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, 2022 2021 2022 2021 Revenue $ 484 $ 471 $ 1,322 $ 1,263 Cost of services rendered 274 217 757 619 Gross Profit 210 254 565 644 Selling and administrative expenses 137 138 403 392 Depreciation and amortization expense 8 8 25 27 Goodwill and intangibles impairment 14 — 14 — Restructuring charges 5 — 18 2 Interest expense 8 7 22 32 Interest and net investment income ( 1 ) — ( 1 ) ( 1 ) Loss on extinguishment of debt — — — 31 Income before Income Taxes 39 101 85 161 Provision for income taxes 11 25 23 39 Net Income $ 28 $ 76 $ 63 $ 122 Other Comprehensive Income, Net of Income Taxes: Net unrealized gain on derivative instruments 9 2 26 10 Total Comprehensive Income $ 37 $ 79 $ 89 $ 131 Earnings per Share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.34 $ 0.89 $ 0.77 $ 1.42 Diluted ​ $ 0.34 $ 0.89 $ 0.77 $ 1.42 Weighted-average Common Shares Outstanding: Basic 81.5 85.5 82.0 85.5 Diluted 81.6 85.9 82.1 85.9 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 6 Condensed Consolidated Statements of Financial Position (Unaudited) (In millions, except share data) As of September 30, December 31, 2022 2021 Assets: Current Assets: Cash and cash equivalents $ 244 $ 262 Receivables, less allowance of $ 4 and $ 2 , respectively 4 7 Contract asset 65 — Prepaid expenses and other assets 29 25 Total Current Assets 343 295 Other Assets: Property and equipment, net 64 66 Goodwill 503 512 Intangible assets, net 149 159 Operating lease right-of-use assets 9 17 Deferred customer acquisition costs 17 16 Other assets 10 5 Total Assets $ 1,095 $ 1,069 Liabilities and Shareholders' Equity: Current Liabilities: Accounts payable $ 89 $ 66 Accrued liabilities: Payroll and related expenses 23 24 Home service plan claims 123 88 Other 27 28 Deferred revenue 113 155 Current portion of long-term debt 17 17 Total Current Liabilities 391 378 Long-Term Debt 596 608 Other Long-Term Liabilities: Deferred taxes 37 41 Operating lease liabilities 16 19 Other long-term obligations 8 21 Total Other Long-Term Liabilities 60 81 Commitments and Contingencies (Note 8) Shareholders' Equity: Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 86,053,212 shares issued and 81,490,682 shares outstanding at September 30, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021 1 1 Additional paid-in capital 85 70 Retained earnings 116 53 Accumulated other comprehensive income (loss) 8 ( 18 ) Less common stock held in treasury, at cost; 4,562,530 shares at September 30, 2022 and 2,566,284 shares as of December 31, 2021 ( 162 ) ( 103 ) Total Equity 47 2 Total Liabilities and Shareholders' Equity $ 1,095 $ 1,069 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. 7 Condensed Consolidated Statement of Changes in Equity (Unaudited) (In millions) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 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 80 57 70 46 Exercise of stock options — 1 — 2 Issuance of common stock — — — 1 Taxes paid related to net share settlement of equity awards — — ( 3 ) ( 5 ) Stock-based employee compensation 5 5 17 19 Issuance of common stock upon ESPP purchase — — 1 — Balance at end of period 85 63 85 63 Retained Earnings (Accumulated Deficit) Balance at beginning of period 88 ( 30 ) 53 ( 75 ) Net income 28 76 63 122 Balance at end of period 116 47 116 47 Accumulated Other Comprehensive Income (Loss) Balance at beginning of period ( 1 ) ( 26 ) ( 18 ) ( 33 ) Other comprehensive income, net of tax 9 2 26 10 Balance at end of period 8 ( 24 ) 8 ( 24 ) Common Stock Held in Treasury Balance at beginning of period ( 162 ) — ( 103 ) — Repurchase of common stock — ( 25 ) ( 59 ) ( 25 ) Balance at end of period ( 162 ) ( 25 ) ( 162 ) ( 25 ) Total Equity $ 47 $ 62 $ 47 $ 62 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 8 Condensed Consolidated Statements of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2022 2021 Cash and Cash Equivalents at Beginning of Period $ 262 $ 597 Cash Flows from Operating Activities: Net Income 63 122 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization expense 25 27 Deferred income tax (benefit) provision ( 12 ) 2 Stock-based compensation expense 17 19 Goodwill and intangibles impairment 14 — Restructuring charges 18 2 Payments for restructuring charges ( 2 ) ( 1 ) Loss on extinguishment of debt — 31 Other ( 1 ) 5 Change in working capital: Receivables 3 — Prepaid expenses and other current assets ( 68 ) ( 49 ) Accounts payable 23 20 Deferred revenue ( 42 ) ( 41 ) Accrued liabilities 29 6 Accrued interest payable — ( 9 ) Current income taxes 15 7 Net Cash Provided from Operating Activities 80 142 Cash Flows from Investing Activities: Purchases of property and equipment ( 30 ) ( 23 ) Other investing activities 5 — Net Cash Used for Investing Activities ( 25 ) ( 23 ) Cash Flows from Financing Activities: Borrowings of debt, net of discount — 638 Payments of debt and finance lease obligations ( 13 ) ( 990 ) Debt issuance cost paid — ( 8 ) Call premium paid on retired debt — ( 21 ) Repurchase of common stock ( 59 ) ( 25 ) Other financing activities ( 2 ) ( 2 ) Net Cash Used for Financing Activities ( 74 ) ( 407 ) Cash Decrease During the Period ( 19 ) ( 289 ) Cash and Cash Equivalents at End of Period $ 244 $ 309 See accompanying Notes to the unaudited Condensed Consolidated Financial Statements. ‎ 9 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 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 September 30, 2022, we had 2.2 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 financial statements and the notes thereto included in our 2021 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. Macroeconomic Conditions Changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability, may reduce demand for our services, increase our costs and adversely impact our business. 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 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.  Our contractors continued to be impacted by inflation, including higher labor, fuel and parts and equipment costs. We continue to take actions to mitigate these impacts, including increasing the share of parts and equipment our contractors source through us, increasing the percent of service requests completed by lower-cost preferred contractors and accelerating contractor recruitment efforts.  Industry-wide parts availability challenges continued to drive elevated appliance replacement levels due to lack of parts availability, further contributing to increased costs and adversely impacting the customer experience, which was reflected in our customer retention rate.  Due to labor availability challenges, we continued to experience workforce retention issues, including difficulties in hiring and retaining employees in customer service operations and throughout our business, and we believe our contractors are experiencing similar workforce challenges. The COVID-19 Pandemic The implications of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. 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. Accordingly, the COVID-19 situation remains very fluid, and we continue to adjust our response in real time. It remains difficult to predict the overall continuing impact the COVID-19 pandemic will have on our business. f ‎ 10 Note 2. Significant Accounting Policies Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2021 Form 10-K. There have been no material changes to the significant accounting policies for the nine months ended September 30, 2022. 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) 2022 2021 2022 2021 Renewals $ 356 $ 328 $ 949 $ 867 Real estate (1) 51 73 153 207 Direct-to-consumer (1) 64 59 176 157 Other 13 11 44 31 Total $ 484 $ 471 $ 1,322 $ 1,263 _____________________________ (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 our ProConnect on-demand home services business and Streem, as well as administrative fees and ancillary services attributable to our home service plan agreements. 11 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 $ 17 million and $ 16 million as of September 30, 2022 and December 31, 2021, respectively. Amortization of these deferred acquisition costs was $ 6 million and $ 5 million for the three months ended September 30, 2022 and 2021, respectively, and $ 15 million for each of the nine-month periods ended September 30, 2022 and 2021. There were no impairment losses in relation to these capitalized costs. Contract balances Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers, including contracts resulting from customer renewals, are generally for a period of one year . We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivable are recorded within Receivables, less allowances, in the accompanying condensed consolidated statements of financial position. We invoice our monthly-pay customers on a straight-line basis over the contract term. As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed. As of September 30, 2022, a contract asset of $ 65 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 $ 113 million and $ 155 million as of September 30, 2022 and December 31, 2021, respectively. Changes in deferred revenue for the nine months ended September 30, 2022 were as follows: (In millions) Deferred Revenue Balance as of December 31, 2021 $ 155 Deferral of revenue 209 Recognition of deferred revenue ( 251 ) Balance as of September 30, 2022 $ 113 There was approximately $ 33 million and $ 155 million of revenue recognized in the three and nine months ended September 30, 2022, respectively, that was included in the deferred revenue balance as of December 31, 2021. 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. 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. 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. The balance of goodwill was $ 503 million as of September 30, 2022 and $ 512 million as of December 31, 2021. There were no goodwill or trade name impairment charges recorded in the three or nine months ended September 30, 2021, and there were no accumulated impairment losses recorded as of December 31, 2021. 12 The table below summarizes the other intangible asset balances: As of September 30, 2022 As of December 31, 2021 (In millions) Gross Accumulated ‎ Amortization Net Gross Accumulated ‎ Amortization Net Trade names (1) $ 141 $ — $ 141 $ 141 $ — $ 141 Customer relationships 173 ( 172 ) — 173 ( 172 ) — Developed technology (2) 19 ( 12 ) 6 25 ( 12 ) 13 Other (3) 32 ( 31 ) 2 37 ( 32 ) 5 Total $ 364 $ ( 216 ) $ 149 $ 375 $ ( 216 ) $ 159 _____________________________ (1) Not subject to amortization. (2) Includes a net $ 3 million impairment relating to the Streem reporting unit, which comprises $ 6 million of gross cost and $ 4 million of accumulated amortization. (3) Includes a net $ 2 million impairment relating to the Streem reporting unit, which comprises $ 4 million of gross cost and $ 2 million of accumulated amortization. Amortization expense was $ 2 million for each of the three months ended September 30, 2022 and 2021 and $ 6 million and $ 8 million for the nine months ended September 30, 2022 and 2021, respectively. The following table outlines expected amortization expense for existing intangible assets for the remainder of 2022 and the next five years : (In millions) 2022 (remainder) $ 1 2023 4 2024 2 2025 — 2026 — 2027 — Total $ 8 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 less than one year to 12 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, 2022 2021 Weighted-average remaining lease term (years) 8 9 Weighted-average discount rate 5.6 % 5.6 % We recognized operating lease expense of $ 1 million for each of the three-month periods ended September 30, 2022 and 2021 and $ 3 million for each of the nine-month periods ended September 30, 2022 and 2021 . 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) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities $ 4 $ 4 Leased assets obtained in exchange for new lease liabilities — 6 13 Supplemental balance sheet information related to operating leases is as follows: As of September 30, December 31, (In millions) 2022 2021 Other accrued liabilities $ 4 $ 4 Operating lease liabilities 16 19 Total operating lease liabilities $ 20 $ 23 The following table presents maturities of our operating lease liabilities as of September 30, 2022. (In millions) 2022 (remainder) $ 1 2023 (1) 4 2024 (1) 2 2025 (1) 1 2026 (1) 2 2027 2 Thereafter 10 Total lease payments 22 Less imputed interest ( 6 ) Total $ 16 _____________________________ (1) Each of the years ending December 31, 2023 through 2026 presented net of approximately $ 1 million of projected annual sublease income. Sublease of Company Headquarters On August 10, 2022, we subleased our corporate headquarters facility in Memphis, Tennessee. As a result of us exiting the facility on June 27, 2022, we incurred a non-cash impairment charge of $ 11 million for the nine months ended September 30, 2022. There were no such charges for the three months ended September 30, 2022. 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 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 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. We are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the nine months ended September 30 , 2022 and 2021 was generated in the United States. Note 7. Restructuring Charges We incurred restructuring charges of $ 5 million ($ 4 million, net of tax) and less than $ 1 million (less than $ 1 million, net of tax) for the three months ended September 30, 2022 and 2021, respectively, and $ 18 million ($ 13 million, net of tax) and $ 2 million ($ 1 million, net of tax) 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. 14 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. The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying consolidated statements of operations and comprehensive income. As of December 31, 2021, there were less than $ 1 million of restructuring charges accrued, which were paid or otherwise settled during the nine months ended September 30, 2022. As of September 30, 2022, there were $ 2 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position. Note 8. Commitments and Contingencies Accruals for home service plan claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home service plan claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these judgmental accruals. We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. 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) for each of the three-month periods ended September 30, 2022 and 2021 and $ 17 million ($ 15 million, net of tax) and $ 19 million ($ 14 million, net of tax) for the nine months ended September 30, 2022 and 2021, 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, 2022 is presented below: Number of Weighted Avg. Weighted Avg. Weighted Avg. Awards Exercise Grant Date Vesting Granted Price Fair Value Period Stock options 568,623 28.64 14.54 4.00 Performance options (1) 272,503 24.74 11.50 4.00 Restricted stock units 1,189,141 27.96 3.00 Performance shares (2) 285,801 28.03 3.00 _____________________________ (1) The number of performance options granted during the nine months ended September 30, 2022 represents the target value of the awards. The performance options contain a market condition that is based on our share price target, and the ultimate number of performance options to be earned depends on the achievement of this market condition. (2) The number of performance shares granted during the nine months ended September 30, 2022 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. 15 As of September 30, 2022 , there was $ 43 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 2.29 years. Note 10. Long-Term Debt Long-term debt is summarized in the following table: As of September 30, December 31, (In millions) 2022 2021 Term Loan A maturing in 2026 (1) $ 242 $ 252 Term Loan B maturing in 2028 (2) 371 373 Revolving Credit Facility maturing in 2026 (3) — — Less current portion ( 17 ) ( 17 ) Total long-term debt $ 596 $ 608 _______________________________ (1) As of September 30, 2022 , and December 31, 2021, each presented net of $ 2 million in unamortized debt issuance costs. (2) As of September 30, 2022 , and December 31, 2021, each presented net of $ 3 million in unamortized debt issuance costs and $ 2 million in unamortized original issue discount. (3) As of September 30, 2022, there were $ 2 million of letters of credit outstanding under our $ 250 million Revolving Credit Facility. The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate. 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; therefore, from time to time, our ability to draw on the Revolving Credit Facility may be limited. As of September 30, 2022, 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. Scheduled Long-term Debt Payments As of September 30, 2022, future scheduled long - term debt payments are $ 4 million for the remainder of 2022, $ 17 million for each of the years ending December 31, 2023 through 2025, $ 205 million for the year ending December 31, 2026 and $ 4 million for the year ending December 31, 2027. 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) 2022 2021 Cash paid for (received from): Interest expense $ 21 $ 39 Income tax payments, net of refunds 20 29 Interest income ( 1 ) ( 1 ) 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. 16 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, 2021 $ ( 18 ) $ ( 18 ) Other comprehensive income before reclassifications: Pre-tax amount 29 28 Tax provision 6 6 After-tax amount 22 22 Amounts reclassified from accumulated other comprehensive income (1) 4 4 Net current period other comprehensive income 27 26 Balance as of September 30, 2022 $ 8 $ 8 Balance as of December 31, 2020 $ ( 33 ) $ ( 33 ) Other comprehensive income before reclassifications: Pre-tax amount 5 5 Tax provision 1 1 After-tax amount 4 4 Amounts reclassified from accumulated other comprehensive income (1) 6 6 Net current period other comprehensive income 10 10 Balance as of September 30, 2021 $ ( 24 ) $ ( 24 ) ___________________________________ (1) Amounts are net of tax. See reclassifications out of AOCI below for further details. Reclassifications out of AOCI included the following components. Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) Nine Months Ended September 30, Condensed Consolidated Statements of (In millions) 2022 2021 Operations and Comprehensive Income Location Loss on interest rate swap contract $ ( 5 ) $ ( 8 ) Interest expense Impact of income taxes 1 2 Provision for income taxes Total reclassifications related to derivatives $ ( 4 ) $ ( 6 ) Total reclassifications for the period $ ( 4 ) $ ( 6 ) 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 gain in AOCI expected to be recognized in earnings is $ 3 million, net of tax, as of September 30, 2022 . 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. 17 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 $ 613 million and $ 625 million, and the estimated fair value was $ 602 million and $ 630 million as of September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021. We value our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contract. We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the nine months ended September 30, 2022 . 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, 2022 and 2021. The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis 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, 2022: Financial Assets: Interest rate swap contract Prepaid expenses and other assets $ 4 $ — $ 4 $ — Other assets 6 — 6 — Total financial assets $ 10 $ — $ 10 $ — As of December 31, 2021: Financial Liabilities: Interest rate swap contract Other accrued liabilities $ 9 $ — $ 9 $ — Other long-term obligations 15 — 15 — Total financial liabilities $ 24 $ — $ 24 $ — 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. 18 Purchases of outstanding shares are as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2022 2021 2022 2021 Number of shares purchased — 0.5 1.9 0.5 Average price paid per share (1) $ — $ 46.11 $ 30.51 $ 46.11 Cost of shares purchased $ — $ 25 $ 59 $ 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 potentially dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs , performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method. Basic and diluted earnings per share are calculated as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2022 2021 2022 2021 Net Income $ 28 $ 76 $ 63 $ 122 Weighted-average common shares outstanding 81.5 85.5 82.0 85.5 Effect of dilutive securities: RSUs (1) 0.2 0.2 0.1 0.2 Stock options (2) — 0.2 — 0.2 Weighted-average common shares outstanding - assuming dilution 81.6 85.9 82.1 85.9 Basic earnings per share $ 0.34 $ 0.89 $ 0.77 $ 1.42 Diluted earnings per share $ 0.34 $ 0.89 $ 0.77 $ 1.42 ___________________________________ (1) RSUs of 0.8 million and 0.3 million shares for the three months ended September 30, 2022 and 2021, respectively, and 1.0 million and 0.3 million shares for the nine months ended September 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. (2) Options to purchase 1.6 million and 0.7 million shares for the three months ended September 30, 2022 and 2021 , respectively, and 1.4 million and 0.6 million shares for the nine months ended September 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. 19 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 risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K. SUMMARY OF MATERIAL RISKS 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 2021 Annual Report on Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:  changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability;  increases in parts, appliance and home system prices, and other operating costs;  risks related to the COVID-19 pandemic;  changes in the source and intensity of competition in our market;  our ability to successfully implement our business strategies;  our ability to attract, retain and maintain positive relations with third-party contractors and vendors;  physical effects of climate change, adverse weather conditions and Acts of God, along with the increased focus on sustainability;  failure of our marketing efforts to be successful or cost-effective;  our dependence on our real estate customer acquisition channel;  our ability to attract and retain qualified key employees and labor availability in our customer service operations;  our dependence on third-party vendors, including business process outsourcers, and third-party component suppliers;  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;  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;  third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites; 20  inappropriate use of social media by us or other parties to harm our reputation;  special risks applicable to operations outside the United States by us or our business process outsource providers;  tax liabilities and potential indemnification of Terminix for material taxes if the distribution fails to qualify as tax-free;  the effects of our significant indebtedness and the limitations contained in the agreements governing such indebtedness;  increases in interest rates increasing the cost of servicing our indebtedness;  increased borrowing costs due to lowering or withdrawal of the credit ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;  our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations; and  other factors described in this report and from time to time in documents that we file with the SEC. Available Information Our website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our Annual Report on 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 on our website to be part of this Quarterly Report on Form 10-Q. 21