What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-02 · 158 added, 124 removed, 278 unchanged (50% of the section changed)

8 unchanged sentences

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.

Frontdoor also provides a one-stop app for home repair and maintenance.

Frontdoor also provides on-demand home services and a one-stop app for home repair and maintenance.

Enabled by our Streem technology, the app empowers homeowners by connecting them in real time through video chat with pre-qualified experts to diagnose and solve their problems.

Additionally, Frontdoor now offers home service plans under the Frontdoor brand.

As of June 30, 2023, we had 2.1 million active home service plans across all brands in the United States.

For the three months ended June 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $523 million, $70 million and $121 million, respectively, and $487 million, $33 million and $77 million, respectively .

For the six months ended June 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $890 million, $91 million and $174 million, respectively, and $838 million, $35 million and $102 million, respectively.

As of September 30, 2023, we had 2.0 million active home service plans across all brands in the United States.

For the three months ended September 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $524 million, $71 million and $128 million, respectively, and $484 million, $28 million and $79 million, respectively .

For the nine months ended September 30, 2023 and 2022, we generated revenue, net income and Adjusted EBITDA of $1,414 million, $163 million and $302 million, respectively, and $1,322 million, $63 million and $181 million, respectively.

For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations—Adjusted EBITDA.”

For the six months ended June 30, 2023 , our total operating revenue included 76 percent of revenue derived from existing customer renewals, while eight 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 four percent was derived from other revenue channels.

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

For the nine months ended September 30, 2023 , our total operating revenue included 77 percent of revenue derived from existing customer renewals, while eight percent and 11 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 four percent was derived from other revenue channels.

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.

Key Factors and Trends Affecting Our Results of Operations

Macroeconomic Conditions

Evolving macroeconomic conditions, including inflation, global supply chain challenges 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, consumer sentiment or labor availability, may reduce demand for our services, increase our costs and adversely impact our business.

Current macroeconomic conditions, including inflation, higher interest rates, the challenging real estate market and rising global geopolitical issues, may affect existing home sales, consumer sentiment or labor availability.

These conditions may reduce demand for our services, increase our costs or otherwise 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 six months ended June 30, 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 a decline in the number of home resale transactions combined with 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, parts and equipment costs and labor availability challenges.

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

 Industry-wide parts and equipment availability has returned to pre-pandemic levels;

however, inflation levels for the period remained high.

During the nine months ended September 30, 2023, our financial condition and results of operations continued to be adversely impacted by the following:

 Challenging real estate market conditions, driven by a decline in the number of home resale transactions, primarily resulting from higher interest rates, combined with low home inventory levels, continue to constrain demand for home service plans in the first-year real estate channel.

 Consumer sentiment remains mixed as a result of a broad range of current macroeconomic conditions.

We believe this environment impacted demand for home service plans in the first-year direct-to-consumer and renewal channels.

 Our contractor network continues to be impacted by inflation, including higher labor, parts and equipment costs and labor availability challenges.

The ultimate implications of the current macroeconomic conditions on our results of operations and overall financial performance remain uncertain.

It remains difficult to predict the overall continuing impact these conditions will have on our business as they may reduce demand for our services, increase our costs or otherwise adversely impact our business.

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

4 unchanged sentences

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 six months of 2023 as compared to the first six months of 2022 resulted in a lower number of service requests per customer, which favorably impacted contract claims costs.

For example, favorable weather trends in the first nine months of 2023 as compared to the first nine months of 2022 resulted in a lower number of service requests per customer, which 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.

42 unchanged sentences

 Free Cash Flow,

 growth in number of home service plans, and

 number of home service plans, and

 customer retention rate.

36 unchanged sentences

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

Number of Home Service Plans and Customer Retention Rate.

We report on our 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.

3 unchanged sentences

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K.

There have been no material changes to our critical accounting policies for the six months ended June 30, 2023 .

There have been no material changes to our critical accounting policies for the nine months ended September 30, 2023 .

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 be more focused on integrating Streem’s technology into our 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 of 2022, which comprised the remaining net carrying amount of Streem’s goodwill of $9 million and intangibles of $5 million.

We do not believe there are any additional circumstances 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.

Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended

September 30,

(In millions)

2 unchanged sentences

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

5 unchanged sentences

* not meaningful

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Six Months Ended

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

Nine Months Ended

September 30,

(In millions)

2 unchanged sentences

Depreciation and amortization expense

Goodwill and intangibles impairment

Restructuring charges

5 unchanged sentences

* not meaningful

We reported revenue of $523 million and $487 million for the three months ended June 30, 2023 and 2022 , respectively, and $890 million and $838 million for the six months ended June 30, 2023 and 2022, respectively.

We reported revenue of $524 million and $484 million for the three months ended September 30, 2023 and 2022 , respectively, and $1,414 million and $1,322 million for the nine months ended September 30, 2023 and 2022, respectively.

The following tables provide a summary of our r evenue by major customer acquisition channel:

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended

September 30,

Increase (Decrease)

4 unchanged sentences

(1) First-year revenue only.

Revenue increased seven percent for the three months ended June 30, 2023 compared to the three months ended June 30, 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 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 a change in consumer sentiment as a result of macroeconomic factors and higher consumer price sensitivity.

Revenue increased eight percent for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions.

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 real estate market.

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 is a result of a broad range of macroeconomic conditions impacting consumer demand in the home service plan category.

The increase in other revenue was primarily driven by growth in on-demand home services .

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Six Months Ended

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

Nine Months Ended

September 30,

Increase (Decrease)

4 unchanged sentences

(1) First-year revenue only.

Revenue increased six percent for the six months ended June 30, 2023 compared to the six months ended June 30, 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.

Revenue increased seven percent for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions.

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 real estate market.

The increase in other revenue was primarily driven by growth in on-demand home services .

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

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

September 30,

(In millions)

2 unchanged sentences

Customer retention rate

The reduction in the number of home service plans as of June 30, 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 a change in consumer sentiment as a result of macroeconomic factors and higher consumer price sensitivity.

The reduction in the number of home service plans as of September 30, 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 real estate market, as well as a decline in the number of direct-to-consumer home service plans, which we believe resulted from a change in consumer sentiment as a result of macroeconomic conditions.

Cost of Services Rendered

We reported cost of services rendered of $253 million and $276 million for the three months ended June 30, 2023 and 2022 , respectively, and $449 million and $483 million for the six months ended June 30, 2023 and 2022, respectively .

We reported cost of services rendered of $256 million and $274 million for the three months ended September 30, 2023 and 2022 , respectively, and $706 million and $757 million for the nine months ended September 30, 2023 and 2022, respectively .

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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

(In millions)

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Impact of change in revenue

Contract claims costs

Three Months Ended June 30, 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 favorable weather impact of $17 million as cooler than normal weather drove a lower number of service requests per customer.

Additionally, contract claims costs reflects a $4 million favorable adjustment related to the development of prior period claims, compared to a $7 million unfavorable adjustment in the second quarter of 2022, and continued process improvement initiatives.

These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Three Months Ended September 30, 2023

The impact of change in revenue is driven by growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs primarily reflects the favorable impact of continued process improvement initiatives specifically relating to better cost management efforts across our contractor network, a transition to higher service fees, and a lower number of service requests per customer, offset, in part, by ongoing inflationary cost pressure.

Additionally, contract claims costs reflects a $9 million favorable adjustment related to the development of prior period claims, compared to a $2 million favorable adjustment in the third quarter of 2022.

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

(In millions)

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Impact of change in revenue

Contract claims costs

Six Months Ended June 30, 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 favorable weather impact of $23 million as mild weather drove a lower number of service requests per customer.

Additionally, contract claims costs reflects a $9 million favorable adjustment related to the development of prior period claims, compared to a $12 million unfavorable adjustment in the first six months of 2022, and continued process improvement initiatives.

These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

Nine Months Ended September 30, 2023

The impact of change in revenue is driven by the reduction in number of home service plans, offset, in part, by growth in on-demand home services.

The decrease in contract claims costs primarily reflects a favorable weather impact of $21 million as mild weather drove a lower number of service requests per customer.

The favorable impact of continued process improvement initiatives specifically relating to better cost management efforts across our contractor network and a transition to higher service fees, were offset, in part, by ongoing inflationary cost pressure.

Selling and Administrative Expenses

We reported selling and administrative expenses of $162 million and $140 million for the three months ended June 30, 2023 and 2022, respectively, and $287 million and $266 million for the six months ended June 30, 2023 ad 2022, respectively .

We reported selling and administrative expenses of $152 million and $137 million for the three months ended September 30, 2023 and 2022, respectively, and $439 million and $403 million for the nine months ended September 30, 2023 and 2022, respectively .

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

3 unchanged sentences

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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

(In millions)

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Sales and marketing costs

2 unchanged sentences

General and administrative costs

Three Months Ended June 30, 2023

Sales and marketing costs increased due to our investment in marketing associated with the launch of the Frontdoor brand.

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

General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Three Months Ended September 30, 2023

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

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

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

(In millions)

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Sales and marketing costs

2 unchanged sentences

General and administrative costs

Six Months Ended June 30, 2023

Sales and marketing costs increased due to our investment in marketing associated with the launch of the Frontdoor brand.

Nine Months Ended September 30, 2023

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

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

General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

Gener al and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

Depreciation and Amortization Expense

Depreciation expense was $8 million and $7 million for the three months ended June 30, 2023 and 2022, respectively, and $16 million and $13 million for the six months ended June 30, 2023 and 2022, respectively.

Amortization expense was $1 million and $2 million for the three months ended June 30, 2023 and 2022, respectively, and $2 million and $4 million for the six months ended June 30, 2023 and 2022, respectively .

Depreciation expense was $8 million and $6 million for the three months ended September 30, 2023 and 2022, respectively, and $24 million and $19 million for the nine months ended September 30, 2023 and 2022, respectively.

Amortization expense was $1 million and $2 million for the three months ended September 30, 2023 and 2022, respectively, and $3 million and $6 million for the nine months ended September 30, 2023 and 2022, respectively .

The increase in depreciation expense was primarily due to incremental capital expenditures.

The decrease in amortization expense was primarily driven by the impairment to the Streem reporting unit in the third quarter of 2022.

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, 2023.

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

Restructuring Charges

We had restructuring charges of less than $1 million and $12 million for the three months ended June 30, 2023 and 2022, respectively, and $1 million and $12 million for the six months ended June 30, 2023 and 2022, respectively.

For the three and six months ended June 30, 2023, these charges primarily include severance costs.

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

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

Restructuring charges were $5 million for each of the three months ended September 30, 2023 and 2022 and $6 million and $18 million for the nine months ended September 30, 2023 and 2022, respectively.

For the three and nine months ended September 30, 2023, restructuring charges primarily comprised a $2 million impairment charge related to our Phoenix, AZ customer service center’s operating lease right-of-use asset and the related fixed assets and $2 million of professional fees, with the balance comprised of severance costs.

The impairment charge was the result of our decision to exit the leased property.

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 prior corporate 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.

During the fourth quarter of 2023, we will continue the evaluation of our long-term plan for our owned and leased properties.

If a decision is made to exit additional properties, an impairment of certain right-of-use assets, leasehold improvements and other related assets is reasonably possible.

Interest Expense

Interest expense was $10 million and $7 million for the three months ended June 30, 2023 and 2022 , respectively, and $20 million and $14 million for the six months ended June 30, 2023 and 2022, respectively.

Interest expense was $10 million and $8 million for the three months ended September 30, 2023 and 2022 , respectively, and $30 million and $22 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase was driven by higher interest rates on our variable rate debt.

Interest and Net Investment Income

Interest and net investment income was $4 million and less than $1 million for the three months ended June 30, 2023 and 2022, respectively, and $8 million and less than $1 million for the six months ended June 30, 2023 and 2022, respectively.

Interest and net investment income was $4 million and $1 million for the three months ended September 30, 2023 and 2022, respectively, and $12 million and $1 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase driven was by higher interest rates on our cash and cash equivalent balances.

Provision for Income Taxes

The effective tax rate on income before income taxes was 24.8 percent and 23.2 percent for the three months ended June 30, 2023 and 2022 , respectively, and 24.9 percent and 25.1 percent for the six months ended June 30, 2023 and 2022, respectively.

The increase in the effective tax rate for the three months ended June 30, 2023 compared to 2022 was primarily due to the impacts of share-based awards and a decrease in income tax credits, partially offset by state income taxes.

