What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-03 · 124 added, 231 removed, 191 unchanged (65% of the section changed)

5 unchanged sentences

“Risk Factors” in our 2022 Form 10-K.

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.

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.

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.

Our operations also include on-demand home services 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.

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

For the three months ended March 31, 2023, we generated revenue, net income and Adjusted EBITDA of $367 million, $22 million and $54 million, respectively .

For the three months ended March 31, 2022, we generated revenue, net income and Adjusted EBITDA of $351 million, $2 million and $25 million, respectively .

For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations for the three months ended March 31, 2023 and 2022—Adjusted EBITDA.”

For the three months ended March 31, 2023 , our total operating revenue included 76 percent of revenue derived from existing customer renewals, while nine 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.

For the three months ended March 31, 2022 , our total operating revenue included 70 percent of revenue derived from existing customer renewals, while 13 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.

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.

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

Current 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, 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 impact on us of unfavorable economic conditions in any particular region of the United States.

During the first quarter of 2023, our financial condition and results of operations continued to be adversely impacted by the following:

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

 Consumer sentiment remains pressured as higher inflation eroded real personal income.

We believe this environment, combined with our higher prices for a home service plan, impacted our ability to add customers, especially in the direct-to-consumer channel.

 Our contractors continued to be impacted by inflation, including higher labor, fuel and parts and equipment costs, and labor availability challenges.

We continue to take actions to mitigate these impacts, including increasing the share of parts and equipment our contractors source through us at lower costs, increasing the percent of service requests completed by lower-cost preferred contractors and accelerating contractor recruitment efforts.

 Industry-wide parts and equipment availability is on track to return to pre-pandemic levels;

however, inflation levels remain high.

Our business is subject to seasonal fluctuations, which drive 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.

In 2022, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately two percent, 47 percent, 39 percent and 12 percent of our net income, and approximately 12 percent, 36 percent, 37 percent and 15 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.

Extreme temperatures, typically in the winter and summer months, can lead to an increase in service requests related to home systems, particularly HVAC systems, resulting in higher costs and lower profitability, while mild temperatures in the winter or summer months can lead to lower home systems claim frequency, resulting in lower costs and higher profitability.

For example, favorable weather trends in the first quarter of 2023 as compared to the first quarter of 2022 favorably impacted contract claims costs.

While weather variations as described above may affect our business, major weather events and other similar Acts of God, or natural disasters such as typhoons, hurricanes, tornadoes or earthquakes, 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.

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The home service plan category is highly competitive.

While we have a broad range of competitors in each locality and region, we are the only home service plan company providing home service plans nationwide.

The broader U.S.

home services industry is also highly competitive.

We compete against businesses providing on-demand home services directly and those offering leads to contractors seeking to provide on-demand home services.

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.

We believe our nationwide network of approximately 15,000 pre-qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.

Acquisition Activity

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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.

For example, in 2019, we acquired Streem to enable home service professionals to more efficiently interact with customers and complete repairs, and, in 2020, we acquired a business to expand on-demand home services via its intellectual capital and know-how, technology platform capabilities and geographic presence.

Non-GAAP Financial Measures

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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.

See “ — Results of Operations for the Three Months Ended March 31, 2023 and 2022—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.

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 customer retention rate.

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

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

Home service plan contracts are typically one year in duration.

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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 (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.

The dilutive effect, if any, of stock options, performance options (which are stock options that become exercisable 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), restricted stock units (“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 restricted stock awards (“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.

We evaluate our operating and financial performance primarily based on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S.

We define Adjusted EBITDA as net income before:

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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.

We focus on measures designed to monitor cash flow, including net cash provided from operating activities and Free Cash Flow.

Free Cash Flow is a financial measure that is 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.

We report on our growth (reduction) in number of home service plans and customer retention rate as measurements of our operating performance.

These measurements are presented on a rolling 12-month basis in order to avoid seasonal anomalies.

The number of home service plans is representative of our recurring home service plan customer base and is measured as the number of customers with active contracts as of the respective period-end date.

Our customer retention rate is calculated as the ratio of the number of end-of-period home service plan contracts to the sum of the number of beginning-of-period home service plan contracts and the number of new home service plan sales and acquired accounts during the respective period.

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 2022 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.

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

Results of Operations

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

Three Months Ended

September 30,

(In millions)

Cost of services rendered

Selling and administrative expenses

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

Interest expense

Interest and net investment income

Income before Income Taxes

Provision for income taxes

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* not meaningful

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

Nine Months Ended

September 30,

Three Months Ended

(In millions)

2 unchanged sentences

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

2 unchanged sentences

* not meaningful

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

We reported revenue of $367 million and $351 million for the three months ended March 31, 2023 and 2022 , respectively .

The following table provides a summary of our r evenue by major customer acquisition channel:

Three Months Ended

September 30,

(In millions)

Increase (Decrease)

Real estate (1)

Direct-to-consumer (1)

Total revenue

________________________________

(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)

Increase (Decrease)

Real estate (1)

Direct-to-consumer (1)

Total revenue

________________________________

(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.

Revenue increased four percent for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase in renewal revenue primarily reflects improved price realization.

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

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

September 30,

The decrease in direct-to-consumer revenue primarily reflects a decline in the number of first-year direct-to-consumer home service plans which we believe resulted from the impact of inflation on consumer sentiment, higher-priced home service plan offerings and a changing competitive landscape, offset, in part, by improved price realization.

The decrease in other revenue was primarily driven by lower Streem revenue.

The following table provides a summary of the number of home service plans, growth in number of home service plans and customer retention rate:

(In millions)

Number of home service plans

(Reduction) growth in number of home service plans

Reduction in number of home service plans

Customer retention rate

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.

The reduction in the number of home service plans as of March 31, 2023 was primarily 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 a decline in the number of direct-to-consumer home service plans, which we believe resulted from the impact of inflation on consumer sentiment, higher-priced home service plan offerings and a changing competitive landscape.

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,

(In millions)

Contract claims cost

Bad debt expense

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

(In millions)

Three Months Ended September 30, 2021

Impact of change in revenue

Contract claims costs

Three Months Ended September 30, 2022

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

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

We reported cost of services rendered of $ 197 million and $207 million for the three months ended March 31, 2023 and 2022 , respectively.

The following table provides a summary of the changes in cost of services rendered:

(In millions)

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Impact of change in revenue

Contract claims costs

Nine Months Ended September 30, 2022

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

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.

Three Months Ended March 31, 2023

The impact of change in revenue is driven by the reduction in number of home service plans.

The decrease in contract claims costs reflects a $6 million favorable adjustment related to the development of prior period claims, compared to a $9 million unfavorable adjustment in the first quarter of 2022.

Additionally, first-quarter 2023 contract claims costs reflects a favorable weather impact of $6 million, offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

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:

We reported selling and administrative expenses of $125 million for each of the three months ended March 31, 2023 and 2022 .

The following tables provide a summary of the components of selling and administrative expenses:

Three Months Ended

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

General and administrative costs

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

The following table provides a summary of the changes in selling and administrative expenses:

(In millions)

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Sales and marketing costs

Customer service costs

General and administrative costs

Three Months Ended September 30, 2022

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

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

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

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

(In millions)

Nine Months Ended September 30, 2021

Sales and marketing costs

Stock-based compensation expense

General and administrative costs

Nine Months Ended September 30, 2022

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

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

Three Months Ended March 31, 2023

Sales and marketing costs increased due to our continued investment in marketing to drive sales growth in the home service plan direct-to-consumer channel.

Customer service costs decreased primarily due to lower labor costs driven by a lower number of service requests.

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.

Depreciation expense was $8 million and $6 million for the three months ended March 31, 2023 and 2022, respectively.

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

Depreciation expense increased primarily due to incremental capital expenditures.

Amortization expense decreased due to certain intangible assets being fully amortized subsequent to March 31, 2022.

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.

We had restructuring charges of $1 million and less than $1 million during the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023, these charges primarily include severance 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.

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.

Interest expense was $10 million and $7 million for the three months ended March 31, 2023 and 2022 , respectively, with the increase driven by higher interest rates on our variable rate debt.

Interest and Net Investment Income

Interest and net investment income was $3 million and less than $1 million for the three months ended March 31, 2023 and 2022, respectively, with the increase driven by higher interest rates on our cash and cash equivalent balances.

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 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.

The effective tax rate on our income 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.

Net income was $22 million and $2 million for the three months ended March 31, 2023 and 2022 , respectively.

The increase was primarily driven by the operating results discussed above.

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

Adjusted EBITDA was $54 million and $25 million for the three months ended March 31, 2023 and 2022 , respectively.

The following table provides a summary of the changes in our Adjusted EBITDA:

(In millions)

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Impact of change in revenue

2 unchanged sentences

Customer service costs

General and administrative costs

Three Months Ended September 30, 2022

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

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

Impact of change in revenue

Contract claims costs

Sales and marketing costs

General and administrative costs

Nine Months Ended September 30, 2022

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

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

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

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

Interest and net investment income

Three Months Ended March 31, 2023

Sales and marketing costs increased due to our continued investment in marketing to drive sales growth in the home service plan direct-to-consumer channel.

Customer service costs decreased primarily due to lower labor costs driven by a lower number of service requests.

The increase in interest and net investment income was driven by higher interest rates on our cash and cash equivalent balances.

A reconciliation of Net Income to Adjusted EBITDA is as follows:

Three Months Ended

Nine Months Ended

September 30,

(In millions)

Depreciation and amortization expense

Goodwill and intangibles impairment (1)

Restructuring charges (1)

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Interest expense

Loss on extinguishment of debt (1)

Adjusted EBITDA

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(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.

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

(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.

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

As of 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.

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

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

Cash and cash equivalents totaled $337 million and $292 million as of March 31, 2023 and December 31, 2022, 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.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of March 31, 2023 and December 31, 2022, the total net assets subject to these third-party restrictions were $150 million and $145 million, respectively.

As of March 31, 2023, there was $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 $248 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.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of March 31, 2023 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

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.

We closely monitor the performance of our investment portfolio, primarily cash deposits.

From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements.

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The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles.

We have a diversified investment strategy for our cash investments, and look for opportunities to improve their performance, by diversifying these financial instruments among various counterparties, with priority given for the major financial institutions that serve as lenders under the Credit Agreement.

Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although in substantially all of our accounts, our holdings exceed insured limits.

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.

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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.

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

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

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None of our subsidiaries are obligated to make funds available to us through the payment of dividends.

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,

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 Quarterly Report on Form 10-Q are summarized in the following table:

Three Months Ended

(In millions)

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Financing activities

Cash (decrease) increase during the period

Cash increase (decrease) during the period

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.

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.

Net cash provided from operating activities was $60 million and $47 million for the three months ended March 31, 2023 and 2022 , respectively.

Net cash provided from operating activities for the three months ended March 31, 2023 comprised $34 million in earnings adjusted for non-cash charges and $26 million in cash provided from working capital.

Cash provided from working capital was primarily driven by seasonality.

Net cash provided from operating activities for the three months ended March 31, 2022 comprised $14 million in earnings adjusted for non-cash charges and $33 million in cash provided from working capital.

Cash provided from working capital was primarily driven by seasonality.

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.

Net cash used for investing activities was $8 million for each of the three months ended March 31, 2023 and 2022 .

Capital expenditures were $8 million and $9 million for the three months ended March 31, 2023 and 2022 , respectively, and included recurring capital needs and technology projects.

We expect capital expenditures for the full year 2023 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $45 million.

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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.

Net cash used for financing activities was $7 million and $47 million for the three months ended March 31, 2023 and 2022 , respectively.

For the three months ended March 31, 2023, we made scheduled principal payment of debt of $4 million.

For the three months ended March 31, 2022, we made scheduled principal payments of debt and finance lease obligations of $4 million and purchased outstanding shares at an aggregate cost of $40 million .

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

GAAP measure, to Free Cash Flow using data derived from the condensed consolidated statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q:

Three Months Ended

(In millions)

September 30,

Net cash provided from operating activities

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Our 2022 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2022.

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.

We continue to make the contractually required payments associated with these commitments.

There are no significant additions to our obligations and commitments since those reported in the 2022 Form 10-K.

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.

 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.

A summary of the significant changes in our financial position from December 31, 2022 to March 31, 2023 is as follows:

 Home service plan claims decreased during the three months ended March 31, 2023, reflecting both the faster payment of claims and a lower number of service requests per customer as compared to the prior quarter.

 Deferred revenue increased during the three months ended March 31, 2023, reflecting a net contract liability related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition, offset, in part, by a decline in the number of first-year real estate home service plans.

 Total shareholders’ equity was $83 million as of March 31, 2023 compared to $61 million as of December 31, 2022.

The increase was primarily driven by net income.

See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

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 2. Management’s Discussion and Analysis