Frontdoor, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Frontdoor, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (In millions, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Revenue $ 524 $ 484 $ 1,414 $ 1,322 Cost of services rendered 256 274 706 757 Gross Profit 268 210 708 565 Selling and administrative expenses 152 137 439 403 Depreciation and amortization expense 9 8 28 25 Goodwill and intangibles impairment — 14 — 14 Restructuring charges 5 5 6 18 Interest expense 10 8 30 22 Interest and net investment income ( 4 ) ( 1 ) ( 12 ) ( 1 ) Income before Income Taxes 96 39 217 85 Provision for income taxes 24 11 54 23 Net Income $ 71 $ 28 $ 163 $ 63 Other Comprehensive Income, Net of Income Taxes: Unrealized gain on derivative instruments, net of income taxes — 9 2 26 Total Other Comprehensive Income, Net of Income Taxes — 9 2 26 Comprehensive Income $ 72 $ 37 $ 164 $ 89 Earnings per Share: ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.89 $ 0.34 $ 2.01 $ 0.77 Diluted ​ $ 0.89 $ 0.34 $ 2.00 $ 0.77 Weighted-average Common Shares Outstanding: Basic 80.1 81.5 81.0 82.0 Diluted 80.6 81.6 81.3 82.1 See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited). ‎ 3 Frontdoor, Inc. Condensed Consolidated Statements of Financial Position (Unaudited) (In millions, except share data) As of September 30, December 31, 2023 2022 Assets: Current Assets: Cash and cash equivalents $ 320 $ 292 Receivables, less allowance of $ 5 and $ 4 , respectively 7 5 Prepaid expenses and other current assets 31 33 Contract assets 72 — Total Current Assets 429 330 Other Assets: Property and equipment, net 64 66 Goodwill 503 503 Intangible assets, net 144 148 Operating lease right-of-use assets 8 11 Deferred customer acquisition costs 12 16 Other assets 8 8 Total Assets $ 1,168 $ 1,082 Liabilities and Shareholders' Equity: Current Liabilities: Accounts payable $ 87 $ 80 Accrued liabilities: Payroll and related expenses 29 22 Home service plan claims 93 103 Other 40 21 Deferred revenue 98 121 Current portion of long-term debt 17 17 Total Current Liabilities 364 364 Long-Term Debt 580 592 Other Long-Term Liabilities: Deferred tax liabilities, net 28 39 Operating lease liabilities 16 18 Other long-term liabilities 8 8 Total Other Long-Term Liabilities 52 65 Commitments and Contingencies (Note 8) Shareholders' Equity: Common stock, $ 0.01 par value; 2,000,000,000 shares authorized; 86,502,847 shares issued and 79,617,524 shares outstanding as of September 30, 2023 and 86,079,773 shares issued and 81,517,243 shares outstanding as of December 31, 2022 1 1 Additional paid-in capital 110 90 Retained earnings 287 124 Accumulated other comprehensive income 10 8 Less treasury stock, at cost; 6,885,323 shares as of September 30, 2023 and 4,562,530 shares as of December 31, 2022 ( 238 ) ( 162 ) Total Shareholders' Equity 171 61 Total Liabilities and Shareholders' Equity $ 1,168 $ 1,082 See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited). 4 Frontdoor, Inc. Condensed Consolidated Statement of Changes in Equity (Unaudited) (In millions) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Common Stock: Balance at beginning of period $ 1 $ 1 $ 1 $ 1 Balance at end of period 1 1 1 1 Additional Paid-in Capital: Balance at beginning of period 101 80 90 70 Stock-based compensation expense 8 5 21 17 Exercise of stock options 2 — 3 — Taxes paid related to net share settlement of equity awards — — ( 4 ) ( 3 ) Issuance of common stock related to ESPP — — — 1 Balance at end of period 110 85 110 85 Retained Earnings: Balance at beginning of period 216 88 124 53 Net income 71 28 163 63 Balance at end of period 287 116 287 116 Accumulated Other Comprehensive Income (Loss): Balance at beginning of period 9 ( 1 ) 8 ( 18 ) Other comprehensive income, net of tax — 9 2 26 Balance at end of period 10 8 10 8 Treasury Stock: Balance at beginning of period ( 196 ) ( 162 ) ( 162 ) ( 103 ) Repurchase of common stock ( 42 ) — ( 76 ) ( 59 ) Balance at end of period ( 238 ) ( 162 ) ( 238 ) ( 162 ) Total Shareholders' Equity $ 171 $ 47 $ 171 $ 47 See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited). ‎ 5 Frontdoor, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2023 2022 Cash and Cash Equivalents at Beginning of Period $ 292 $ 262 Cash Flows from Operating Activities: Net Income 163 63 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization expense 28 25 Deferred income tax benefit ( 12 ) ( 12 ) Stock-based compensation expense 21 17 Goodwill and intangibles impairment — 14 Restructuring charges 6 18 Payments for restructuring charges ( 3 ) ( 2 ) Other 5 ( 1 ) Changes in working capital: Receivables ( 1 ) 3 Prepaid expenses and other current assets ( 70 ) ( 68 ) Accounts payable 7 23 Deferred revenue ( 22 ) ( 42 ) Accrued liabilities ( 2 ) 29 Current income taxes 22 15 Net Cash Provided from Operating Activities 139 80 Cash Flows from Investing Activities: Purchases of property and equipment ( 23 ) ( 30 ) Other investing activities — 5 Net Cash Used for Investing Activities ( 23 ) ( 25 ) Cash Flows from Financing Activities: Repayments of debt ( 13 ) ( 13 ) Repurchase of common stock ( 76 ) ( 59 ) Other financing activities — ( 2 ) Net Cash Used for Financing Activities ( 88 ) ( 74 ) Cash Increase (Decrease) During the Period 28 ( 19 ) Cash and Cash Equivalents at End of Period $ 320 $ 244 See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited). ‎ 6 Frontdoor, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates primarily under the American Home Shield brand. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our home service plan customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than 20 home systems and appliances, including electrical, plumbing, HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps. 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. As of September 30, 2023, we had 2.0 million active home service plans across all brands in the United States. f Note 2. Significant Accounting Policies Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2022 Form 10-K. There have been no material changes to our significant accounting policies during the nine months ended September 30, 2023. Basis of Presentation We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2022 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results that might be achieved for the respective full year. Newly Adopted Accounting Standards In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This standard is currently effective and upon adoption may be applied prospectively to contract modifications. In March 2021, the FASB issued ASU 2020-06, which extended the sunset date for the required transition to December 31, 2024. In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement. We adopted ASU 2020-04 in connection with this transition of the benchmark rate under our Credit Agreement. This transition did not have a material impact on our consolidated financial statements and related disclosures. 7 Note 3. Revenue The majority of our revenue is generated from annual home service plan contracts entered into with our customers. We derive substantially all of our revenue from customers in the United States. We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenue by major customer acquisition channel is as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2023 2022 2023 2022 Renewals $ 406 $ 356 $ 1,083 $ 949 Real estate (1) 40 51 115 153 Direct-to-consumer (1) 54 64 157 176 Other 24 13 59 44 Total $ 524 $ 484 $ 1,414 $ 1,322 _____________________________ (1) First-year revenue only. Our home service plan contracts have one performance obligation, which is to provide for the repair or replacement of essential home systems and appliances, as applicable per the contract. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative fair value of the services provided to the customer. As the costs to fulfill the obligations of the home service plans are incurred on an other-than-straight-line basis, we utilize historical evidence to estimate the expected claims expense and related timing of such costs and make a corresponding adjustment each period to the timing of our related revenue recognition. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract Assets and Liabilities” below. We regularly review our estimates of claims costs and adjust these estimates when appropriate. Renewals Revenue from customer renewals of home service plan contracts, which were previously initiated in the real estate or direct-to-consumer channel are classified as renewals above. Renewals relate to consecutive contract periods and take place at the end of the first year of a real estate or direct-to-consumer home service plan contract. Customer payments for renewals are primarily received in installments over the new contract period. Real estate Real estate home service plans are sold through annual contracts which occur in connection with a real estate sale. These plans are typically paid in full at closing on the real estate transaction. First-year revenue from the real estate channel is classified as real estate above. At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described above. Direct-to-consumer Direct-to-consumer home service plans are sold through annual contracts which occur in response to our marketing efforts. Customer payments for direct-to-consumer sales are primarily received in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above. At the option of the customer, upon renewal of the contract, the future revenue derived from home service plans sold in this channel is classified as Renewal revenue as described above. Other Other revenue primarily includes revenue generated by on-demand home services, as well as administrative fees and ancillary services attributable to our home service plan contracts. 8 Deferred Customer Acquisition Costs We capitalize the incremental costs of obtaining a contract with a customer and recognize the related expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $ 12 million and $ 16 million as of September 30, 2023 and December 31, 2022, respectively. Amortization of deferred customer acquisition costs was $ 5 million and $ 6 million for the three months ended September 30, 2023 and 2022, respectively, and $ 13 million and $ 15 million for the nine months ended September 30, 2023 and 2022, respectively. There were no impairment losses related to these capitalized costs during the three months ended September 30, 2023 and 2022. Receivables, Less Allowance We record a receivable due from customers once we have an unconditional right to invoice and receive payment in the future related to the services provided and anticipate the collection of amounts due to us. Contracts for home service plans may be invoiced upfront or monthly in straight-line installment payments over the contract period. The payment terms are determined prior to the execution of the contract. Contract Assets and Liabilities Contract assets arise when we recognize revenue for our home service plan contracts prior to a customer being invoiced. These timing differences are created when the recognition of revenue in proportion to the costs expected to be incurred in performing the services under the contract are accelerated as compared to the recognition of revenue on a straight-line basis over the contract period. Contract assets were $ 72 million as of September 30, 2023. Our contract liabilities consist of deferred revenue which is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. A summary of the changes in deferred revenue for the nine months ended September 30, 2023 is as follows: (In millions) Balance at beginning of period $ 121 Deferral of revenue 177 Recognition of deferred revenue ( 199 ) Balance at end of period $ 98 There was approximately $ 25 million and $ 120 million of revenue recognized during the three and nine months ended September 30, 2023, respectively, that was included in the deferred revenue balance as of December 31, 2022. Note 4. Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis or more frequently if circumstances indicate a potential impairment. An assessment for impairment is performed on October 1 of every year. In connection with the preparation of our condensed consolidated financial statements for the third quarter of 2022, we determined that indicators of a potential goodwill and intangible assets impairment were present for our Streem reporting unit. In particular, we will 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 intangible assets of $ 5 million. The balance of goodwill was $ 503 million as of September 30, 2023 and December 31, 2022. There were no goodwill impairment charges recorded in the three and nine months ended September 30, 2023. 9 The following table provides a summary of the components of our intangible assets: As of September 30, 2023 As of December 31, 2022 Accumulated Accumulated (In millions) Gross Amortization Net Gross Amortization Net Trade names (1) $ 141 $ — $ 141 $ 141 $ — $ 141 Customer relationships 173 ( 173 ) — 173 ( 172 ) — Developed technology 19 ( 16 ) 3 19 ( 13 ) 5 Other 32 ( 32 ) — 32 ( 31 ) 1 Total $ 365 $ ( 220 ) $ 144 $ 365 $ ( 217 ) $ 148 _____________________________ (1) Not subject to amortization. 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. As indicated above, an impairment charge of $ 5 million was recognized during the three and nine months ended September 30, 2022 related to Streem’s intangible assets. There were no intangible asset impairment charges for the three and nine months ended September 30, 2023. Note 5. Leases We have operating leases primarily for our corporate offices, customer service centers and engineering and technology campuses. Our leases have remaining lease terms ranging from less than one year to 11 years, some of which include options to extend the leases for up to five years . The weighted-average remaining lease term and weighted-average discount rate related to our operating leases are as follows: As of September 30, December 31, 2023 2022 Weighted-average remaining lease term (years) 9 9 Weighted-average discount rate 6.4 % 6.3 % We recognized operating lease expense of $ 1 million for each of the three months ended September 30, 2023 and 2022 and $ 2 million and $ 3 million for the nine months ended September 30, 2023 and 2022, respectively. These expenses are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income. Supplemental balance sheet information related to our operating lease liabilities is as follows: As of September 30, December 31, (In millions) 2023 2022 Other accrued liabilities $ 3 $ 3 Operating lease liabilities 16 18 Total operating lease liabilities $ 19 $ 21 Supplemental cash flow information related to our operating leases is as follows: Nine Months Ended September 30, (In millions) 2023 2022 Cash paid on operating lease liabilities (1) $ 3 $ 4 _____________________________ (1) Amount is presented net of cash provided from sublease income. 10 The following table presents the maturities of our operating lease liabilities as of September 30, 2023: (In millions) 2023 (remainder) (1) $ 1 2024 (1) 2 2025 (1) 2 2026 (1) 2 2027 3 2028 2 Thereafter 10 Total future minimum lease payments (1) 22 Less imputed interest ( 6 ) Total operating lease liabilities (1) $ 16 _____________________________ (1) Amount is presented net of future sublease income totaling $ 3 million, which relates to the remainder of the year ending December 31, 2023 and the years ending December 31, 2024 through December 31, 2026. Sublease of Prior Corporate Headquarters On August 10, 2022, we subleased our prior corporate headquarters facility in Memphis, Tennessee. As a result of us exiting the facility on June 27, 2022, we incurred a non-cash impairment charge of $ 11 million for the nine months ended September 30, 2 022. Relocation of Phoenix Customer Service Center On August 15, 2023, we entered into a new lease in Scottsdale, Arizona, and subsequently decided to exit our lease in Phoenix, Arizona. As a result, we incurred a non-cash impairment charge of $ 2 million for the three and nine months ended September 30 , 2023. Note 6. Income Taxes We are subject to taxation in the United States, various states and foreign jurisdictions. Substantially all of our income before income taxes for the three months ended September 30, 2023 and 2022 was generated in the United States. We compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items. As a result, our estimated tax rate is adjusted each quarter. The effective tax rate on 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. Note 7. Restructuring Charges We incurred restructuring charges of $ 5 million ($ 4 million, net of tax) for each of the three months ended September 30, 2023 and 2022 and $ 6 million ($ 5 million, net of tax) and $ 18 million ($ 13 million, net of tax) 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 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. 11 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. The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying consolidated statements of operations and comprehensive income. As of December 31, 2022, there were $ 2 million of restructuring charges accrued, of which $ 1 million were paid or otherwise settled during the nine months ended September 30, 2023. As of September 30, 2023, there was $ 2 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position. Note 8. Commitments and Contingencies Accruals for home service plan claims are made using internal actuarial projections, which are based on current claims and historical claims experience. Accruals are established based on estimates of the ultimate cost to settle claims. Home service plan claims take approximately three months to settle, on average, and substantially all claims are settled within six months of incurrence. The amount of time required to settle a claim can vary based on a number of factors, including whether a replacement is ultimately required. In addition to our estimates, we engage a third-party actuary to perform an accrual analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs along with the third-party analysis and adjust our estimates when appropriate. We believe that utilizing actuarial methods in our estimation process to account for these liabilities provides a consistent and effective way to measure these judgmental accruals. We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. Due to the nature of our business activities, we are also at times subject to pending and threatened legal and regulatory actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected, individually or in the aggregate, to have a material adverse effect on our business, financial position, results of operations or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our business, financial position, results of operations or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions. Note 9. Stock-Based Compensation We recognized stock-based compensation expense of $ 8 million ($ 7 million, net of tax) and $ 5 million ($ 4 million, net of tax) for the three months ended September 30, 2023 and 2022, respectively, and $ 21 million ($ 18 million, net of tax) and $ 17 million ($ 15 million, net of tax) for the nine months ended September 