What changed in this filing

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Item 1. Financial Statements

2023-05-04 compared with 2022-11-03 · 187 added, 277 removed, 240 unchanged (66% of the section changed)

FINANCIAL STATEMENTS

Frontdoor, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Cost of services rendered

1 unchanged sentence

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

1 unchanged sentence

Interest and net investment income

Loss on extinguishment of debt

Income before Income Taxes

Provision for income taxes

Other Comprehensive Income, Net of Income Taxes:

Net unrealized gain on derivative instruments

Total Comprehensive Income

Other Comprehensive (Loss) Income, Net of Income Taxes:

Unrealized (loss) gain on derivative instruments, net of income taxes

Total Other Comprehensive (Loss) Income, Net of Income Taxes

Comprehensive Income

Earnings per Share:

Weighted-average Common Shares Outstanding:

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

Frontdoor, Inc.

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

September 30,

Current Assets:

1 unchanged sentence

Receivables, less allowance of $ 3 and $ 4 , respectively

Contract asset

Prepaid expenses and other assets

Prepaid expenses and other current assets

Total Current Assets

15 unchanged sentences

Other Long-Term Liabilities:

Deferred taxes

Deferred tax liabilities, net

Operating lease liabilities

Other long-term obligations

Other long-term liabilities

Total Other Long-Term Liabilities

3 unchanged sentences

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

86,294,094 shares issued and 81,723,843 shares outstanding as of March 31, 2023 and 86,079,773 shares issued and 81,517,243 shares outstanding as of December 31, 2022

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income (loss)

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

Accumulated other comprehensive income

Less treasury stock, at cost;

4,570,251 shares as of March 31, 2023 and 4,562,530 shares as of December 31, 2022

Total Shareholders'

Total Liabilities and Shareholders'

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

Frontdoor, Inc.

Condensed Consolidated Statement of Changes in Equity (Unaudited)

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Common Stock:

Balance at beginning of period

2 unchanged sentences

Balance at beginning of period

Exercise of stock options

Issuance of common stock

Stock-based compensation expense

Taxes paid related to net share settlement of equity awards

Stock-based employee compensation

Issuance of common stock upon ESPP purchase

Balance at end of period

Retained Earnings (Accumulated Deficit)

Retained Earnings:

Balance at beginning of period

2 unchanged sentences

Balance at beginning of period

Other comprehensive income, net of tax

Other comprehensive (loss) income, net of tax

Balance at end of period

Common Stock Held in Treasury

Treasury Stock:

Balance at beginning of period

1 unchanged sentence

Balance at end of period

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

Total Shareholders'

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

Frontdoor, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Nine Months Ended

September 30,

Three Months Ended

Cash and Cash Equivalents at Beginning of Period

2 unchanged sentences

Depreciation and amortization expense

Deferred income tax (benefit) provision

Deferred income tax benefit

Stock-based compensation expense

Goodwill and intangibles impairment

Restructuring charges

Payments for restructuring charges

Loss on extinguishment of debt

Change in working capital:

Changes in working capital:

Prepaid expenses and other current assets

2 unchanged sentences

Accrued liabilities

Accrued interest payable

Current income taxes

2 unchanged sentences

Purchases of property and equipment

Other investing activities

Net Cash Used for Investing Activities

Cash Flows from Financing Activities:

Borrowings of debt, net of discount

Payments of debt and finance lease obligations

Debt issuance cost paid

Call premium paid on retired debt

Repayments of debt

Repurchase of common stock

1 unchanged sentence

Net Cash Used for Financing Activities

Cash Decrease During the Period

Cash Increase (Decrease) During the Period

Cash and Cash Equivalents at End of Period

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

Frontdoor, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Notes to the Condensed Consolidated Financial Statements

Description of Business

Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates primarily under the American Home Shield brand.

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.

Our operations also include on-demand home services and Streem, a technology platform that uses augmented reality, computer vision and machine learning to help home service professionals more quickly and accurately diagnose breakdowns and complete repairs.

As of March 31, 2023, we had 2.1 million active home service plans, which were offered nationally.

Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2022 Form 10-K.

There have been no material changes to the significant accounting policies for the nine months ended September 30, 2022.

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.

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.

There have been no material changes to our significant accounting policies during the three months ended March 31, 2023.

Basis of Presentation

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 our financial position, results of operations and cash flows for the interim periods presented.

The results of operations for any interim period are not necessarily indicative of the results that might be achieved for the respective full year.

Newly Adopted Accounting Standards

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

This standard is currently effective and upon adoption may be applied prospectively to contract modifications.

In March 2021, the FASB issued ASU 2020-06, which extended the sunset date for the required transition to December 31, 2024.

In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement.

We adopted ASU 2020-04 in connection with this transition of the benchmark rate under our Credit Agreement.

This transition did not have a material impact on our consolidated financial statements and related disclosures.

The majority of our revenue is generated from annual home service plan contracts entered into with our customers.

We derive substantially all of our revenue from customers in the United States.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In millions)

3 unchanged sentences

(1) First-year revenue only.

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 home service plans are sold through annual contracts in connection with a real estate sale, and payments are typically paid in full at closing.

Our home service plan contracts 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 fair value of the services 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 and make a corresponding adjustment each period to the timing of our related revenue recognition.

This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract Assets and Liabilities” below.

We regularly review our estimates of claims costs and adjust these estimates when appropriate.

Revenue from customer renewals of home service plan contracts, which were previously initiated in the real estate or direct-to-consumer channel are classified as renewals above.

Renewals relate to consecutive contract periods and take place at the end of the first year of a real estate or direct-to-consumer home service plan contract.

Customer payments for renewals are typically received either at the commencement of the renewal period or in installments over the new contract period.

Real estate home service plans are sold through annual contracts which occur in connection with a real estate sale.

These plans are typically paid in full at closing on the real estate transaction.

First-year revenue from the real estate channel is classified as real estate above.

At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described 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.

Direct-to-consumer home service plans are sold through annual contracts which occur in response to our marketing efforts.

Customer payments for direct-to-consumer sales are typically received 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 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.

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.

At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described above.

Other revenue primarily includes revenue generated by on-demand home services and Streem, as well as administrative fees and ancillary services attributable to our home service plan contracts.

Deferred Customer Acquisition Costs

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the related 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 March 31, 2023 and December 31, 2022, respectively.

Amortization of deferred customer acquisition costs was $ 4 million for each of the three months ended March 31, 2023 and 2022.

There were no impairment losses related to these capitalized costs during the three months ended March 31, 2023 and 2022.

Receivables, Less Allowance

We record a receivable due from customers once we have an unconditional right to invoice and receive payment in the future related to the services provided and anticipate the collection of amounts due to us.

Contracts for home service plans may be invoiced upfront or monthly in straight-line installment payments over the contract period.

The payment terms are determined prior to the execution of the contract.

Contract Assets and Liabilities

Contract assets arise when we recognize revenue for our home service plan contracts prior to a customer being invoiced.

These timing differences are created when the recognition of revenue in proportion to the costs expected to be incurred in performing the services under the contract are accelerated as compared to the recognition of revenue on a straight-line basis over the contract period.

Our contract liabilities consist of deferred revenue which 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:

A summary of the changes in deferred revenue for the three months ended March 31, 2023 is as follows:

(In millions)

Balance as of December 31, 2021

Balance at beginning of period

Deferral of revenue

Recognition of deferred revenue

Balance as of September 30, 2022

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.

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.

The table below summarizes the other intangible asset balances:

As of September 30, 2022

Balance at end of period

There was approximately $ 47 million of revenue recognized during the three months ended March 31, 2023 that was included in the deferred revenue balance as of December 31, 2022.

Intangible Assets

The following table provides a summary of the components of our intangible assets:

As of March 31, 2023

As of December 31, 2022

(In millions)

‎ Amortization

Trade names (1)

3 unchanged sentences

(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)

Amortization expense was $ 1 million and $ 2 million for the three months ended March 31, 2023 and 2022, respectively.

There were no impairment charges in these periods.

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:

September 30,

Our leases have remaining lease terms ranging from less than one year to 12 years, some of which include options to extend the leases for up to five years .

The weighted-average remaining lease term and weighted-average discount rate related to our operating leases are as follows:

Weighted-average remaining lease term (years)

Weighted-average discount rate

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 .

We recognized operating lease expense of $ 1 million for each of the three months ended March 31, 2023 and 2022.

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)

Cash paid for amounts included in the measurement of lease liabilities

Leased assets obtained in exchange for new lease liabilities

Supplemental balance sheet information related to operating leases is as follows:

September 30,

Supplemental balance sheet information related to our operating lease liabilities is as follows:

(In millions)

2 unchanged sentences

Total operating lease liabilities

The following table presents maturities of our operating lease liabilities as of September 30, 2022.

Supplemental cash flow information related to our operating leases is as follows:

Three Months Ended

(In millions)

Cash paid on operating lease liabilities

The following table presents the maturities of our operating lease liabilities as of March 31, 2023:

(In millions)

2023 (remainder) (1)

Total lease payments

Total future minimum lease payments

Less imputed interest

_____________________________

(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.

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.

(1) Amount is presented net of future sublease income totaling $ 4 million, which relates to the remainder of the year ending December 31, 2023 and the years ending December 31, 2024 through December 31, 2026.

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.

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.

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.

Substantially all of our income before income taxes for the three months ended March 31, 2023 and 2022 was generated in the United States.

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.

As a result, our estimated tax rate is adjusted each quarter.

The effective tax rate on our income before income taxes was 25.2 percent and 51.1 percent for the three months ended March 31, 2023 and 2022, respectively.

The decrease in our effective tax rate was primarily due to the impacts of share-based awards and state income taxes on limited pre-tax income in the prior year.

Commitments and Contingencies

5 unchanged sentences

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 believe that utilizing actuarial methods in our estimation process 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.

6 unchanged sentences

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:

Weighted Avg.

We recognized stock-based compensation expense of $ 5 million ($ 4 million, net of tax) and $ 6 million ($ 6 million, net of tax) for the three months ended March 31, 2023 and 2022, respectively.

These costs are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

A summary of awards granted under the Omnibus Plan during the three months ended March 31, 2023 is as follows:

Stock options

1 unchanged sentence

Restricted stock units

Performance shares (2)

_____________________________

(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.

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”).

(1) The information related to performance options above assumes 100 % of the performance target is met.

The performance options contain a market condition that is based on a per share price target for our common stock, and the ultimate number of performance options that may be earned depends on the achievement of this market condition.

As of March 31, 2023 , there was $ 60 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, performance 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 3.1 years.

Long-Term Debt

Long-term debt is summarized in the following table:

September 30,

A summary of our debt is as follows:

(In millions)

5 unchanged sentences

_______________________________

(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.

(1) Term Loan A is presented net of unamortized debt issuance costs of $ 1 million and $ 2 million as of March 31, 2023 and December 31, 2022, respectively.

(2) Term Loan B is presented net of unamortized debt issuance costs of $ 3 million and unamortized discount of $ 1 million as of March 31, 2023 and December 31, 2022.

In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement.

This change was effective in March 2023 for Term Loan A and the Revolving Credit Facility and will be effective in June 2023 for Term Loan B.

As of March 31, 2022, we had $ 2 million of letters of credit outstanding under our $ 250 million Revolving Credit Facility, and the available borrowing capacity under Revolving Credit Facility was $ 248 million.

As of March 31, 2023, we were in compliance with the covenants under the Credit Agreement.

Scheduled Debt Payments

The following table presents future scheduled debt payments as of March 31, 2023:

(In millions)

2023 (remainder)

Total future scheduled debt payments

Less unamortized debt issuance costs

Less unamortized discount

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,

Supplemental information relating to our accompanying condensed consolidated statements of cash flows is as follows:

Three Months Ended

(In millions)

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Interest expense

Income tax payments, net of refunds

Interest income

Income tax payments, net of refunds

Comprehensive Income (Loss)

Comprehensive income (loss), which includes net income (loss) and unrealized gain (loss) on derivative instruments, is disclosed in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity.

The following tables summarize the activity in AOCI, net of the related tax effects.

(In millions)

on Derivatives

Balance as of December 31, 2021

Other comprehensive income before reclassifications:

Pre-tax amount

Tax provision

After-tax amount

Amounts reclassified from accumulated other comprehensive income (1)

Net current period other comprehensive income

Balance as of September 30, 2022

Balance as of December 31, 2020

Other comprehensive income before reclassifications:

Comprehensive income (loss) consists of net income (loss) and the unrealized gains (losses) on our derivative instrument.

We disclose comprehensive income (loss) in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity.

A summary of the changes in AOCI is as follows:

Balance at beginning of period

Other comprehensive loss before reclassifications:

Pre-tax amount

Tax provision

Impact of income taxes

After-tax amount

Amounts reclassified from accumulated other comprehensive income (1)

Net current period other comprehensive income

Balance as of September 30, 2021

Amounts reclassified from AOCI (1)

Total other comprehensive loss

Balance at end of period

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(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

(1) Amounts are net of income taxes.

See the table below on reclassifications out of AOCI for additional information.

A summary of reclassifications out of AOCI is as follows:

Three Months Ended

(In millions)

Operations and Comprehensive Income Location

Loss on interest rate swap contract

Interest expense

Gain (loss) on interest rate swap contract (1)

Impact of income taxes (2)

Provision for income taxes

Total reclassifications related to derivatives

Total reclassifications for the period

Total reclassifications during the period

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(1) Included in interest expense in the accompanying condensed consolidated statements of income and comprehensive income.

(2) Included in provision for income taxes in the accompanying condensed consolidated statements of income and comprehensive income.

Derivative Financial Instruments

We currently use a derivative financial instrument to manage risks associated with changes in interest rates.

We currently use a derivative financial instrument to manage risks associated with changes in interest rates by hedging the interest payments on a portion of our variable rate debt through the use of an interest rate swap contract.

We do not hold or issue derivative financial instruments for trading or speculative purposes.

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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.

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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.

See Note 11 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 during the periods presented.

As the underlying forecasted transactions occur during the next 12 months, we estimate the unrealized hedging gain in AOCI expected to be recognized in earnings is $ 4 million, net of tax, as of March 31, 2023.

The amounts ultimately reclassified into earnings during the next 12 months will be determined based on the actual interest rates in effect at the time the positions are settled, and as a result, they could differ materially from our estimate noted above.

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:

The valuation techniques require inputs that we categorize into 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");

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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 period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these financial instruments.

As of March 31, 2023 and December 31, 2022, the carrying amounts of our total debt were $ 605 million and $ 609 million, respectively, and the estimated fair values were $ 602 million and $ 613 million, respectively.

The fair value of our debt was 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 and was based on information available to us as of the respective period end dates.

We determine the fair value of 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:

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 these 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 three months ended March 31, 2023 .

Transfers between hierarchy levels, if any, are recognized at the end of the reporting period.

There were no transfers between hierarchy levels during the three months ended March 31, 2023.

Our interest rate swap contract is currently our only financial instrument remeasured at fair value on a recurring basis.

A summary of the carrying value and fair value of this financial instrument are as follows:

Estimated Fair Value Measurements

(In millions)

Statement of Financial

‎ Position Location

‎ Unobservable

As of September 30, 2022:

Financial Assets:

Interest rate swap contract

Prepaid expenses and other assets

Total financial assets

As of March 31, 2023:

Prepaid expenses and other current assets

As of December 31, 2022:

Financial Liabilities:

Interest rate swap contract

Other accrued liabilities

Other long-term obligations

Total financial liabilities

Prepaid expenses and other current assets

Share Repurchase Program

On September 7, 2021, we announced a three-year repurchase authorization of up to $ 400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024.

Purchases of outstanding shares are as follows:

As of March 31, 2023, 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 accompanying condensed consolidated statements of financial position, and we had $ 238 million remaining available for future repurchases under the program.

A summary of repurchases of outstanding shares is as follows:

Three Months Ended

Nine Months Ended

September 30,

(In millions, except per share data)

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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:

The dilutive effect of stock options, performance options, RSUs , performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

A summary of the calculations of our basic and diluted earnings per share is as follows:

Three Months Ended

Nine Months Ended

September 30,

(In millions, except per share data)

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(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.

(1) RSUs of 510,116 shares and 429,064 shares for the three months ended March 31, 2023 and 2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

(2) Stock options to purchase 1,114,819 shares and 1,200,018 shares for the three months ended March 31, 2023 and 2022, respectively, and performance options to purchase 258,596 shares for the three months ended March 31, 2023 were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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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;

Risk Factors in our 2022 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, the persistence of the COVID-19 pandemic and instability in the banking system as a result of several recent regional bank failures, 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;

 the ability of our marketing efforts to be successful or cost-effective;

 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 dependence on our first-year real estate and direct-to-consumer acquisition channels and our renewals 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;

 cybersecurity breaches, disruptions or failures in our technology systems;

 our ability to protect the security of personal information about our customers;

 evolving corporate governance and disclosure regulations and expectations related to environmental, social and governance matters;

 risks related to the COVID-19 pandemic;

 compliance with, or violation of, laws and regulations, including consumer protection laws, or lawsuits or other claims by third parties, 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;

 physical effects of climate change, adverse weather conditions and Acts of God, along with the increased focus on sustainability;

 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;

 a requirement to recognize impairment charges;

 third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;

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 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;

 a return on investment in our common stock is dependent on appreciation in the price;

 inclusion in our certificate of incorporation includes a forum selection clause that could discourage an acquisition of our company or litigation against us and our directors and officers;

 the effects of our significant indebtedness, our ability to incur additional debt and the limitations contained in the agreements governing such indebtedness;

 increases in interest rates increasing the cost of servicing our indebtedness and counterparty credit risk due to instruments designed to minimize exposure to market risks;

 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;

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Available Information

Our website address is www.frontdoorhome.com.

Our website address is www.frontdoor.com.

We use our website as a channel of distribution for company information.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements