Frontdoor, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (In millions, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue $ 471 $ 440 $ 1,263 $ 1,151 Cost of services rendered 217 225 619 572 Gross Profit 254 215 644 579 Selling and administrative expenses 138 129 392 358 Depreciation and amortization expense 8 7 27 25 Restructuring charges — — 2 4 Interest expense 7 14 32 43 Interest and net investment (income) loss — — ( 1 ) 1 Loss on extinguishment of debt — — 31 — Income before Income Taxes 101 65 161 148 Provision for income taxes 25 16 39 37 Net Income $ 76 $ 49 $ 122 $ 111 Other Comprehensive Income (Loss), Net of Income Taxes: Net unrealized gain (loss) on derivative instruments 2 1 10 ( 15 ) Total Comprehensive Income $ 79 $ 50 $ 131 $ 95 Earnings per Share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.89 $ 0.57 $ 1.42 $ 1.30 Diluted ​ $ 0.89 $ 0.57 $ 1.42 $ 1.29 Weighted-average Common Shares Outstanding: Basic 85.5 85.3 85.5 85.2 Diluted 85.9 85.6 85.9 85.5 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 4 Condensed Consolidated Statements of Financial Position (Unaudited) (In millions, except share data) As of September 30, December 31, 2021 2020 Assets: Current Assets: Cash and cash equivalents $ 309 $ 597 Receivables, less allowance of $ 2 in each period 5 5 Contract asset 53 — Prepaid expenses and other assets 18 24 Total Current Assets 385 626 Other Assets: Property and equipment, net 64 60 Goodwill 512 512 Intangible assets, net 161 170 Operating lease right-of-use assets 19 15 Deferred customer acquisition costs 16 19 Other assets 4 3 Total Assets $ 1,161 $ 1,405 Liabilities and Shareholders' Equity: Current Liabilities: Accounts payable $ 76 $ 55 Accrued liabilities: Payroll and related expenses 23 23 Home service plan claims 99 90 Interest payable — 9 Other 33 32 Deferred revenue 147 187 Current portion of long-term debt 17 7 Total Current Liabilities 394 403 Long-Term Debt 612 968 Other Long-Term Liabilities: Deferred taxes 44 38 Operating lease liabilities 21 18 Other long-term obligations 29 40 Total Other Long-Term Liabilities 93 96 Commitments and Contingencies (Note 8) Shareholders' Equity: Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 85,768,848 shares issued and 85,221,181 shares outstanding at September 30, 2021 and 85,477,779 shares issued and outstanding at December 31, 2020 1 1 Additional paid-in capital 63 46 Retained earnings (accumulated deficit) 47 ( 75 ) Accumulated other comprehensive loss ( 24 ) ( 33 ) Less common stock held in treasury, at cost; 547,667 shares at September 30, 2021 ( 25 ) — Total Equity (Deficit) 62 ( 61 ) Total Liabilities and Shareholders' Equity $ 1,161 $ 1,405 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 5 Condensed Consolidated Statement of Changes in Equity (Deficit) (Unaudited) (In millions) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Common Stock Balance at beginning of period $ 1 $ 1 $ 1 $ 1 Balance at end of period 1 1 1 1 Additional Paid-in Capital Balance at beginning of period 57 37 46 29 Exercise of stock options 1 — 2 — Issuance of common stock — — 1 1 Taxes paid related to net share settlement of equity awards — — ( 5 ) ( 2 ) Stock-based employee compensation 5 4 19 13 Balance at end of period 63 41 63 41 Retained Earnings (Accumulated Deficit) Balance at beginning of period ( 30 ) ( 126 ) ( 75 ) ( 188 ) Net income 76 49 122 111 Balance at end of period 47 ( 77 ) 47 ( 77 ) Accumulated Other Comprehensive Loss Balance at beginning of period ( 26 ) ( 37 ) ( 33 ) ( 21 ) Other comprehensive income (loss), net of tax 2 1 10 ( 15 ) Balance at end of period ( 24 ) ( 36 ) ( 24 ) ( 36 ) Common Stock Held in Treasury Balance at beginning of period — — — — Repurchase of common stock ( 25 ) — ( 25 ) — Balance at end of period ( 25 ) — ( 25 ) — Total Equity (Deficit) $ 62 $ ( 71 ) $ 62 $ ( 71 ) See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 6 Condensed Consolidated Statements of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2021 2020 Cash and Cash Equivalents at Beginning of Period $ 597 $ 428 Cash Flows from Operating Activities: Net Income 122 111 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization expense 27 25 Deferred income tax provision 2 1 Stock-based compensation expense 19 13 Restructuring charges 2 4 Payments for restructuring charges ( 1 ) ( 3 ) Loss on extinguishment of debt 31 — Other 5 5 Change in working capital, net of acquisitions: Receivables — 1 Prepaid expenses and other current assets ( 49 ) ( 43 ) Accounts payable 20 21 Deferred revenue ( 41 ) ( 9 ) Accrued liabilities 6 32 Accrued interest payable ( 9 ) ( 6 ) Current income taxes 7 3 Net Cash Provided from Operating Activities 142 154 Cash Flows from Investing Activities: Purchases of property and equipment ( 23 ) ( 26 ) Business acquisitions, net of cash received — ( 5 ) Purchases of available-for-sale securities — ( 2 ) Sales and maturities of available-for-sale securities — 9 Net Cash Used for Investing Activities ( 23 ) ( 25 ) Cash Flows from Financing Activities: Borrowings of debt, net of discount 638 — Payments of debt and finance lease obligations ( 990 ) ( 5 ) Debt issuance cost paid ( 8 ) — Call premium paid on retired debt ( 21 ) — Repurchase of common stock ( 25 ) — Other financing activities ( 2 ) ( 1 ) Net Cash Used for Financing Activities ( 407 ) ( 6 ) Cash (Decrease) Increase During the Period ( 289 ) 123 Cash and Cash Equivalents at End of Period $ 309 $ 551 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 7 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 September 30, 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. During the first nine months of 2021, our financial condition and results of operations were adversely impacted by the COVID-19 pandemic as follows:  The tight existing home sales market continued to constrain demand for home service plans in the first-year real estate channel. Additionally, due to the annual nature of our home service plan agreements and the corresponding recognition of revenue over this annual period, real estate revenue for the first quarter of 2021 was adversely impacted by the decline in U.S. existing home sales that occurred in the second quarter of 2020.  We continued to experience an increase in appliance claims compared to pre-pandemic levels primarily due to increased usage of home systems and appliances driven by customers spending greater time at home in response to COVID-19. In addition, industry-wide parts availability challenges have caused increased cost pressure, and, more specifically, additional appliance replacements due to lack of parts availability, further contributing to the increased costs. These industry-wide supply chain challenges also impacted the customer experience, which was reflected in our customer retention rate.  We incurred incremental customer service wages due to a higher number of service requests in the appliance trade compared to pre-pandemic levels, which was primarily a result of customers spending greater time at home in response to COVID-19. Additionally, due to labor availability challenges, we continued to experience difficulties in hiring and retaining customer service personnel. 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 nine months ended September 30, 2021. 8 Note 3. Revenue The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Our home service plan agreements 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 Nine Months Ended September 30, September 30, (In millions) 2021 2020 2021 2020 Renewals $ 328 $ 303 $ 867 $ 792 Real estate (1) 73 76 207 206 Direct-to-consumer (1) 59 56 157 143 Other 11 4 31 10 Total $ 471 $ 440 $ 1,263 $ 1,151 _____________________________ (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. Other Other revenue includes revenue generated by ProConnect and Streem, as well as administrative fees and ancillary services attributable to our home service plan agreements. 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 $ 16 million and $ 19 million as of September 30, 2021 and December 31, 2020, respectively. Amortization of these deferred acquisition costs was $ 5 million and $ 6 million for the three months ended September 30, 2021 and 2020, respectively, and $ 15 million for each of the nine months ended September 30, 2021 and 2020. There were no impairment losses in relation to these capitalized costs. 9 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. As of September 30, 2021, a contract asset of $ 53 million was recorded related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition. Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. Deferred revenue was $ 147 million and $ 187 million as of September 30, 2021 and December 31, 2020, respectively. Changes in deferred revenue for the nine months ended September 30, 2021 were as follows: (In millions) Deferred Revenue Balance as of December 31, 2020 $ 187 Deferral of revenue 267 Recognition of deferred revenue ( 308 ) Balance as of September 30, 2021 $ 147 There was approximately $ 41 million and $ 187 million of revenue recognized in the three and nine months ended September 30, 2021, respectively, that was included in the deferred revenue balance as of December 31, 2020. Deferred revenue decreased during the nine months ended September 30, 2021, reflecting a decline in the number of first-year real estate home service plans, a shift in the mix of annual-pay customers to monthly-pay customers and the recognition of previously deferred amounts on an other-than-straight-line basis to match the timing of cost recognition. 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 September 30, 2021 and December 31, 2020. There were no goodwill or trade name impairment charges recorded in the nine months ended September 30, 2021 and 2020. There were no accumulated impairment losses recorded as of September 30, 2021 and December 31, 2020. During the second quarter of 2020, we completed a business acquisition for $ 5 million, which was primarily allocated to developed technology and other intangible assets. There were no acquisitions during the nine months ended September 30, 2021. The table below summarizes the other intangible asset balances: As of September 30, 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 ( 172 ) — 173 ( 171 ) 2 Developed technology 25 ( 11 ) 15 25 ( 6 ) 19 Other 37 ( 31 ) 6 37 ( 29 ) 8 Total $ 375 $ ( 214 ) $ 161 $ 375 $ ( 205 ) $ 170 _____________________________ (1) Not subject to amortization. 10 Amortization expense was $ 2 million and $ 2 million for the three months ended September 30, 2021 and 2020, respectively, and $ 8 million and $ 9 million for the nine months ended September 30, 2021 and 2020, respectively. 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) $ 2 2022 8 2023 6 2024 4 2025 — 2026 — Total $ 21 Note 5. Leases We have operating leases primarily for our corporate offices, customer service centers and engineering and technology campuses. Our leases have remaining lease terms of two years to 13 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 September 30, December 31, 2021 2020 Weighted-average remaining lease term (years) 9 9 Weighted-average discount rate 5.6 % 6.0 % We recognized operating lease expense of $ 1 million for each of the three months ended September 30, 2021 and 2020 and $ 3 million and $ 2 million for the nine months ended September 30, 2021 and 2020, respectively . These expenses are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income. Supplemental cash flow information related to operating leases is as follows: Nine Months Ended September 30, (In millions) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities (1) $ 4 $ 4 Leased assets obtained in exchange for new lease liabilities 6 2 _____________________________ (1) For the nine months ended September 30, 2020, amounts include $ 2 million of lease termination costs related to the decision to consolidate certain operations of Landmark Home Warranty, LLC (“Landmark”) with those of OneGuard Home Warranties (“OneGuard”). 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 September 30, December 31, (In millions) 2021 2020 Operating lease right-of-use assets $ 24 $ 21 Less lease incentives ( 5 ) ( 6 ) Operating lease right-of-use assets, net $ 19 $ 15 Other accrued liabilities $ 4 $ 3 Operating lease liabilities 21 18 Total operating lease liabilities $ 24 $ 21 11 The following table presents maturities of our operating lease liabilities as of September 30, 2021. (In millions) 2021 (remainder) $ 1 2022 5 2023 5 2024 3 2025 2 2026 2 Thereafter 12 Total lease payments 32 Less imputed interest ( 7 ) Total $ 24 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 24.3 percent and 24.8 percent for the three months ended September 30, 2021 and 2020, respectively, and 24.4 percent and 25.1 percent for nine months ended September 30, 2021 and 2020, respectively . The decrease in the effective tax rate for the nine months ended September 30, 2021 compared to 2020 is primarily due to excess tax benefits for share-based awards and income tax credits, offset, in part, by an increase in state income taxes. We are subject to taxation in the United States, various states and foreign jurisdictions. Pursuant to the terms of the tax matters agreement entered into with Terminix in connection with the Spin-off, we are not subject to federal examination by the IRS or examination by state taxing authorities where a unitary or combined state income tax return is filed for the years prior to 2018. We are not subject to state and local income tax examinations by tax authorities in jurisdictions where separate income tax returns are filed for the years prior to 2016. Substantially all of our income before income taxes for the nine months ended September 30, 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 less than $ 1 million (less than $ 1 million, net of tax) for each of the three months ended September 30, 2021 and 2020 and $ 2 million ($ 1 million, net of tax) and $ 4 million ($ 3 million, net of tax) for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, restructuring charges primarily comprised severance costs. 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, 2021, restructuring charges comprised $ 1 million of accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities and $ 1 million of severance and other costs. For the nine months ended September 30, 2020, restructuring charges comprised $ 2 million of lease termination costs and $ 1 million of severance and other costs related to the decision to consolidate the operations of Landmark with those of OneGuard, which was completed during the first quarter of 2020, as well as $ 1 million of accelerated depreciation of certain technology systems. 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 nine months ended September 30, 2021. As of September 30, 2021, there were no accrued restructuring charges in the accompanying condensed consolidated statements of financial position. 12 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. 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 $ 5 million ($ 4 million, net of tax) and $ 4 million ($ 4 million, net of tax) for the three months ended September 30, 2021 and 2020, respectively, and $ 19 million ( 14 million, net of tax) and $ 13 million ($ 11 million, net of tax) for the nine months ended September 30, 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 nine months ended September 30, 2021 is presented below: Number of Weighted Avg. Weighted Avg. Weighted Avg. Awards Exercise Grant Date Vesting Granted Price Fair Value Period Stock options 271,735 $ 54.36 $ 27.78 4.00 Restricted stock units 434,820 54.25 3.00 Performance shares (1) 98,017 54.81 3.00 _____________________________ (1) The number of performance shares granted during the nine months ended September 30, 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 September 30, 2021, there was $ 46 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 2.31 years. 13 Note 10. Long-Term Debt Long-term debt is summarized in the following table: As of September 30, December 31, (In millions) 2021 2020 Term Loan A maturing in 2026 (1) $ 255 $ — Term Loan B maturing in 2028 (2) 374 — Amended Revolving Credit Facility maturing in 2026 — — Prior Term Loan Facility maturing in 2025 (3) — 629 Prior Revolving Credit Facility maturing in 2023 — — 2026 Notes (4) — 346 Less current portion ( 17 ) ( 7 ) Total long-term debt $ 612 $ 968 ___________________________________ (1) As of September 30, 2021, presented net of $ 2 million in unamortized debt issuance costs. (2) As of September 30, 2021, presented net of $ 4 million in unamortized debt issuance costs and $ 2 million in unamortized original issue discount. (3) As of December 31, 2020, presented net of $ 5 million in unamortized debt issuance costs and $ 1 million in unamortized original issue discount. (4) As of December 31, 2020, presented net of $ 4 million in unamortized debt issuance costs. Credit Facilities On February 17, 2021, we repaid $ 100 million of the outstanding principal amount of the Prior 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. On June 17, 2021, we entered into the Amended Credit Agreement, providing for the Term Loan A maturing June 17, 2026 , the Term Loan B maturing June 17, 2028 and the Amended Revolving Credit Facility, which terminates June 17, 2026 . The net proceeds of the transaction, together with cash on hand, were used to redeem the remaining outstanding principal amounts of $ 534 million of the Prior Term Loan Facility and $ 350 million of the 2026 Notes at a price of 106.1 %. In addition, the Amended Revolving Credit Facility replaced the Prior Revolving Credit Facility . In connection with the repayments, we recorded a loss on extinguishment of debt of $ 30 million in the second quarter of 2021, which included a “make-whole” redemption premium of $ 21 million on the 2026 Notes and the write-off of $ 9 million of debt issuance costs and original issue discount. The interest rates applicable to the Term Loan A and the Amended Revolving Credit Facility are based on a fluctuating rate of interest based on the Consolidated First Lien Leverage Ratio ( as defined in the Amended Credit Agreement ) and measured by reference to either, at our option, (i) an adjusted LIBOR plus a margin range of 1.50 % to 2.00 % per annum or (ii) an alternate base rate plus a margin range of 0.50 % to 1.00 % per annum. The interest rates applicable to the Term Loan B are based on a fluctuating rate of interest measured by reference to either, at our option, (i) an adjusted LIBOR plus a margin of 2.25 % per annum or (ii) an alternate base rate plus a margin of 1.25 % per annum. The obligations under the Amended Credit Agreement are guaranteed by certain subsidiaries (collectively, the “Guarantors”) and are secured by substantially all of the material tangible and intangible assets of Frontdoor and the Guarantors, subject to certain customary exceptions. The Amended Revolving Credit Facility provides for senior secured revolving loans and stand-by and other letters of credit. The Amended Revolving Credit Facility limits outstanding letters of credit to $ 250 million. As of September 30, 2021, there were $ 2 million of letters of credit outstanding and $ 248 million of available borrowing capacity under the Amended Revolving Credit Facility. The Amended Credit Agreement contains certain affirmative and negative covenants, including limitations on the incurrence of indebtedness, liens, ability to engage in certain fundamental transactions, make certain dispositions, make certain restricted payments and engage in transactions with affiliates. The Amended Credit Agreement also contains a financial covenant requiring the maintenance of a Consolidated First Lien Leverage Ratio, as defined in the Amended Credit Agreement, of not greater than 3.50 to 14 1.00 at the end of each fiscal quarter or, subject to certain limitations, 4.00 to 1.00 following material acquisitions . As of September 30, 2021, we were in compliance with the financial covenants under the Amended Credit Agreement that were in effect on such date. Scheduled Long-term Debt Payments As of September 30, 2021, future scheduled long - term debt payments are $ 4 million for the remainder of 2021, $ 17 million for each of the years ending December 31, 2022 through 2025 and $ 205 million for the year ending December 31, 2026. Note 11. Supplemental Cash Flow Information Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table: Nine Months Ended September 30, (In millions) 2021 2020 Cash paid for (received from): Interest expense $ 39 $ 47 Income tax payments, net of refunds 29 33 Interest income ( 1 ) ( 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 5 5 Tax provision (benefit) 1 1 After-tax amount 4 4 Amounts reclassified from accumulated ‎ other comprehensive income (loss) (1) 6 6 Net current period other comprehensive income (loss) 10 10 Balance as of September 30, 2021 $ ( 24 ) $ ( 24 ) Balance as of December 31, 2019 $ ( 21 ) $ ( 21 ) Other comprehensive income (loss) before reclassifications: Pre-tax amount ( 26 ) ( 26 ) Tax provision (benefit) ( 6 ) ( 6 ) After-tax amount ( 20 ) ( 20 ) Amounts reclassified from accumulated ‎ other comprehensive income (loss) (1) 5 5 Net current period other comprehensive income (loss) ( 15 ) ( 15 ) Balance as of September 30, 2020 $ ( 36 ) $ ( 36 ) ___________________________________ (1) Amounts are net of tax. See reclassifications out of AOCI below for further details. 15 Reclassifications out of AOCI included the following components for the periods indicated. Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) Nine Months Ended September 30, Consolidated Statements of (In millions) 2021 2020 Operations and Comprehensive Income Location Loss on interest rate swap contract $ ( 8 ) $ ( 6 ) Interest expense Impact of income taxes 2 2 Provision for income taxes Total reclassifications related to derivatives $ ( 6 ) $ ( 5 ) Total reclassifications for the period $ ( 6 ) $ ( 5 ) 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 September 30, 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 $ 629 million and $ 975 million, and the estimated fair value was $ 635 million and $ 1,004 million as of September 30, 2021 and December 31, 2020, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of September 30, 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. 16 We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the nine months ended September 30, 2021. Transfers between levels, if any, are recognized at the end of the reporting period. There were no transfers between levels during the nine months ended September 30, 2021 and 2020. The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented are as follows: 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 September 30, 2021: Financial Liabilities: Interest rate swap contract Other accrued liabilities $ 10 $ — $ 10 $ — Other long-term obligations 20 — 20 — Total financial liabilities $ 31 $ — $ 31 $ — 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. Share Repurchase Program On September 7, 2021, we announced a three-year repurchase authorization of up to $ 400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024. Purchases of outstanding shares are as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2021 2020 2021 2020 Number of shares purchased 0.5 $ — 0.5 $ — Average price paid per share (1) $ 46.11 $ — $ 46.11 — Cost of shares purchased $ 25 — $ 25 — ________________________________ (1) The average price paid per share is calculated on a trade date basis and excludes commissions. Note 16. 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. 17 Basic and diluted earnings per share are calculated as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2021 2020 2021 2020 Net Income $ 76 $ 49 $ 122 $ 111 Weighted-average common shares outstanding 85.5 85.3 85.5 85.2 Effect of dilutive securities: RSUs (1) 0.2 0.2 0.2 0.2 Stock options (2) 0.2 0.1 0.2 0.1 Weighted-average common shares outstanding - assuming dilution 85.9 85.6 85.9 85.5 Basic earnings per share $ 0.89 $ 0.57 $ 1.42 $ 1.30 Diluted earnings per share $ 0.89 $ 0.57 $ 1.42 $ 1.29 ___________________________________ (1) Restricted stock units of 0.3 million and 0.1 million shares for the three months ended September 30, 2021 and 2020, respectively, and 0.3 million and 0.1 million shares for the nine months ended September 30, 2021 and 2020, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. (2) Options to purchase 0.7 million and 0.9 million shares for the three months ended September 30, 2021 and 2020, respectively, and 0.6 million and 0.7 million shares for the nine months ended September 30, 2021 and 2020, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. 18 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; 19  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 Amended 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. 20