What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 148 added, 245 removed, 173 unchanged (69% of the section changed)

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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 I, Item 1A.

“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.

Our home service plans help our customers maintain their homes and protect against costly and unexpected breakdowns of essential home systems and appliances.

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 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 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.

“Risk Factors” in our 2020 Form 10-K.

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 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.

For the three months ended March 31, 2021 and 2020, we generated revenue, net income and Adjusted EBITDA of $329 million, $5 million and $36 million, respectively, and $294 million, $13 million and $47 million, respectively.

For the three months ended March 31, 2021, our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 17 percent and 12 percent were derived from new home service plan sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively, and two percent was derived from other revenue streams.

For the three months ended March 31, 2020, our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 19 percent and 12 percent were derived from new home service plan 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

Impact of COVID-19

On March 11, 2020, the WHO characterized 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.

Specifically, we have:

Established a Cross-Functional Business Continuity Team.

This core team actively monitors national and local developments and emerging issues, deploys coordinated and strategic real-time responses to address the needs of employees, customers and contractors, and ensures ongoing operational efficiency during this time.

Changed How Employees Work.

We have fully transitioned all of our contact center agents to work remotely from their homes, ensuring uninterrupted customer service.

All other employees, including those at our Memphis corporate headquarters, Denver technology center, India technology center and the Streem office in Portland, are also working remotely.

Increased Customer Communications.

Our contractor network has been designated by the U.S.

Department of Homeland Security as “Essential Critical Infrastructure Workers” during the COVID-19 response and has consistently been deemed “essential” by state and local governments.

As of today, we do not foresee significant disruption to our ability to provide services to our customers.

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 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 .

In order to protect the health and safety of the public, including our customers, contractors and real estate partners, we have accelerated the deployment of Streem’s augmented reality remote video technology.

Using this innovative solution, we are enabling contractors to engage remotely with customers to reduce the number of required in-person visits and speed the repair process.

For real estate professionals, an agent can connect remotely with a home seller, lead a virtual tour and guide the owner to areas that need closer inspection, all while allowing the creation of high definition digital assets that future buyers can view remotely without ever entering the home.

Increased Contractor Education and Communication.

Because the contractor network provides essential services, it is generally operating normally despite varying state and local conditions.

We are leveraging the Centers for Disease Control and Prevention (“CDC”) recommendations to increase customer and technician screening for COVID-19 and remain in ongoing communication with contractors to enable them to operate within CDC guidelines and help ensure the health and safety of their technicians, as well as our customers.

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.

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 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.

existing home sales.

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

Impact of the COVID-19 Pandemic

On March 11, 2020, the WHO characterized 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.

Included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K are the steps we took in 2020 and have continued to take in response to the COVID-19 pandemic to protect the well-being of our employees, customers and contractors.

We continue to respond to the real-time needs of our business.

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.

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.

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

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.

Although there are effective vaccines for COVID-19 that have been approved for use, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains) and when or if normal economic activity and business operations will resume.

We expect that a significant number of people will continue to work remotely from home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs.

Accordingly, 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 the COVID-19 pandemic will have on our business.

Macroeconomic Conditions

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Seasonal fluctuations are primarily driven by a higher number of central HVAC work orders in the summer months.

In the first quarter of 2021 and throughout 2020, additional variations were experienced as the COVID-19 pandemic resulted in an elevated level of service requests, primarily in the appliance and plumbing trades, as our customers spent more time at home.

In 2020, approximately 20 percent, 28 percent, 30 percent and 22 percent of our revenue, approximately 12 percent, 43 percent, 43 percent and 2 percent of our net income, and approximately 17 percent, 37 percent, 34 percent and 12 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

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Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency.

For example, seasonally mild temperatures were a factor throughout 2019, leading to a decrease in contract claims costs.

While weather variations as described above may affect our business, major weather events and other Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service.

As a rule, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to home service plans that we offer, and such insurance coverage in fact reduces our obligations to provide service to systems and appliances damaged by insured, catastrophic events.

