What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 143 added, 121 removed, 279 unchanged (49% of the section changed)

7 unchanged sentences

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 usually 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 home service plan customers usually 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, 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 June 30, 2022 , we had 2.2 million active home service plans across all 50 states and the District of Columbia.

For the three months ended June 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of $487 million, $33 million and $77 million, respectively, and $462 million, $40 million and $114 million, respectively.

For the six months ended June 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of $838 million, $35 million and $102 million, respectively, and $791 million, $45 million and $150 million, respectively.

For the six months ended June 30, 2022 , our total operating revenue included 71 percent of revenue derived from existing customer renewals, while 12 percent and 13 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

For the six months ended June 30, 2021 , our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 17 percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

New CEO Appointment

On May 20, 2022, we announced the appointment of William Cobb, Chairman of the Board of Directors of the Company, as Chief Executive Officer of the Company, effective June 1, 2022.

Cobb has served as Chairman of the Board since October 2018 and continues to hold that office.

At September 30, 2022 , we had 2.2 million active home service plans across all 50 states and the District of Columbia.

For the three months ended September 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of $484 million, $28 million and $79 million, respectively, and $471 million, $76 million and $122 million, respectively.

For the nine months ended September 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of $1,322 million, $63 million and $181 million, respectively, and $1,263 million, $122 million and $272 million, respectively.

For the nine months ended September 30, 2022 , our total operating revenue included 72 percent of revenue derived from existing customer renewals, while 12 percent and 13 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

For the nine months ended September 30, 2021 , our total operating revenue included 69 percent of revenue derived from existing customer renewals, while 16 percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.

Key Factors and Trends Affecting Our Results of Operations

2 unchanged sentences

While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the risk of poor economic conditions in any particular region of the United States.

During the first six months of 2022, our financial condition and results of operations were adversely impacted by the following:

During the first nine months of 2022, our financial condition and results of operations were adversely impacted by the following:

 The challenging home seller’s market, driven, in part, by extremely low home inventory levels, continued to constrain demand for home service plans in the first-year real estate channel.

5 unchanged sentences

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

Given the emergence of COVID-19 variants and surges in COVID-19 cases, a significant number of people may continue to spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs.

Moreover, as a result of the increase in remote or hybrid working arrangements in response to the pandemic, which trend may continue to persist even as the pandemic continues to subside, a significant number of people may continue to spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs.

We also expect that industry-wide supply chain challenges may continue to contribute to increased costs and impact the customer experience, which may affect customer retention.

2 unchanged sentences

Our business is subject to seasonal fluctuations, which drives variations in our revenue, net income and Adjusted EBITDA for interim periods.

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

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

In 2021, we continued to experience additional variations as the COVID-19 pandemic resulted in an elevated level of service requests in the appliance trade compared to pre-pandemic levels as our customers spent more time at home.

2 unchanged sentences

The demand for our services, and our results of operations, are affected by weather conditions.

Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability.

Extreme temperatures can lead to an increase in service requests related to home systems, particularly HVAC systems, resulting in higher claim frequency and costs and lower profitability.

For example, contract claims costs were unfavorably impacted by the extremely hot weather across the country during the second quarter of 2022 as compared to 2021.

65 unchanged sentences

depreciation and amortization expense;

goodwill and intangibles impairment;

restructuring charges;

16 unchanged sentences

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K.

There have been no material changes to our critical accounting policies for the six months ended June 30, 2022 , certain of which are described below.

There have been no material changes to our critical accounting policies for the nine months ended September 30, 2022 , certain of which are described below.

Goodwill and Intangible Assets

In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis, or more frequently, if circumstances indicate a potential impairment.

As of June 30, 2022 , we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets.

In connection with the preparation of our condensed consolidated financial statements for the third quarter of 2022, we determined that indicators of a potential goodwill and intangible assets impairment were present for our Streem reporting unit.

In particular, we will now be more focused on integrating Streem’s technology into the core business and will be less focused on selling this technology platform to third-party business-to-business customers as a software-as-a-service platform.

This shift in focus resulted in significantly lower projected revenue for Streem.

We performed an interim impairment analysis of the Streem reporting unit as of September 30, 2022.

In performing the discounted cash flow analysis, we determined that the carrying amount of the Streem reporting unit exceeded its fair value.

An impairment charge of $14 million was recognized during the third quarter, which comprised the remaining net book value of Streem’s goodwill of $9 million and intangibles of $5 million.

W e do not believe there are any additional circumstances, including those related to COVID-19, that would indicate any other potential impairment of our goodwill or indefinite-lived intangible assets.

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

During the third quarter of 2022, we will continue our evaluation of the long-term plan for the Streem reporting unit.

We will be more focused on integrating Streem’s technology into the core business and will be less focused on selling this technology platform to third-party customers;

therefore, an impairment of goodwill and intangible assets at Streem is reasonably possible.

Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended

September 30,

(In millions)

2 unchanged sentences

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

Interest expense

Loss on extinguishment of debt

Interest and net investment income

Income before Income Taxes

2 unchanged sentences

* not meaningful

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Six Months Ended

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

Interest expense

Interest and net investment (income) loss

Interest and net investment income

Loss on extinguishment of debt

3 unchanged sentences

* not meaningful

We reported revenue of $487 million and $462 million for the three months ended June 30, 2022 and 2021, respectively, and $838 million and $791 million for the six months ended June 30, 2022 and 2021, respectively .

We reported revenue of $484 million and $471 million for the three months ended September 30, 2022 and 2021, respectively, and $1,322 million and $1,263 million for the nine months ended September 30, 2022 and 2021, respectively .

Revenue by major customer acquisition channel is as follows:

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended

September 30,

(In millions)

5 unchanged sentences

(1) First-year revenue only.

Revenue increased five percent for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans.

Revenue increased three percent for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans.

The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller’s market.

The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products.

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

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Six Months Ended

The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products, offset, in part, by a decline in the number of first-year direct-to-consumer home service plans.

The increase in other revenue was driven by growth in our ProConnect on-demand home services business .

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

Nine Months Ended

September 30,

(In millions)

5 unchanged sentences

(1) First-year revenue only.

Revenue increased six percent for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans.

Revenue increased five percent for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans.

The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller’s market.

The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products.

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

The increase in other revenue was driven by growth in our ProConnect on-demand home services business .

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

September 30,

(In millions)

2 unchanged sentences

Customer retention rate

The number of home service plans and customer retention rate as of June 30, 2022 were negatively impacted by a decline in the number of first-year real estate home service plans, which was driven by a continuation of the challenging home seller’s market, as well as the impact on customer experience of industry-wide supply chain challenges.

The number of home service plans as of September 30, 2022 were negatively impacted by a decline in the number of first-year real estate home service plans, which was driven by a continuation of the challenging home seller’s market, as well as the impact on customer experience of industry-wide supply chain challenges.

Cost of Services Rendered

We reported cost of services rendered of $276 million and $221 million for the three months ended June 30, 2022 and 2021, respectively, and $483 million and $402 million for the six months ended June 30, 2022 and 2021, respectively.

We reported cost of services rendered of $274 million and $217 million for the three months ended September 30, 2022 and 2021, respectively, and $757 million and $619 million for the nine months ended September 30, 2022 and 2021, respectively.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

1 unchanged sentence

Bad debt expense

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

(In millions)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Impact of change in revenue

Contract claims costs

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs.

Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter.

In addition, contract claims costs for the second quarter of 2022 include a $7 million unfavorable adjustment related to the adverse development of prior period claims.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

(In millions)

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Impact of change in revenue

Contract claims costs

Bad debt expense

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs.

Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter.

In addition, contract claims costs for the six months ended June 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of prior period claims.

In addition, contract claims costs for the nine months ended September 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of prior period claims.

Selling and Administrative Expenses

We reported selling and administrative expenses of $140 million and $136 million for the three months ended June 30, 2022 and 2021, respectively, and $266 million and $254 million for the six months ended June 30, 2022 and 2021, respectively.

We reported selling and administrative expenses of $137 million and $138 million for the three months ended September 30, 2022 and 2021, respectively, and $403 million and $392 million for the nine months ended September 30, 2022 and 2021, respectively.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

General and administrative costs

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

(In millions)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Sales and marketing costs

Stock-based compensation expense

Customer service costs

General and administrative costs

Three Months Ended June 30, 2022

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect.

General and administrative costs increased primarily due to increased professional fees.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Three Months Ended September 30, 2022

The decrease in sales and marketing costs was primarily driven by reduced investments in our ProConnect on-demand home services business .

The decrease in customer service costs was primarily driven by lower labor costs.

General and administrative costs increased primarily due to higher personnel and insurance costs.

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

(In millions)

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Sales and marketing costs

1 unchanged sentence

General and administrative costs

Six Months Ended June 30, 2022

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect.

General and administrative costs increased primarily due to increased professional fees and higher personnel costs.

Nine Months Ended September 30, 2022

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and our ProConnect on-demand home services business .

General and administrative costs increased primarily due to increased professional fees and higher personnel and insurance costs.

Depreciation and Amortization Expense

Depreciation expense was $7 million and $6 million for the three months ended June 30, 2022 and 2021, respectively, and $13 million and $12 million for the six months ended June 30, 2022 and 2021, respectively .

Amortization expense was $2 million and $3 million for the three months ended June 30, 2022 and 2021, respectively, and $4 million and $6 million for the six months ended June 30, 2022 and 2021, respectively .

Depreciation expense was $6 million for each of the three-month periods ended September 30, 2022 and 2021 and $19 million and $18 million for the nine months ended September 30, 2022 and 2021, respectively .

Amortization expense was $2 million for each of the three-month periods ended September 30, 2022 and 2021 and $6 million and $8 million for the nine months ended September 30, 2022 and 2021, respectively .

The decrease in amortization expense was due to certain intangible assets becoming fully amortized during 2021.

Goodwill and Intangibles Impairment

Goodwill and intangibles impairment was $14 million for the three and nine months ended September 30, 2022.

There was no such impairment for the three and nine months ended September 30, 2021.

See Critical Accounting Policies and Estimates – Goodwill and Intangible Assets for further information.

Restructuring Charges

Restructuring charges were $12 million and $1 million for the three months ended June 30, 2022 and 2021, respectively, and $12 million and $2 million for the six months ended June 30, 2022 and 2021, respectively.

For the three and six months ended June 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our Memphis headquarters facility operating lease right-of-use asset and leasehold improvements and $1 million of severance and other costs.

The impairment was the result of vacating the facility with the intent to sublease.

For the three months ended June 30, 2021 , restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

For the six months ended June 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.

Restructuring charges were $5 million and less than $1 million for the three months ended September 30, 2022 and 2021, respectively, and $18 million and $2 million for the nine months ended September 30, 2022 and 2021, respectively.

For the three months ended September 30, 2022, restructuring charges primarily comprised a $2 million impairment of certain internally developed software and $3 million of severance and other costs.

Severance costs of $2 million related to a reduction in workforce of seven percent as part of our completed strategic review of our selling, general and administrative expenses.

For the nine months ended September 30, 2022, restructuring charges primarily comprised an $11 million impairment charge related to our Memphis headquarters facility operating lease right-of-use asset and leasehold improvements, a $2 million impairment of certain internally developed software and $5 million of severance and other costs.

Severance costs of $2 million related to a reduction in workforce of seven percent as part of our completed strategic review of our selling, general and administrative expenses.

For the three months ended September 30, 2021 , restructuring charges primarily comprised severance costs.

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.

Interest Expense

Interest expense was $7 million and $12 million for the three months ended June 30, 2022 and 2021, respectively, and $14 million and $25 million for the six months ended June 30, 2022 and 2021, respectively.

Interest expense was $8 million and $7 million for the three months ended September 30, 2022 and 2021, respectively, and $22 million and $32 million for the nine months ended September 30, 2022 and 2021, respectively.

The decrease was driven by our debt reduction and refinancing activities in 2021.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $30 million and $31 million for t he three and six months ended June 30, 2021, respectively.

Loss on extinguishment of debt was $31 million for t he nine months ended September 30, 2021.

Amounts relate to our debt reduction and refinancing activities in 2021.

There were no such charges for the three and six months ended June 30, 2022.

There were no such charges for the three and nine months ended September 30, 2022 and the three months ended September 30, 2021.

Provision for Income Taxes

The effective tax rate on income was 23.2 percent and 26.0 percent for the three months ended June 30, 2022 and 2021, respectively, and 25.1 percent and 24.5 percent for the six months ended June 30, 2022 and 2021, respectively.

The decrease in the effective tax rate for the three months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and income tax credits, offset, in part, by an increase in state income taxes.

The increase in the effective tax rate for the six months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and state income taxes, offset, in part, by an increase in income tax credits.

Net income was $33 million and $40 million for the three months ended June 30, 2022 and 2021, respectively, and $35 million and $45 million for the six months ended June 30, 2022 and 2021, respectively .

For both the three and six months ended June 30, 2022 compared to 2021, the decrease in net income was primarily driven by the decrease in the aforementioned operating results and the increase in restructuring charges, offset, in part, by the decrease in interest expense and the impact of the prior year loss on extinguishment of debt.

The effective tax rate on income was 28.2 percent and 24.3 percent for the three months ended September 30, 2022 and 2021, respectively, and 26.5 percent and 24.4 percent for the nine months ended September 30, 2022 and 2021, respectively.

The increase in the effective tax rate for both the three and nine months ended September 30, 2022 compared to 2021 is primarily due to share-based awards and impairment of goodwill and intangible assets, offset, in part, by income tax credits and state income taxes.

Net income was $28 million and $76 million for the three months ended September 30, 2022 and 2021, respectively, and $63 million and $122 million for the nine months ended September 30, 2022 and 2021, respectively .

For the three months ended September 30, 2022 compared to 2021, the decrease in net income was primarily driven by the decrease in the aforementioned operating results, the goodwill and intangibles impairment charges and the increase in restructuring charges.

For the nine months ended September 30, 2022 compared to 2021, the decrease in net income was primarily driven by the decrease in the aforementioned operating results, the goodwill and intangibles impairment charges and the increase in restructuring charges, offset, in part, by the decrease in interest expense and the impact of the prior year loss on extinguishment of debt.

Adjusted EBITDA

Adjusted EBITDA was $77 million and $114 million for the three months ended June 30, 2022 and 2021, respectively, and $102 million and $150 million for the six months ended June 30, 2022 and 2021, respectively .

Adjusted EBITDA was $79 million and $122 million for the three months ended September 30, 2022 and 2021, respectively, and $181 million and $272 million for the nine months ended September 30, 2022 and 2021, respectively .

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

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

(In millions)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Impact of change in revenue

1 unchanged sentence

Sales and marketing costs

Customer service costs

General and administrative costs

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs.

Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter.

In addition, contract claims costs for the second quarter of 2022 include a $7 million unfavorable adjustment related to the adverse development of prior period claims.

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect.

General and administrative costs increased primarily due to increased professional fees.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The decrease in sales and marketing costs was primarily driven by reduced investment in our ProConnect on-demand home services business .

The decrease in customer service costs was primarily driven by lower labor costs.

General and administrative costs increased primarily due to higher personnel and insurance costs.

Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021

(In millions)

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Impact of change in revenue

2 unchanged sentences

General and administrative costs

Bad debt expense

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs.

Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter.

In addition, contract claims costs for the six months ended June 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of prior period claims.

The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect.

General and administrative costs increased primarily due to increased professional fees and higher personnel costs.

In addition, contract claims costs for the nine months ended September 30, 2022 include a $12 million unfavorable adjustment related to the adverse development of prior period claims.

General and administrative costs increased primarily due to increased professional fees and higher personnel and insurance costs.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

Depreciation and amortization expense

Goodwill and intangibles impairment (1)

Restructuring charges (1)

5 unchanged sentences

_________________________________

(1) We exclude restructuring charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(1) We exclude goodwill and intangibles impairment, restructuring charges and loss on extinguishment of debt from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(2) We exclude non-cash stock-based compensation expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance.

We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

(3) We exclude loss on extinguishment of debt from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

Liquidity and Capital Resources

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The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates.

As of June 30, 2022 , we were in compliance with the covenants under the agreements that were in effect on such date.

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

Cash and cash equivalents totaled $269 million and $262 million as of June 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 , we were in compliance with the covenants under the agreements that were in effect on such date.

Based on current conditions, we do not believe the acceleration of inflationary cost pressures, global supply chain challenges and the persistence of the COVID-19 pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement.

Cash and cash equivalents totaled $244 million and $262 million as of September 30, 2022 and December 31, 2021, respectively.

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

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of June 30, 2022 , and December 31, 2021, the total net assets subject to these third-party restrictions was $159 million and $175 million, respectively.

As of June 30, 2022 , there were $2 million of letters of credit outstanding and $248 million of available borrowing capacity under the Revolving Credit Facility.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of September 30, 2022 , and December 31, 2021, the total net assets subject to these third-party restrictions was $157 million and $175 million, respectively.

As of September 30, 2022 , there were $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and the available borrowing capacity under the Revolving Credit Facility was limited by the applicable consolidated first lien leverage ratio contained in the Credit Agreement to $199 million.

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

Available liquidity was $357 million at June 30, 2022 , consisting of $109 million of cash not subject to third-party restrictions and $248 million of available borrowing capacity under the Revolving Credit Facility.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at June 30, 2022 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility at September 30, 2022 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We closely monitor the performance of our investment portfolio.

7 unchanged sentences

We expect to fund the share repurchases from net cash provided from operating activities.

As of June 30, 2022, we have purchased a total of 4,478,194 outstanding shares at an aggregate cost of $162 million under this program, which is included in treasury stock on the condensed consolidated statements of financial position.

We did not repurchase any shares during the three months ended September 30, 2022.

As of September 30, 2022, we have purchased a total of 4,478,194 outstanding shares at an aggregate cost of $162 million under this program, which is included in treasury stock on the condensed consolidated statements of financial position.

We had $238 million remaining available for future repurchases under the program.

Purchases under the repurchase program may be made from time to time by the company in the open market at prevailing market prices (including through a Rule 10b5-1 Plan), in privately negotiated transactions, or through any combination of these methods, through September 3, 2024.

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

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Operating Activities

Net cash provided from operating activities was $94 million and $119 million for the six months ended June 30, 2022 and 2021, respectively.

Net cash provided from operating activities in 2022 comprised $68 million in earnings adjusted for non-cash charges and $26 million in cash provided from working capital.

Cash provided from working capital was primarily driven by seasonality.

Net cash provided from operating activities in 2021 comprised $112 million in earnings adjusted for non-cash charges and an $8 million decrease in cash required for working capital.

The decrease in cash required for working capital was driven by seasonality and growth in our underlying business, offset, in part, by interest payments made in connection with the redemption of the 2026 Notes.

Net cash provided from operating activities was $80 million and $142 million for the nine months ended September 30, 2022 and 2021, respectively.

Net cash provided from operating activities in 2022 comprised $121 million in earnings adjusted for non-cash charges, offset, in part, by $41 million in cash used for working capital.

Cash used for working capital was primarily driven by seasonality and the impacts on deferred revenue of a decline in the number of first-year real estate home service plans.

Net cash provided from operating activities in 2021 comprised $207 million in earnings adjusted for non-cash charges, offset, in part, by $65 million in cash used for working capital.

Cash used for working capital was driven by seasonality and the impacts on deferred revenue of a decline in the number of first-year real estate home service plans and a shift in the mix of annual-pay customers to monthly-pay customers.

Investing Activities

Net cash used for investing activities was $19 million and $15 million for the six months ended June 30, 2022 and 2021, respectively.

Capital expenditures were $19 million and $15 million for the six months ended June 30, 2022 and 2021, respectively, and included recurring capital needs and technology projects.

Net cash used for investing activities was $25 million and $23 million for the nine months ended September 30, 2022 and 2021, respectively.

Capital expenditures were $30 million and $23 million for the nine months ended September 30, 2022 and 2021, respectively, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2022 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $40 million to $45 million.

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Financing Activities

Net cash used for financing activities was $69 million and $378 million for the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022, we made scheduled principal payments of debt and finance lease obligations of $8 million and purchased outstanding shares at an aggregate cost of $59 million .

For the six months ended June 30, 2021, as part of our debt reduction and refinancing activities in 2021, we borrowed $638 million, net of discount, under the Term Loan Facilities and redeemed the remaining outstanding principal amounts of $634 million of the Prior Term Loan Facility and $350 million of the 2026 Notes.

Net cash used for financing activities was $74 million and $407 million for the nine months ended September 30, 2022 and 2021, respectively.

For the nine months ended September 30, 2022, we made scheduled principal payments of debt and finance lease obligations of $13 million and purchased outstanding shares at an aggregate cost of $59 million .

For the nine months ended September 30, 2021, as part of our debt reduction and refinancing activities in 2021, we borrowed $638 million, net of discount, under the Term Loan Facilities and redeemed the remaining outstanding principal amounts of $634 million of the Prior Term Loan Facility and $350 million of the 2026 Notes.

In connection with the repayments, we paid a “make-whole” redemption premium of $21 million on the 2026 Notes and debt issuance costs of $8 million.

In addition, we repurchased $25 million of common stock.

Free Cash Flow

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GAAP measure, to Free Cash Flow using data derived from our audited consolidated financial statements.

Six Months Ended

Nine Months Ended

(In millions)

September 30,

Net cash provided from operating activities

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Financial Position

The following discussion describes changes in our financial position from December 31, 2021 to June 30, 2022 :

 Contract asset increased during the six months ended June 30, 2022, reflecting a net contract asset related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

 Accounts payable increased during the six months ended June 30, 2022, reflecting the timing of trade payables due to the seasonality of our business.

 Home service plan claims increased during the six months ended June 30, 2022, reflecting the seasonality of contract claims and inflation, which increased amounts due to contractors and suppliers.

 Deferred revenue decreased during the six months ended June 30, 2022, reflecting a decline in the number of first-year real estate home service plans.

 Other long-term liabilities decreased during the six months ended June 30, 2022, primarily due to the change in the valuation of our interest rate swap.

 Total shareholders’ equity was $6 million as of June 30, 2022 compared to $2 million as of December 31, 2021.

The following discussion describes changes in our financial position from December 31, 2021 to September 30, 2022 :

 Contract asset increased during the nine months ended September 30, 2022, reflecting a net contract asset related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

 Intangible assets, net decreased during the nine months ended September 30, 2022, reflecting a $5 million impairment of intangibles related to our Streem reporting unit.

See Critical Accounting Policies and Estimates – Goodwill and Intangible Assets for further information.

 Accounts payable increased during the nine months ended September 30, 2022, reflecting the timing of trade payables due to the seasonality of our business.

 Home service plan claims increased during the nine months ended September 30, 2022, reflecting inflation and the seasonality of contract claims, which increased amounts due to contractors and suppliers.

 Deferred revenue decreased during the nine months ended September 30, 2022, reflecting a decline in the number of first-year real estate home service plans and the recognition of previously deferred amounts on an other than straight-line basis to match the timing of cost recognition .

 Long-term debt decreased during the nine months ended September 30, 2022, reflecting schedule debt payments.

 Other long-term liabilities decreased during the nine months ended September 30, 2022, primarily due to the change in the valuation of our interest rate swap.

 Total shareholders’ equity was $47 million as of September 30, 2022 compared to $2 million as of December 31, 2021.

The increase was primarily driven by net income and the change in valuation of our interest rate swap, offset, in part, by the repurchases of common stock.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis