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Nine Months Ended

September 30,

(In millions)

Cash paid on operating lease liabilities⁽¹⁾

Published: 2023-11-01 16:29:11 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38617

________________________________________________

Frontdoor, Inc.

(Exact name of registrant as specified in its charter)


Delaware		82-3871179
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3400 Players Club Parkway, Memphis, Tennessee 38125

(Address of principal executive offices) (Zip Code)

901-701-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common stock, par value $0.01 per share	FTDR	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of October 27, 2023, there were 79,621,736 shares outstanding of the registrant’s common stock, par value $0.01 per share.

Frontdoor, Inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

To aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:



Term / Abbreviation	Definition
2022 Form 10-K	Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2022
AOCI	Accumulated other comprehensive income or loss
ASC	FASB Accounting Standards Codification
ASU	FASB Accounting Standards Update
ASU 2020-04	ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
ASU 2022-06	ASU 2022-06, Reference Rate Reform (Topic 848); Deferral of the Sunset Date of Topic 848
Code	Internal Revenue Code of 1986, as amended
Credit Agreement	The agreements governing the Credit Facilities
Credit Facilities	The Term Loan Facilities together with the Revolving Credit Facility
ESPP	Frontdoor, Inc. 2019 Employee Stock Purchase Plan
Exchange Act	The Securities Exchange Act of 1934, as amended
FASB	U.S. Financial Accounting Standards Board
HVAC	Heating, ventilation and air conditioning
IRS	Internal Revenue Service
LIBOR	London Inter-bank Offered Rate
NASDAQ	Nasdaq Global Select Market
Omnibus Plan	Frontdoor, Inc. 2018 Omnibus Incentive Plan
Revolving Credit Facility	$250 million revolving credit facility effective June 17, 2021
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Streem	Streem, LLC, our technology business that uses augmented reality, computer vision and machine learning to provide services
Term Loan A	$260 million term loan A facility effective June 17, 2021
Term Loan B	$380 million term loan B facility effective June 17, 2021
Term Loan Facilities	The Term Loan A together with the Term Loan B
Topic 848	ASC 848, Reference Rate Reform
U.S. or United States	United States of America
U.S. GAAP	Accounting principles generally accepted in the United States of America

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Frontdoor,” “we,” “our,” “us,” and the “company” refer to Frontdoor, Inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee.

We hold various service marks, trademarks and trade names, such as Frontdoor®, American Home Shield®, HSA™, OneGuard®, Landmark Home Warranty®, Streem® and the Frontdoor logo. Solely for convenience, the service marks, trademarks and trade names referred to in this Quarterly Report on Form 10-Q are presented without the SM, ®, and TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these service marks, trademarks and trade names. All service marks, trademarks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Certain amounts presented in the tables in this report are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

TABLE OF CONTENTS



	Page
	No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income	3
Condensed Consolidated Statements of Financial Position	4
Condensed Consolidated Statements of Changes in Equity (Deficit)	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
Cautionary Statement Concerning Forward-Looking Statements	17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
Part II. Other Information	33
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	33
Item 6. Exhibits	34
Signature	35

‎

PART I. FINANCIAL INFORMATION

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).

‎

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).

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).

‎

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).

‎

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.

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.

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.

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.

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:

_____________________________

(1)Amount is presented net of cash provided from sublease income.

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, 2022.

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.

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.

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

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.

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	$	—

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.

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;

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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto included in our 2022 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K. The cautionary statements discussed in “Cautionary Statement Concerning Forward-Looking Statements” and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Cautionary Statement Concerning Forward-Looking Statements” as well as the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K.

Overview

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 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

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 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. 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 other process improvement efforts.

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.

Seasonality

Our business is subject to seasonal fluctuations, which drive variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of HVAC work orders in the summer months. In 2022, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately two percent, 47 percent, 39 percent and 12 percent of our net income, and approximately 12 percent, 36 percent, 37 percent and 15 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

The demand for our services, and our results of operations, are affected by weather conditions. Extreme temperatures, 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 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. Generally, repairs associated with such isolated events are addressed by homeowners’ and other forms of insurance as opposed to the home service plans that we offer.

Tariff and Import/Export Regulations

Changes in U.S. tariff and import/export regulations may impact the costs of parts, appliances and home systems. Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs. For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems.

Competition

We compete in the U.S. home service plan category and the broader U.S. home services industry. The home service plan category is highly competitive. While we have a broad range of competitors in each locality and region, we are the only home service plan company providing home service plans nationwide. The broader U.S. home services industry is also highly competitive. We compete against businesses providing on-demand home services directly and those offering leads to contractors seeking to provide on-demand home services. The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals. We believe our nationwide network of approximately 15,000 pre-qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.

