as of December 31, 2019

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Net current period other comprehensive income (loss)

Balance as of September 30, 2019

Balance as of March 31, 2020

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Other Comprehensive Income (Loss)

Nine Months Ended

September 30,

Three Months Ended

Consolidated Statements of

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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 changes in fair value recorded in AOCI.

Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded in the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with changes in fair value recorded in AOCI.

Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows.

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See Note 12 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 September 30, 2020.

As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $ 8 million, net of tax, as of March 31, 2021.

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

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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 nine months ended September 30, 2020 and 2019.

The carrying amount of total debt was $ 976 million and $ 980 million, and the estimated fair value was $ 1,005 million and $ 1,031 million as of September 30, 2020 and December 31, 2019, respectively.

The carrying amount of total debt was $ 875 million and $ 975 million, and the estimated fair value was $ 902 million and $ 1,004 million as of March 31, 2021 and December 31, 2020, 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 September 30, 2020 and December 31, 2019.

The fair value estimates presented in this report are based on information available to us as of March 31, 2021 and December 31, 2020.

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

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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 have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the year.

We have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the three months ended March 31, 2021.

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

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

There were no transfers between levels during the three months ended March 31, 2021 and 2020.

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

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‎ Unobservable

As of September 30, 2020:

As of March 31, 2021:

Financial Liabilities:

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As of December 31, 2020:

Financial Assets:

Investments in marketable securities

Marketable securities

Total financial assets

Financial Liabilities:

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Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued.

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

The dilutive effect of stock options, RSUs , performance shares and RSAs 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

Nine Months Ended

September 30,

(In millions, except per share data)

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___________________________________

(1) Options to purchase 0.9 million and 0.7 million shares for the three and nine months ended September 30, 2020, respectively, and 0.3 million and 0.5 million shares for the three and nine months ended 2019, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

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

There were no such anti-dilutive options for the three months ended Mar ch 31, 2021.

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.

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

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

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 2020 Form 10-K.

Factors, risks, trends and uncertainties that make an investment in us speculative or risky and that could cause actual results or events to differ materially from those anticipated in our forward-looking statements 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 2020 Annual Report on Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:

 risks related to the COVID-19 pandemic;

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 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;

 failure of our marketing efforts to be successful or cost-effective;

 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;

 special risks applicable to operations outside the United States by us or our business process outsource providers;

 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;

 increases in parts, appliance and home 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;

 requirement to recognize 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;

 tax liabilities and potential indemnification of Terminix 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;

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 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.

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

Available Information

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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 will make available free of charge on the Investor section of our website our Annual Report 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.

We do not intend for information contained in our website to be part of this Quarterly Report on Form 10-Q.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements