Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In millions, except per share data)
Three Months Ended
March 31,
2021
2020
Revenue
$
329
$
294
Cost of services rendered
181
147
Gross Profit
148
147
Selling and administrative expenses
118
105
Depreciation and amortization expense
9
8
Restructuring charges
1
3
Interest expense
13
15
Interest and net investment income
—
( 2 )
Loss on extinguishment of debt
1
—
Income before Income Taxes
5
17
Provision for income taxes
1
4
Net Income
$
5
$
13
Other Comprehensive Income (Loss), Net of Income Taxes:
Net unrealized gain (loss) on derivative instruments
7
( 15 )
Total Comprehensive Income (Loss)
$
12
$
( 2 )
Earnings per Share:
Basic
$
0.06
$
0.15
Diluted
$
0.06
$
0.15
Weighted-average Common Shares Outstanding:
Basic
85.4
85.1
Diluted
86.0
85.4
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions, except share data)
As of
March 31,
December 31,
2021
2020
Assets:
Current Assets:
Cash and cash equivalents
$
538
$
597
Receivables, less allowance of $ 2 in each period
4
5
Prepaid expenses and other assets
30
24
Total Current Assets
573
626
Other Assets:
Property and equipment, net
61
60
Goodwill
512
512
Intangible assets, net
167
170
Operating lease right-of-use assets
20
15
Deferred customer acquisition costs
20
19
Other assets
3
3
Total Assets
$
1,355
$
1,405
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable
$
66
$
55
Accrued liabilities:
Payroll and related expenses
19
23
Home service plan claims
85
90
Interest payable
3
9
Other
32
32
Deferred revenue
227
187
Current portion of long-term debt
7
7
Total Current Liabilities
439
403
Long-Term Debt
868
968
Other Long-Term Liabilities:
Deferred taxes
41
38
Operating lease liabilities
23
18
Other long-term obligations
30
40
Total Other Long-Term Liabilities
94
96
Commitments and Contingencies (Note 8)
Shareholders' Equity:
Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 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
1
1
Additional paid-in capital
49
46
Accumulated deficit
( 70 )
( 75 )
Accumulated other comprehensive loss
( 26 )
( 33 )
Total Deficit
( 46 )
( 61 )
Total Liabilities and Shareholders' Equity
$
1,355
$
1,405
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
4
Condensed Consolidated Statement of Changes in (Deficit) Equity (Unaudited)
(In millions)
Three Months Ended
March 31,
2021
2020
Common Stock
Balance at beginning of period
$
1
$
1
Balance at end of period
1
1
Additional Paid-in Capital
Balance at beginning of period
46
29
Exercise of stock options
1
—
Taxes paid related to net share settlement of equity awards
( 4 )
( 1 )
Stock-based employee compensation
6
3
Balance at end of period
49
31
Accumulated Deficit
Balance at beginning of period
( 75 )
( 188 )
Net income
5
13
Balance at end of period
( 70 )
( 174 )
Accumulated Other Comprehensive Loss
Balance at beginning of period
( 33 )
( 21 )
Other comprehensive income (loss), net of tax
7
( 15 )
Balance at end of period
( 26 )
( 36 )
Total Deficit
$
( 46 )
$
( 178 )
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
5
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
Three Months Ended
March 31,
2021
2020
Cash and Cash Equivalents at Beginning of Period
$
597
$
428
Cash Flows from Operating Activities:
Net Income
5
13
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense
9
8
Stock-based compensation expense
6
3
Restructuring charges
1
3
Payments for restructuring charges
( 1 )
( 3 )
Loss on extinguishment of debt
1
—
Change in working capital, net of acquisitions:
Receivables
1
3
Prepaid expenses and other current assets
1
2
Accounts payable
11
7
Deferred revenue
40
40
Accrued liabilities
( 8 )
( 15 )
Accrued interest payable
( 6 )
( 6 )
Current income taxes
( 8 )
4
Net Cash Provided from Operating Activities
52
60
Cash Flows from Investing Activities:
Purchases of property and equipment
( 7 )
( 8 )
Purchases of available-for-sale securities
—
( 2 )
Sales and maturities of available-for-sale securities
—
7
Net Cash Used for Investing Activities
( 7 )
( 3 )
Cash Flows from Financing Activities:
Payments of debt
( 102 )
( 2 )
Other financing activities
( 3 )
( 1 )
Net Cash Used for Financing Activities
( 105 )
( 3 )
Cash (Decrease) Increase During the Period
( 59 )
54
Cash and Cash Equivalents at End of Period
$
538
$
482
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.
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frontdoor, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
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.
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. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.
Impact of 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 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, 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.
f Note 2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2020 Form 10-K. There have been no material changes to the significant accounting policies for the three months ended March 31, 2021.
7
Note 3. Revenue
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. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer. As the costs to fulfill the obligations of the home service plans are incurred on an other-than-straight-line basis, we utilize historical evidence to estimate the expected claims expense and related timing of such costs. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract balances” below. We regularly review our estimates of claims costs and adjust our estimates when appropriate. We derive substantially all of our revenue from customers in the United States.
We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenue by major customer acquisition channel is as follows:
___
Three Months Ended
March 31,
(In millions)
2021
2020
Renewals
$
224
$
200
Real estate (1)
57
56
Direct-to-consumer (1)
41
35
Other
8
3
Total
$
329
$
294
_____________________________
(1) First-year revenue only.
Renewals
Revenue from all customer renewals, whether initiated via the real estate or direct-to-consumer channel, are classified as renewals above. Customer payments for renewals are received either at the commencement of the renewal period or in installments over the contract period.
Real estate
Real estate home service plans are sold through annual contracts in connection with a real estate sale, and payments are typically paid in full at closing. First-year revenue from the real estate channel is classified as real estate above.
Direct-to-consumer
Direct-to-consumer home service plans are sold through annual contracts when customers request a service plan in response to marketing efforts or when third-party resellers make a sale. Customer payments are received either at the commencement of the contract or in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above.
Costs to obtain a contract with a customer
We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $ 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.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers, including contracts resulting from customer renewals, are generally for a period of one year . We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivable are recorded within Receivables, less allowances, in the accompanying condensed consolidated statements of financial position. We invoice our monthly-pay customers on a straight-line basis over the contract term. As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed.
8
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 $ 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)
Deferred
Revenue
Balance as of December 31, 2020
$
187
Deferral of revenue
123
Recognition of deferred revenue
( 84 )
Balance as of March 31, 2021
$
227
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.
Note 4. Goodwill and Intangible Assets
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 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 March 31, 2021
As of December 31, 2020
(In millions)
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Trade names (1)
$
141
$
—
$
141
$
141
$
—
$
141
Customer relationships
173
( 171 )
1
173
( 171 )
2
Developed technology
25
( 8 )
18
25
( 6 )
19
Other
37
( 29 )
7
37
( 29 )
8
Total
$
375
$
( 208 )
$
167
$
375
$
( 205 )
$
170
___________________________________
(1) Not subject to amortization.
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 :
(In millions)
2021 (remainder)
$
8
2022
8
2023
6
2024
4
2025
—
2026
—
Total
$
26
9
Note 5. Leases
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. An incremental borrowing rate is used in determining the present value of lease payments unless an implicit rate is readily determinable. Incremental borrowing rates are determined based on our secured borrowing rating and the lease term.
The weighted-average remaining lease term and weighted-average discount rate related to operating leases is as follows:
As of
March 31,
December 31,
2021
2020
Weighted-average remaining lease term (years)
9
9
Weighted-average discount rate
5.5
%
6.0
%
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:
z
Three Months Ended
March 31,
(In millions)
2021
2020
Cash paid for amounts included in the measurement of lease liabilities (1)
$
1
$
3
Leased assets obtained in exchange for new lease liabilities
6
—
_____________________________
(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:
As of
March 31,
December 31,
(In millions)
2021
2020
Operating lease right-of-use assets
$
26
$
21
Less lease incentives
( 6 )
( 6 )
Operating lease right-of-use assets, net
$
20
$
15
Other accrued liabilities
$
4
$
3
Operating lease liabilities
23
18
Total operating lease liabilities
$
26
$
21
The following table presents maturities of our operating lease liabilities as of March 31, 2021.
(In millions)
2021 (remainder)
$
4
2022
5
2023
5
2024
3
2025
2
2026
2
Thereafter
12
Total lease payments
34
Less imputed interest
( 8 )
Total
$
26
10
Note 6. Income Taxes
As required by ASC 740, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740. The effective tax rate on income was 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 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.
Note 7. Restructuring Charges
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, 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.
Note 8. Commitments and Contingencies
Accruals for home service plan claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home service plan claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these judgmental accruals.
We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.
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.
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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. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our business, financial position, results of operations or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Note 9. Stock-Based Compensation
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.
A summary of awards granted under the Omnibus Plan during the three months ended March 31, 2021 is presented below:
Number of
Weighted Avg.
Weighted Avg.
Weighted Avg.
Awards
Exercise
Grant Date
Vesting
Granted
Price
Fair Value
Period
Stock options
245,599
$
54.81
$
28.09
4 years
Restricted stock units
368,202
54.83
3 years
Performance shares (1)
98,017
54.81
3 years
_____________________________
(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.
Note 10. Long-Term Debt
Long-term debt is summarized in the following table:
As of
March 31,
December 31,
(In millions)
2021
2020
Term Loan Facility maturing in 2025 (1)
$
529
$
629
Revolving Credit Facility maturing in 2023
—
—
2026 Notes (2)
346
346
Less current portion
( 7 )
( 7 )
Total long-term debt
$
868
$
968
___________________________________
(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.
12
Note 11. Supplemental Cash Flow Information
Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table:
Three Months Ended
March 31,
(In millions)
2021
2020
Cash paid for (received from):
Interest expense
$
18
$
20
Income tax payments, net of refunds
8
—
Interest income
—
( 2 )
Note 12. Comprehensive Income (Loss)
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.
Unrealized
Loss
(In millions)
on Derivatives
Total
Balance as of December 31, 2020
$
( 33 )
$
( 33 )
Other comprehensive income (loss) before reclassifications:
Pre-tax amount
7
7
Tax provision (benefit)
2
2
After-tax amount
5
5
Amounts reclassified from accumulated
other comprehensive income (loss) (1)
2
2
Net current period other comprehensive income (loss)
7
7
Balance as of March 31, 2021
$
( 26 )
$
( 26 )
Balance as of December 31, 2019
$
( 21 )
$
( 21 )
Other comprehensive income (loss) before reclassifications:
Pre-tax amount
( 21 )
( 21 )
Tax provision (benefit)
( 5 )
( 5 )
After-tax amount
( 16 )
( 16 )
Amounts reclassified from accumulated
other comprehensive income (loss) (1)
1
1
Net current period other comprehensive income (loss)
( 15 )
( 15 )
Balance as of March 31, 2020
$
( 36 )
$
( 36 )
___________________________________
(1) Amounts are net of tax. See reclassifications out of AOCI below for further details.
Reclassifications out of AOCI included the following components for the periods indicated.
Amounts Reclassified from Accumulated
Other Comprehensive Income (Loss)
Three Months Ended
March 31,
Consolidated Statements of
(In millions)
2021
2020
Operations and Comprehensive Income Location
Loss on interest rate swap contract
$
( 3 )
$
( 1 )
Interest expense
Impact of income taxes
1
—
Provision for income taxes
Total reclassifications related to derivatives
$
( 2 )
$
( 1 )
Total reclassifications for the period
$
( 2 )
$
( 1 )
13
Note 13. Derivative Financial Instruments
We currently use a derivative financial instrument to manage risks associated with changes in interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected cash flows of the associated forecasted transaction.
We hedge the interest payments on a portion of our variable rate debt through the use of an interest rate swap agreement. Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded 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.
The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 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 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.
Note 14. Fair Value Measurements
We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that the business categorizes using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1"); direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets ("Level 2"); and unobservable inputs that require significant judgment for which there is little or no market data ("Level 3"). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement, even though we may have also utilized significant inputs that are more readily observable.
The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The 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 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. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contract.
We 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 three months ended March 31, 2021 and 2020.
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The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented are as follows:
Estimated Fair Value Measurements
(In millions)
Statement of Financial
Position Location
Carrying
Value
Quoted
Prices
In Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
As of March 31, 2021:
Financial Liabilities:
Interest rate swap contract
Other accrued liabilities
$
10
$
—
$
10
$
—
Other long-term obligations
24
—
24
—
Total financial liabilities
$
34
$
—
$
34
$
—
As of December 31, 2020:
Financial Liabilities:
Interest rate swap contract
Other accrued liabilities
$
10
$
—
$
10
$
—
Other long-term obligations
33
—
33
—
Total financial liabilities
$
43
$
—
$
43
$
—
Note 15. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs , performance shares and 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
March 31,
(In millions, except per share data)
2021
2020
Net Income
$
5
$
13
Weighted-average common shares outstanding
85.4
85.1
Effect of dilutive securities:
RSUs
0.4
0.1
Stock options (1)
0.2
0.1
Weighted-average common shares outstanding - assuming dilution
86.0
85.4
Basic earnings per share
$
0.06
$
0.15
Diluted earnings per share
$
0.06
$
0.15
___________________________________
(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.
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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 and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control.
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;
changes in the source and intensity of competition in our market;
weakening general economic conditions, especially as they may affect existing home sales, unemployment and consumer confidence or spending levels;
our ability to successfully implement our business strategies;
our ability to attract, retain and maintain positive relations with third-party contractors and vendors;
adverse 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;
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 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 impairment charges;
failure to maintain our strategic relationships with the real estate brokerages and agents that comprise our real estate customer acquisition channel;
third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;
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inappropriate use of social media by us or other parties to harm our reputation;
our limited history of operating as an independent company;
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;
increases in interest rates increasing the cost of servicing our substantial indebtedness;
increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;
our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations; and
other factors described in this report and from time to time in documents that we file with the SEC.
Available Information
Our website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our 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 Quarterly Report on Form 10-Q.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.