Frontdoor, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto included in our 2021 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K. Overview 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. 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 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. 22 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. Seasonality 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 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. In 2021, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 4 percent, 31 percent, 60 percent and 5 percent of our net income, and approximately 12 percent, 38 percent, 41 percent and 9 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively. Effect of Weather Conditions 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 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. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency. While weather variations as described above may affect our business, major weather events and other similar Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service. Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to the home service plans that we offer. Tariff and Import/Export Regulations Changes in U.S. tariff and import/export regulations may impact the costs of parts, appliances and home systems. Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs. For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems. 23 Competition We compete in the U.S. home service plan category and the broader U.S. home services industry. The home service plan category is highly competitive. The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals. Acquisition Activity We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions. Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so. We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry. We have also used acquisitions to enhance our technological capabilities and geographic presence. In 2019, we acquired Streem to support the service experience for our customers, reduce costs and create potentially new revenue opportunities across a variety of channels. Non-GAAP Financial Measures To supplement our results presented in accordance with U.S. GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items. We present within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measures of Adjusted EBITDA and Free Cash Flow. See “Results of Operations — Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “Liquidity and Capital Resources — Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow. Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period. We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance. While we believe these non-GAAP financial measures are useful in evaluating our business, they should be considered as supplemental in nature and are not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies, limiting their usefulness as comparative measures. Key Business Metrics We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include:  revenue ,  operating expenses,  net income,  earnings per share,  Adjusted EBITDA,  Adjusted EBITDA margin,  net cash provided from operating activities,  Free Cash Flow,  growth in number of home service plans, and  customer retention rate. Revenue. The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Home service plan contracts are typically one year in duration. 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. Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the United States. 24 Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as: salaries and wages, employee benefits and healthcare; contractor costs; parts, appliances and home systems costs; tariffs; insurance premiums; and various regulatory compliance costs. Net Income and Earnings Per Share . The presentation of net income and basic and diluted earnings per share provides measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. 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 (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and RSAs are reflected in diluted earnings per share by applying the treasury stock method. Adjusted EBITDA and Adjusted EBITDA margin. We evaluate performance based primarily on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; goodwill and intangibles impairment; restructuring charges; provision for income taxes; non-cash stock-based compensation expense; interest expense; loss on extinguishment of debt; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans. Net Cash Provided from Operating Activities and Free Cash Flow. We focus on measures designed to monitor cash flow, including net cash provided from operating activities and Free Cash Flow, which is a financial measure not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions. Growth in Number of Home Service Plans and Customer Retention Rate. We report our growth in number of home service plans and customer retention rate in order to track the performance of our business. Home service plans represent our recurring customer base, which includes customers with active contracts for recurring services. Our customer retention rate is calculated as the ratio of ending home service plans to the sum of beginning home service plans, new home service plan sales and acquired accounts for the applicable period. These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies. Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. 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. 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. ‎ 25 Results of Operations Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Three Months Ended Increase September 30, (Decrease) % of Revenue (In millions) 2022 2021 2022 vs. 2021 2022 2021 Revenue $ 484 $ 471 3 % 100 % 100 % Cost of services rendered 274 217 26 57 46 Gross Profit 210 254 (17) 43 54 Selling and administrative expenses 137 138 (1) 28 29 Depreciation and amortization expense 8 8 — 2 2 Goodwill and intangibles impairment 14 — * 3 — Restructuring charges 5 — * 1 — Interest expense 8 7 20 2 1 Interest and net investment income (1) — * — — Income before Income Taxes 39 101 (61) 8 21 Provision for income taxes 11 25 (55) 2 5 Net Income $ 28 $ 76 (63) % 6 % 16 % _______________________________ * not meaningful Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021 Nine Months Ended Increase September 30, (Decrease) % of Revenue (In millions) 2022 2021 2022 vs. 2021 2022 2021 Revenue $ 1,322 $ 1,263 5 % 100 % 100 % Cost of services rendered 757 619 22 57 49 Gross Profit 565 644 (12) 43 51 Selling and administrative expenses 403 392 3 30 31 Depreciation and amortization expense 25 27 (7) 2 2 Goodwill and intangibles impairment 14 — * 1 — Restructuring charges 18 2 * 1 — Interest expense 22 32 (31) 2 3 Interest and net investment income (1) (1) * — — Loss on extinguishment of debt — 31 * — 2 Income before Income Taxes 85 161 (47) 6 13 Provision for income taxes 23 39 (42) 2 3 Net Income $ 63 $ 122 (48) % 5 % 10 % _______________________________ * not meaningful ‎ 26 Revenue 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 September 30, 2022 Compared to Three Months Ended September 30, 2021 Three Months Ended September 30, (In millions) 2022 2021 Increase (Decrease) Renewals $ 356 $ 328 $ 27 8 % Real estate (1) 51 73 (22) (30) Direct-to-consumer (1) 64 59 5 8 Other 13 11 2 22 Total revenue $ 484 $ 471 $ 13 3 % ________________________________ (1) First-year revenue only. 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, 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) 2022 2021 Increase (Decrease) Renewals $ 949 $ 867 $ 82 9 % Real estate (1) 153 207 (54) (26) Direct-to-consumer (1) 176 157 19 12 Other 44 31 13 41 Total revenue $ 1,322 $ 1,263 $ 60 5 % ________________________________ (1) First-year revenue only. 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, 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 . Number of home service plans, growth in number of home service plans and customer retention rate are presented below. As of September 30, (In millions) 2022 2021 Number of home service plans 2.16 2.23 (Reduction) growth in number of home service plans (3) % — % Customer retention rate 75.3 % 74.4 % 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. 27 Cost of Services Rendered 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 Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Contract claims cost $ 269 $ 212 $ 743 $ 606 Bad debt expense 4 5 14 12 Total $ 274 $ 217 $ 757 $ 619 Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 (In millions) Three Months Ended September 30, 2021 $ 217 Impact of change in revenue (1) Contract claims costs 58 Three Months Ended September 30, 2022 $ 274 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. Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021 (In millions) Nine Months Ended September 30, 2021 $ 619 Impact of change in revenue 2 Contract claims costs 135 Other 1 Nine Months Ended September 30, 2022 $ 757 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. 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 $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 Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Sales and marketing costs $ 70 $ 72 $ 198 $ 193 Customer service costs 28 30 86 88 General and administrative costs 38 36 118 111 Total $ 137 $ 138 $ 403 $ 392 Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 (In millions) Three Months Ended September 30, 2021 $ 138 Sales and marketing costs (2) Customer service costs (2) General and administrative costs 3 Three Months Ended September 30, 2022 $ 137 28 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) Nine Months Ended September 30, 2021 $ 392 Sales and marketing costs 6 Stock-based compensation expense (2) General and administrative costs 8 Other (1) Nine Months Ended September 30, 2022 $ 403 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 $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 $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 $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. 29 Loss on Extinguishment of Debt 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 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 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 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 $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 September 30, 2022 Compared to Three Months Ended September 30, 2021 (In millions) Three Months Ended September 30, 2021 $ 122 Impact of change in revenue 14 Contract claims costs (58) Sales and marketing costs 2 Customer service costs 2 General and administrative costs (3) Three Months Ended September 30, 2022 $ 79 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. 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) Nine Months Ended September 30, 2021 $ 272 Impact of change in revenue 58 Contract claims costs (135) Sales and marketing costs (6) General and administrative costs (8) Nine Months Ended September 30, 2022 $ 181 30 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. 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. 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. A reconciliation of Net Income to Adjusted EBITDA is presented below. Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2022 2021 2022 2021 Net Income $ 28 $ 76 $ 63 $ 122 Depreciation and amortization expense 8 8 25 27 Goodwill and intangibles impairment (1) 14 — 14 — Restructuring charges (1) 5 — 18 2 Provision for income taxes 11 25 23 39 Non-cash stock-based compensation expense (2) 5 5 17 19 Interest expense 8 7 22 32 Loss on extinguishment of debt (1) — — — 31 Adjusted EBITDA $ 79 $ 122 $ 181 $ 272 _________________________________ (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. Liquidity and Capital Resources Liquidity A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. 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 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 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. 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. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles. 31 We may, from time to time, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, gross leverage, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, and the price of such repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash provided from operating activities. 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. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of the company’s stock, general market and economic conditions, the company’s liquidity requirements, applicable legal requirements and other business considerations. The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion. Limitations on Distributions and Dividends by Subsidiaries We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions. Our subsidiaries are permitted under the terms of the Credit Agreement and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to regulatory requirements. The payments of ordinary and extraordinary dividends by certain of our subsidiaries (through which we conduct our business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. We expect that such limitations will be in effect for the foreseeable future. In Texas, we are relieved of the obligation to post 75 percent of our otherwise required reserves because we operate a captive insurer approved by Texas regulators in order to satisfy such obligations. None of our subsidiaries are obligated to make funds available to us through the payment of dividends. Cash Flows Cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this report, are summarized in the following table. Nine Months Ended September 30, (In millions) 2022 2021 Net cash provided from (used for): Operating activities $ 80 $ 142 Investing activities (25) (23) Financing activities (74) (407) Cash (decrease) increase during the period $ (19) $ (289) Operating Activities 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. 32 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 $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. We have no additional material capital commitments at this time. Financing Activities 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 The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable U.S. GAAP measure, to Free Cash Flow using data derived from our audited consolidated financial statements. Nine Months Ended (In millions) September 30, 2022 2021 Net cash provided from operating activities $ 80 $ 142 Property additions (30) (23) Free Cash Flow $ 50 $ 119 Contractual Obligations Our 2021 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2021. We continue to make the contractually required payments, and, therefore, the 2022 obligations and commitments described in our 2021 Form 10-K have been reduced by the required payments. Financial Position 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. 33  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. See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this report for further information. 34