Net income was $70 million and $33 million for the three months ended June 30, 2023 and 2022 , respectively, and $91 million and $35 million for the six months ended June 30, 2023 and 2022, respectively.

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

The effective tax rate on income before income taxes was 25.3 percent and 28.2 percent for the three months ended September 30, 2023 and 2022 , respectively, and 25.1 percent and 26.5 percent for the nine months ended September 30, 2023 and 2022, respectively.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to 2022 was primarily due to the impact of the goodwill and intangibles impairment recorded in the third quarter of 2022 and the impact of a lower pre-tax income in 2022, offset, in part, by a reduction in income tax credits in 2023 as compared to 2022.

Net income was $71 million and $28 million for the three months ended September 30, 2023 and 2022 , respectively, and $163 million and $63 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase was primarily driven by the operating results discussed throughout “—Results of Operations” above.

Adjusted EBITDA

Adjusted EBITDA was $121 million and $77 million for the three months ended June 30, 2023 and 2022 , respectively, and $174 million and $102 million for the six months ended June 30, 2023 and 2022, respectively.

Adjusted EBITDA was $128 million and $79 million for the three months ended September 30, 2023 and 2022 , respectively, $302 million and $181 million for the nine months ended September 30, 2023 and 2022, respectively.

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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

(In millions)

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Impact of change in revenue

4 unchanged sentences

Interest and net investment income

Three Months Ended June 30, 2023

The impact of change in revenue reflects improved price realization, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs reflects a favorable weather impact of $17 million as cooler than normal weather drove a lower number of service requests per customer.

These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

Sales and marketing costs increased due to our investment in marketing associated with the launch of the Frontdoor brand.

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

General and administrative costs increased primarily due to investments in technology and increased personnel costs and professional fees.

Three Months Ended September 30, 2023

The impact of change in revenue reflects improved price realization and growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

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

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

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

(In millions)

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Impact of change in revenue

4 unchanged sentences

Interest and net investment income

Six Months Ended June 30, 2023

The impact of change in revenue reflects improved price realization, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs reflects a favorable weather impact of $23 million as mild weather drove a lower number of service requests per customer.

These favorable items were offset, in part, by inflationary cost pressures, including higher contractor-related expenses and parts and equipment costs.

Sales and marketing costs increased due to our investment in marketing associated with the launch of the Frontdoor brand.

Nine Months Ended September 30, 2023

The impact of change in revenue reflects improved price realization and growth in on-demand home services, offset, in part, by the reduction in number of home service plans.

The decrease in contract claims costs primarily reflects a favorable weather impact of $21 million as mild weather drove a lower number of service requests per customer.

Sales and marketing costs increased primarily due to our investment in marketing associated with the Frontdoor brand.

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

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In millions)

Depreciation and amortization expense

Goodwill and intangibles impairment (1)

Restructuring charges (1)

4 unchanged sentences

_________________________________

(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.

(1) We exclude goodwill and intangibles impairment and 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.

3 unchanged sentences

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

As of June 30, 2023, we were in compliance with the covenants under the Credit Agreement.

As of September 30, 2023, we were in compliance with the covenants under the Credit Agreement.

We do not believe current macroeconomic conditions will affect our ongoing ability to meet our debt covenants.

Cash and cash equivalents totaled $344 million and $292 million as of June 30, 2023 and December 31, 2022, respectively.

Cash and cash equivalents totaled $320 million and $292 million as of September 30, 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 June 30, 2023 and December 31, 2022, the total net assets subject to these third-party restrictions were $158 million and $145 million, respectively.

As of June 30, 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.

See “—Limitations on Distributions and Dividends by Subsidiaries.” As of September 30, 2023 and December 31, 2022, the total net assets subject to these third-party restrictions were $152 million and $145 million, respectively.

As of September 30, 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 as of June 30, 2023 will provide us with sufficient liquidity to meet our obligations in the short- and long-term.

We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of September 30, 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.

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

As of June 30, 2023, we have repurchased a total of 5,552,053 outstanding shares at an aggregate cost of $195 million, which is included in treasury stock on the condensed consolidated statements of financial position , and had $205 million remaining available for future repurchases under this program.

As of September 30, 2023, we have repurchased a total of 6,793,266 outstanding shares at an aggregate cost of $236 million, which is included in treasury stock on the condensed consolidated statements of financial position , and we had $164 million remaining available for future repurchases under this program.

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

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Cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows included in Part I, Item 1 of this Quarterly Report on Form 10-Q are summarized in the following table:

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Operating Activities

Net cash provided from operating activities was $112 million and $94 million for the six months ended June 30, 2023 and 2022 , respectively.

Net cash provided from operating activities for the six months ended June 30, 2023 comprised $117 million in earnings adjusted for non-cash charges, offset, in part, by $5 million in cash used for working capital.

Cash used for working capital was primarily driven by a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale, offset, in part, by seasonality.

Net cash provided from operating activities for the six months ended June 30, 2022 comprised $68 million in earnings adjusted for non-cash charges and $26 million in cash provided from working capital.

Cash provided from working capital was primarily driven by seasonality.

Net cash provided from operating activities was $139 million and $80 million for the nine months ended September 30, 2023 and 2022 , respectively.

Net cash provided from operating activities for the nine months ended September 30, 2023 comprised $207 million in earnings adjusted for non-cash charges, offset, in part, by $68 million in cash used for working capital.

Cash used for working capital was primarily driven by seasonality, favorable development of prior period claims and a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale .

Net cash provided from operating activities for the nine months ended September 30, 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.

Investing Activities

Net cash used for investing activities was $15 million and $19 million for the six months ended June 30, 2023 and 2022, respectively .

Capital expenditures were $15 million and $19 million for the six months ended June 30, 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.

Net cash used for investing activities was $23 million and $25 million for the nine months ended September 30, 2023 and 2022, respectively .

Capital expenditures were $23 million and $30 million for the nine months ended September 30, 2023 and 2022 , respectively, and included recurring capital needs and technology projects.

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

We have no additional material capital commitments at this time.

Financing Activities

Net cash used for financing activities was $44 million and $69 million for the six months ended June 30, 2023 and 2022 , respectively.

For the six months ended June 30, 2023, we made scheduled principal payment of debt of $8 million and purchased outstanding shares at an aggregate cost of $34 million.

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

Net cash used for financing activities was $88 million and $74 million for the nine months ended September 30, 2023 and 2022 , respectively.

For the nine months ended September 30, 2023, we made scheduled principal payment of debt of $13 million and purchased outstanding shares at an aggregate cost of $76 million.

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 .

Free Cash Flow

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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:

Six Months Ended

Nine Months Ended

September 30,

(In millions)

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Financial Position

A summary of the significant changes in our financial position from December 31, 2022 to June 30, 2023 is as follows:

 Contract asset increased during the six months ended June 30, 2023, 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.

 Other accrued liabilities increased during the six months ended June 30, 2023, reflecting an increase in federal income tax payable.

 Deferred revenue decreased during the six months ended June 30, 2023, reflecting a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale.

 Total shareholders’ equity was $131 million as of June 30, 2023 compared to $61 million as of December 31, 2022.

A summary of the significant changes in our financial position from December 31, 2022 to September 30, 2023 is as follows:

 Contract asset increased during the nine months ended September 30, 2023, reflecting the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

 Home service plan claims decreased during the nine months ended September 30, 2023, primarily reflecting the impact of a $9 million favorable adjustment recorded in 2023 related to the development of prior period claims.

 Other accrued liabilities increased during the nine months ended September 30, 2023, reflecting an increase in federal income tax payable.

 Deferred revenue decreased during the nine months ended September 30, 2023, reflecting a decline in the number of first-year real estate home service plans, which are typically paid for upfront at the time of closing on the home sale.

 Long-term debt decreased during the nine months ended September 30, 2023, reflecting scheduled debt payments.

 Deferred taxes decreased during the nine months ended September 30, 2023, reflecting timing differences associated with depreciation of fixed assets and certain incentive compensation expense.

 Total shareholders’ equity was $171 million as of September 30, 2023 compared to $61 million as of December 31, 2022.

The increase was primarily driven by net income, offset, in part, by repurchases of our common stock.

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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 2. Management’s Discussion and Analysis