30, 2023 and 2022, respectively. These costs are included in selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income. A summary of awards granted under the Omnibus Plan during the nine months ended September 30, 2023 is as follows: Weighted- Weighted- Weighted- Number of Average Average Average Awards Exercise Grant Date Vesting Granted Price Fair Value Period Stock options 661,231 26.67 12.49 4.0 Performance options (1) 652,004 26.42 10.40 4.0 Restricted stock units 918,804 26.59 3.0 _____________________________ (1) The information related to performance options above assumes 100 % of the performance target is met. The performance options contain a market condition that is based on a per share price target for our common stock, and the ultimate number of performance options that may be earned depends on the achievement of this market condition. As of September 30, 2023 , there was $ 41 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, performance options, restricted stock units (“RSUs”), performance shares and restricted stock awards (“RSAs”). These remaining costs are expected to be recognized over a weighted-average period of 2.84 years. 12 Note 10. Long-Term Debt A summary of our debt is as follows: As of September 30, December 31, (In millions) 2023 2022 Term Loan A maturing in 2026 (1) $ 230 $ 239 Term Loan B maturing in 2028 (2) 368 370 Revolving Credit Facility maturing in 2026 — — Total debt 597 609 Less current portion ( 17 ) ( 17 ) Total long-term debt $ 580 $ 592 _______________________________ (1) Term Loan A is presented net of unamortized debt issuance costs of $ 1 million and $ 2 million as of September 30, 2023 and December 31, 2022, respectively. (2) Term Loan B is presented net of unamortized debt issuance costs of $ 2 million and $ 3 million as of September 30, 2023 and December 31, 2022, respectively, and unamortized discount of $ 1 million as of September 30, 2023 and December 31, 2022. In March 2023, in connection with the planned phase-out of LIBOR, we amended our Credit Facilities to replace LIBOR with SOFR as the benchmark rate under the Credit Agreement. This change was effective in March 2023 for the Term Loan A and the Revolving Credit Facility and in June 2023 for the Term Loan B. As of September 30, 2023, we had $ 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. As of September 30, 2023, we were in compliance with the covenants under the Credit Agreement. Scheduled Debt Payments The following table presents future scheduled debt payments as of September 30, 2023: (In millions) 2023 (remainder) $ 4 2024 17 2025 17 2026 205 2027 4 2028 355 Total future scheduled debt payments 602 Less unamortized debt issuance costs ( 4 ) Less unamortized discount ( 1 ) Total debt $ 597 Note 11. Supplemental Cash Flow Information Supplemental information relating to our accompanying condensed consolidated statements of cash flows is as follows: Nine Months Ended September 30, (In millions) 2023 2022 Cash paid for (received from): Interest expense $ 28 $ 21 Interest income ( 12 ) ( 1 ) Income tax payments, net of refunds 44 20 13 Note 12. Comprehensive Income (Loss) Comprehensive income (loss) consists of net income (loss) and the unrealized gains (losses) on our derivative instrument. We disclose comprehensive income (loss) in the accompanying condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of changes in equity. A summary of the changes in AOCI is as follows: Balance at beginning of period $ 8 Other comprehensive income before reclassifications: Pre-tax amount 7 Impact of income taxes 2 After-tax amount 5 Amounts reclassified from AOCI (1) ( 4 ) Total other comprehensive income 2 Balance at end of period $ 10 ___________________________________ (1) Amounts are net of income taxes. See the table below on reclassifications out of AOCI for additional information. A summary of reclassifications out of AOCI is as follows: Nine Months Ended September 30, (In millions) 2023 2022 Gain (loss) on interest rate swap contract (1) $ 5 $ ( 5 ) Impact of income taxes (2) ( 1 ) 1 Total reclassifications during the period $ 4 $ ( 4 ) ___________________________________ (1) Included in interest expense in the accompanying condensed consolidated statements of income and comprehensive income. (2) Included in provision for income taxes in the accompanying condensed consolidated statements of income and comprehensive income. Note 13. Derivative Financial Instruments We currently use a derivative financial instrument to manage risks associated with changes in interest rates by hedging the interest payments on a portion of our variable rate debt through the use of an interest rate swap contract. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected cash flows of the associated forecasted transaction. Our interest rate swap contract is classified as a cash flow hedge, and, as such, it is recorded in the accompanying condensed consolidated statements of financial position as either an asset or liability at fair value, with changes in fair value recorded in AOCI. Cash flows related to the interest rate swap contract are classified as operating activities in the accompanying condensed consolidated statements of cash flows. The effective portion of the gain or loss on our interest rate swap contract is recorded in AOCI. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement affects earnings. See Note 12 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and for the amounts reclassified out of AOCI and into earnings during the periods presented. As the underlying forecasted transactions occur during the next 12 months, we estimate the unrealized hedging gain in AOCI expected to be recognized in earnings is $ 6 million, net of tax, as of September 30, 2023. The amounts ultimately reclassified into earnings during the next 12 months will be determined based on the actual interest rates in effect at the time the positions are settled, and as a result, they could differ materially from our estimate noted above. 14 Note 14. Fair Value Measurements We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that we categorize into a three-level hierarchy, from highest to lowest level of observable inputs, as follows: unadjusted quoted prices for identical assets or liabilities in active markets ("Level 1"); direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets ("Level 2"); and unobservable inputs that require significant judgment for which there is little or no market data ("Level 3"). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement, even though we may have also utilized significant inputs that are more readily observable. The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these financial instruments. As of September 30, 2023 and December 31, 2022, the carrying amounts of our total debt were $ 597 million and $ 609 million, respectively, and the estimated fair values were $ 600 million and $ 613 million, respectively. The fair value of our debt was estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy and was based on information available to us as of the respective period end dates. We determine the fair value of our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider. The fair value of the contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between these two rates to the notional amount of debt in the interest rate swap contract. We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the nine months ended September 30, 2023 . Transfers between hierarchy levels, if any, are recognized at the end of the reporting period. There were no transfers between hierarchy levels during the nine months ended September 30, 2023. Our interest rate swap contract is currently our only financial instrument remeasured at fair value on a recurring basis. A summary of the carrying value and fair value of this financial instrument are as follows: Estimated Fair Value Measurements Quoted Significant Prices Other Significant in Active Observable Unobservable Carrying Markets Inputs Inputs (In millions) Value (Level 1) (Level 2) (Level 3) As of September 30, 2023: Prepaid expenses and other current assets $ 8 $ — $ 8 $ — Other assets 4 — 4 — Total assets $ 12 $ — $ 12 $ — As of December 31, 2022: Prepaid expenses and other current assets $ 6 $ — $ 6 $ — Other assets 4 — 4 — Total assets $ 10 $ — $ 10 $ — 15 Note 15. Share Repurchase Program On September 7, 2021, we announced a three-year repurchase authorization of up to $ 400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024. 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 accompanying condensed consolidated statements of financial position, and we had $ 164 million remaining available for future repurchases under this program. A summary of repurchases of outstanding shares is as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2023 2022 2023 2022 Number of shares purchased 1.2 — 2.3 1.9 Average price paid per share (1) $ 33.23 $ — $ 32.39 $ 30.51 Cost of shares purchased $ 41 $ — $ 75 $ 59 ________________________________ (1) The average price paid per share is calculated on a trade date basis and excludes associated fees. Note 16. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, performance options, RSUs , performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method. A summary of the calculations of our basic and diluted earnings per share is as follows: Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share data) 2023 2022 2023 2022 Net Income $ 71 $ 28 $ 163 $ 63 Weighted-average common shares outstanding: 80.1 81.5 81.0 82.0 Effect of dilutive securities: RSUs (1) 0.5 0.2 0.3 0.1 Stock options (2) — — — — Weighted-average common shares outstanding - assuming dilution: 80.6 81.6 81.3 82.1 Basic earnings per share $ 0.89 $ 0.34 $ 2.01 $ 0.77 Diluted earnings per share $ 0.89 $ 0.34 $ 2.00 $ 0.77 ___________________________________ (1) RSUs of 59,880 shares and 778,828 shares for the three months ended September 30, 2023 and 2022, respectively, and 471,836 shares and 973,418 shares for the nine months ended September 30, 2023 and 2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. (2) Stock options to purchase 1,338,410 shares and 1,572,100 shares for the three months ended September 30, 2023 and 2022, respectively, and 1,279,130 shares and 1,442,599 shares for the nine months ended September 30, 2023 and 2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. Performance options to purchase 710,323 shares and 272,503 shares for the three months ended September 30, 2023 and 2022, respectively, and 605,483 shares and 121,778 shares for the nine months ended September 30, 2023 and 2022, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. 16 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K. SUMMARY OF MATERIAL RISKS Factors, risks, trends and uncertainties that make an investment in us speculative or risky and that could cause actual results or events to differ materially from those anticipated in our forward-looking statements include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report as well as Item 1A. Risk Factors in our 2022 Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:  changes in macroeconomic conditions, including inflation and global supply chain challenges, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability;  increases in parts, appliance and home system prices, and other operating costs;  changes in the source and intensity of competition in our market;  our ability to successfully implement our business strategies;  the ability of our marketing efforts to be successful or cost-effective;  our ability to attract, retain and maintain positive relations with third-party contractors and vendors;  our dependence on our first-year real estate and direct-to-consumer acquisition channels and our renewals channel;  our ability to attract and retain qualified key employees and labor availability in our customer service operations;  our dependence on third-party vendors, including business process outsourcers, and third-party component suppliers;  cybersecurity breaches, disruptions or failures in our technology systems;  our ability to protect the security of personal information about our customers;  evolving corporate governance and disclosure regulations and expectations related to environmental, social and governance matters;  risks related to the COVID-19 pandemic;  risks related to geopolitical instability;  compliance with, or violation of, laws and regulations, including consumer protection laws, or lawsuits or other claims by third parties, increasing our legal and regulatory expenses;  increases in tariffs or changes to import/export regulations;  physical effects of climate change, adverse weather conditions and Acts of God, along with the increased focus on sustainability;  our ability to protect our intellectual property and other material proprietary rights;  negative reputational and financial impacts resulting from acquisitions or strategic transactions; 17  a requirement to recognize impairment charges;  third-party use of our trademarks as search engine keywords to direct our potential customers to their own websites;  inappropriate use of social media by us or other parties to harm our reputation;  special risks applicable to operations outside the United States by us or our business process outsource providers;  a return on investment in our common stock is dependent on appreciation in the price;  inclusion in our certificate of incorporation includes a forum selection clause that could discourage an acquisition of our company or litigation against us and our directors and officers;  the effects of our significant indebtedness, our ability to incur additional debt and the limitations contained in the agreements governing such indebtedness;  increases in interest rates increasing the cost of servicing our indebtedness and counterparty credit risk due to instruments designed to minimize exposure to market risks;  increased borrowing costs due to lowering or withdrawal of the credit ratings, outlook or watch assigned to us, our debt securities or our Credit Facilities;  our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations; and  other factors described in this report and from time to time in documents that we file with the SEC. Available Information Our website address is www.frontdoor.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained on our website to be part of this Quarterly Report on Form 10-Q. 18