For example, unfavorable weather trends, as compared to 2020, negatively impacted contract claims costs in the first quarter of 2021.

While weather variations as described above may affect our business, major weather events and other similar Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service.

As a rule, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to home service plans that we offer, and such insurance coverage in fact reduces our obligations to provide service to home systems and appliances damaged by insured, catastrophic events.

Tariff and Import/Export Regulations

Changes in U.S.

tariff and import/export regulations may impact the costs of home systems, appliances and repair parts.

tariff and import/export regulations may impact the costs of parts, appliances and home systems.

Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs.

For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our home systems, appliances and repair parts.

We compete in the home service plan industry and the broader U.S.

home services market.

The home service plan industry is a highly competitive industry.

The principal methods of competition, and the areas in which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals.

For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems.

We compete in the U.S.

home service plan category and the broader U.S.

home services industry.

The home service plan category is highly competitive.

The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals.

Acquisition Activity

We have a track record of acquiring other businesses and successfully integrating them into our operations, including the acquisition of Streem in 2019.

We anticipate that the highly fragmented nature of the home service plan industry will continue to create strategic opportunities for further consolidation, and, with our scale, we believe we will be the acquirer of choice in the industry.

We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions.

In particular, we intend to focus strategically on underserved regions where we can enhance and expand service capabilities.

Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, as well as enhance our technology capabilities, and we intend to continue to do so.

We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services segment.

Critical Accounting Policies and Estimates

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

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 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.

Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so.

We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry.

We have also used acquisitions to enhance our technological capabilities.

In 2019, we acquired Streem to support the service experience for our customers, reduce costs and create potential new revenue opportunities across a variety of channels.

We expect to use Streem’s services in our core home service plan business and in ProConnect’s on-demand business to deliver a superior service experience and reduce our costs.

In 2020, we acquired a business to expand our ProConnect on-demand offering via their intellectual capital and know-how, technology platform capabilities and geographic presence.

Non-GAAP Financial Measures

To supplement our results presented in accordance with U.S.

GAAP, we have disclosed non-GAAP financial measures of operating results that exclude or adjust certain items.

GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items.

We present within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measure of Adjusted EBITDA.

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Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided.

Our revenue volume is impacted by new unit sales, customer retention and acquisitions.

We derive substantially all of our revenue from customers in the U.S.

Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions.

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

Operating Expenses.

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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 potentially dilutive shares of common stock been issued.

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

The dilutive effect of stock options, RSUs, performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA margin.

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restructuring charges;

Spin-off charges;

secondary offering costs;

loss on extinguishment of debt;

and other non-operating expenses.

We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, Spin-off charges and equity-based, long-term incentive plans.

Net Cash Provided from Operating Activities and Free Cash Flow.

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Home service plans represent our recurring customer base, which includes customers with active contracts for recurring services.

Our customer retention rate is calculated as the ratio of ending home service plans to the sum of beginning home service plans, new unit sales and acquired accounts for the applicable period.

Our customer retention rate is calculated as the ratio of ending home service plans to the sum of beginning home service plans, new home service plan sales and acquired accounts for the applicable period.

These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K.

There have been no material changes to our critical accounting policies for the three months ended March 31, 2021, 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 on an annual basis, or more frequently, if circumstances indicate a potential impairment.

As of March 31, 2021, 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.

Results of Operations

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

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Three Months Ended

September 30,

(In millions)

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Depreciation and amortization expense

Interest expense

Interest and net investment income

Income before Income Taxes

Provision for income taxes

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

Nine Months Ended

September 30,

(In millions)

Cost of services rendered

Selling and administrative expenses

Depreciation and amortization expense

Restructuring charges

Spin-off charges

Interest expense

Interest and net investment loss (income)

Interest and net investment income

Loss on extinguishment of debt

Income before Income Taxes

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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.

We reported revenue of $329 million and $294 million for the three months ended March 31, 2021 and 2020, respectively.

Revenue by major customer acquisition channel is as follows:

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

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

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 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 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.

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

Nine Months Ended

September 30,

Revenue increased 12 percent for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans, due, in part, to customer retention initiatives.

The increase in real estate revenue primarily reflects improved price realization.

Due to the annual nature of our home service plan agreements, real estate revenue has continued to be adversely impacted by the decline in U.S.

existing home sales in the second quarter of 2020.

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

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

The increase in other revenue was driven by growth in ProConnect and Streem.

Number of home service plans, growth in number of home service plans and customer retention rate are presented below.

(In millions)

Increase (Decrease)

Real estate (1)

Direct-to-consumer (1)

Total revenue

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(1) First-year revenue only.

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,

Number of home service plans

Growth in number of home service plans

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Cost of Services Rendered

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

(In millions)

Three Months Ended September 30, 2019

Impact of change in revenue

Contract claims costs

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.

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

We reported cost of services rendered of $181 million and $147 million for the three months ended March 31, 2021 and 2020, respectively.

The following table provides a summary of changes in cost of services rendered:

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

(In millions)

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Impact of change in revenue

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.

Three Months Ended March 31, 2021

The increase in contract claims costs reflects higher incidence in the appliance and plumbing trades, primarily a result of customers sheltering at home in response to the COVID-19 pandemic, increased cost pressures in the appliance trade due to industry-wide availability challenges and inflation, offset, in part, by process improvement benefits.

Appliance parts availability challenges continued to drive additional replacements, contributing to the increased cost pressures.

Contract claims costs also reflects an unfavorable weather impact of approximately $5 million.

Selling and Administrative Expenses

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

We reported selling and administrative expenses of $118 million and $105 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 and 2020, selling and administrative expenses comprised sales, marketing and customer service costs of $81 million and $75 million, respectively, and general and administrative expenses of $37 million and $30 million, respectively.

The following table provides a summary of changes in selling and administrative expenses:

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

(In millions)

Three Months Ended September 30, 2019

Three Months Ended March 31, 2020

Sales and marketing costs

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General and administrative costs

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 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)

Nine Months Ended September 30, 2019

Sales and marketing costs

Customer service costs

Stock-based compensation

Secondary offering costs

General and administrative costs

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.

Three Months Ended March 31, 2021

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 and ProConnect and investments in Streem.

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.

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

Depreciation Expense

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.

Depreciation expense was $6 million and $5 million for the three months ended March 31, 2021 and 2020, respectively.

Amortization Expense

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.

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

Restructuring Charges

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.

Restructuring charges were $1 million and $3 million 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.

Interest Expense

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.

Interest expense was $13 million and $15 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021, the decrease was primarily due to a decline in interest rates on the unhedged portion of our variable rate debt.

Interest and Net Investment Income

Interest and net investment income was less than $1 million and $2 million for the three months ended March 31, 2021 and 2020, respectively, and comprised interest on our investment portfolio.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $1 million for t he three months ended March 31, 2021, which was recorded in connection with the partial repayment of the Term Loan Facility and includes the write-off of debt issuance costs and original issue discount.

There were no such charges for the three months ended March 31, 2020.

Provision for 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.

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.

Net income was $5 million and $13 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 compared to 2020, 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 $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 September 30, 2020 Compared to the Three Months Ended September 30, 2019

(In millions)

Three Months Ended September 30, 2019

Impact of change in revenue

Contract claims costs

Sales and marketing costs

Customer service costs

General and administrative costs

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 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.

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

Adjusted EBITDA was $36 million and $47 million for the three months ended March 31, 2021 and 2020, respectively.

The following table provides a summary of changes in our Adjusted EBITDA:

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

(In millions)

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Impact of change in revenue

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General and administrative costs

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.

Three Months Ended March 31, 2021

Appliance parts availability challenges continued to drive additional replacements, contributing to the increased cost pressures.

Contract claims costs also reflects an unfavorable weather impact of approximately $5 million.

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 and ProConnect and investments in Streem.

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.

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

Other primarily consists of interest and net investment income.

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Three Months Ended

Nine Months Ended

September 30,

(In millions)

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Restructuring charges

Spin-off charges

Provision for income taxes

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Interest expense

Secondary offering costs

Other non-operating expenses (1)

Loss on extinguishment of debt

Adjusted EBITDA

________________________________

(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 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 $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 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.

As of March 31, 2021, we were in compliance with the covenants under the agreements that were in effect on such date.

Based on current conditions, we do not believe the COVID-19 pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement and Indenture.

Cash and cash equivalents totaled $538 million and $597 million as of March 31, 2021 and December 31, 2020, respectively.

Our cash and cash equivalents include balances associated with regulatory requirements in our business.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of March 31, 2021 and December 31, 2020, the total net assets subject to these third-party restrictions was $175 million and $180 million, respectively.

As of March 31, 2021, there were $2 million of letters of credit outstanding and $248 million of available borrowing capacity under the Revolving Credit Facility.

The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate.

Available liquidity was $611 million at March 31, 2021, consisting of $363 million of cash not subject to third-party restrictions and $248 million of available borrowing capacity under the Revolving Credit Facility.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at March 31, 2021 will provide us with sufficient liquidity to meet our obligations for the foreseeable future.

On February 17, 2021, we repaid $100 million of 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.

We closely monitor the performance of our investment portfolio.

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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.

Nine Months Ended

September 30,

Three Months Ended

(In millions)

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Financing activities

Cash increase during the period

Cash (decrease) increase during the period

Operating Activities

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.

Net cash provided from operating activities was $52 million for the three months ended March 31, 2021, compared to $60 million for the three months ended March 31, 2020.

Net cash provided from operating activities in 2021 comprised $21 million in earnings adjusted for non-cash charges and a $31 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 2020 comprised $25 million in earnings adjusted for non-cash charges and a $35 million decrease in cash required for working capital.

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

Investing Activities

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.

Net cash used for investing activities was $7 million and $3 million for the three months ended March 31, 2021 and 2020, respectively.

Capital expenditures were $7 million for the three months ended March 31, 2021, compared to $8 million for the three months ended March 31, 2020, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2021 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $45 million.

We have no additional material capital commitments at this time.

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.

Cash flows provided from purchases, sales and maturities of securities, net, for the three months ended March 31, 2020 were $5 million and were driven by the maturities of marketable securities.

There were no cash flows provided from purchases, sales and maturities of securities, net, for the three months ended March 31, 2021.

There were no sales of marketable securities in the three months ended March 31, 2021 and 2020.

Financing Activities

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.

Net cash used for financing activities was $105 million and $3 million for the three months ended March 31, 2021 and 2020, respectively, and primarily consisted of payments on debt.

For the three months ended March 31, 2021, amounts include the partial repayment of $100 million of the Term Loan Facility.

Contractual Obligations

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We continue to make the contractually required payments, and, therefore, the 2021 obligations and commitments described in our 2020 Form 10-K have been reduced by the required payments.

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).

During the three months ended March 31, 2021, we repaid $100 million of the outstanding principal amount of the Term Loan Facility.

This amount was disclosed in our 2020 Form 10-K as a required principal payment in 2025.

Based on applicable rates at March 31, 2021 plus specified margins, this partial repayment results in a reduction in interest expense of approximately $12 million in total for the years 2021 through 2025.

Financial Position

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.

 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.

The following discussion describes changes in our financial position from December 31, 2020 to March 31, 2021:

 Cash and cash equivalents decreased during the three months ended March 31, 2021, primarily due to the repayment of $100 million of outstanding principal amount of the Term Loan Facility, offset, in part, by cash provided from operating activities.

 Accounts payable increased during the three months ended March 31, 2021, reflecting the timing of trade payables due to the seasonality of our business.

 Deferred revenue increased during the three months ended March 31, 2021, primarily due to the recognition of a 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.

 Long-term debt decreased during the three months ended March 31, 2021, due to the repayment of $100 million of outstanding principal amount of the Term Loan Facility.

Off-Balance Sheet Arrangements

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

As of March 31, 2021, 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