Acquisition Activity

We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions. Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so. We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry. We have also used acquisitions to enhance our technological capabilities and geographic presence. For example, in 2019, we acquired Streem to enable home service professionals to more efficiently interact with customers and complete repairs, and, in 2020, we acquired a business to expand on-demand home services via its intellectual capital and know-how, technology platform capabilities and geographic presence.

Non-GAAP Financial Measures

To supplement our results presented in accordance with U.S. GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items. We present within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section the non-GAAP financial measures of Adjusted EBITDA and Free Cash Flow. See “—Results of Operations—Adjusted EBITDA” for a reconciliation of net income to Adjusted EBITDA and “—Liquidity and Capital Resources—Free Cash Flow” for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA and Free Cash Flow. Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period. We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance. While we believe these non-GAAP financial measures are useful in evaluating our business, they should be considered as supplemental in nature and are not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies, limiting their usefulness as comparative measures.

Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include:

revenue,

operating expenses,

net income,

earnings per share,

Adjusted EBITDA,

Adjusted EBITDA margin,

net cash provided from operating activities,

Free Cash Flow,

number of home service plans, and

customer retention rate.

Revenue. The majority of our revenue is generated from annual home service plan contracts entered into with our customers. Home service plan contracts are typically one year in duration. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the United States.

Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as: salaries and wages, employee benefits and healthcare; contractor costs; parts, appliances and home systems costs; tariffs; insurance premiums; and various regulatory compliance costs.

Net Income and Earnings Per Share. The presentation of net income and basic and diluted earnings per share provides measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect, if any, of stock options, performance options (which are stock options that become exercisable upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement), restricted stock units (“RSUs”), performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and restricted stock awards (“RSAs”) are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA and Adjusted EBITDA margin. We evaluate our operating and financial performance primarily based on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; goodwill and intangibles impairment; restructuring charges; provision for income taxes; non-cash stock-based compensation expense; interest expense; loss on extinguishment of debt; and other non-operating expenses. We define “Adjusted EBITDA margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.

Net Cash Provided from Operating Activities and Free Cash Flow. We focus on measures designed to monitor cash flow, including net cash provided from operating activities and Free Cash Flow. Free Cash Flow is a financial measure that is not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions.

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. The number of home service plans is representative of our recurring home service plan customer base and is measured as the number of customers with active contracts as of the respective period-end date. Our customer retention rate is calculated as the ratio of the number of end-of-period home service plan contracts to the sum of the number of beginning-of-period home service plan contracts and the number of new home service plan sales and acquired accounts during the respective period.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K. There have been no material changes to our critical accounting policies for the nine months ended September 30, 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.

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



							% of Revenue
	Three Months Ended				Increase		Three Months Ended
	September 30,				(Decrease)		September 30,
(In millions)	2023		2022		%		2023		2022
Revenue	$	524	$	484	8	%	100	%	100	%
Cost of services rendered		256		274	(6)		49		57
Gross Profit		268		210	27		51		43
Selling and administrative expenses		152		137	11		29		28
Depreciation and amortization expense		9		8	13		2		2
Goodwill and intangibles impairment		—		14	*		—		3
Restructuring charges		5		5	(8)		1		1
Interest expense		10		8	22		2		2
Interest and net investment income		(4)		(1)	*		(1)		—
Income before Income Taxes		96		39	145		18		8
Provision for income taxes		24		11	120		5		2
Net Income	$	71	$	28	154	%	14	%	6	%

_______________________________

* not meaningful

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



							% of Revenue
	Nine Months Ended				Increase		Nine Months Ended
	September 30,				(Decrease)		September 30,
(In millions)	2023		2022		%		2023		2022
Revenue	$	1,414	$	1,322	7	%	100	%	100	%
Cost of services rendered		706		757	(7)		50		57
Gross Profit		708		565	25		50		43
Selling and administrative expenses		439		403	9		31		30
Depreciation and amortization expense		28		25	11		2		2
Goodwill and intangibles impairment		—		14	*		—		1
Restructuring charges		6		18	(65)		—		1
Interest expense		30		22	33		2		2
Interest and net investment income		(12)		(1)	*		(1)		—
Income before Income Taxes		217		85	154		15		6
Provision for income taxes		54		23	141		4		2
Net Income	$	163	$	63	159	%	12	%	5	%

_______________________________

* not meaningful

‎

Revenue

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 revenue by major customer acquisition channel:

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



	Three Months Ended
	September 30,				Increase (Decrease)
(In millions)	2023		2022		$		%
Renewals	$	406	$	356	$	50	14	%
Real estate⁽¹⁾		40		51		(12)	(23)
Direct-to-consumer⁽¹⁾		54		64		(10)	(16)
Other		24		13		11	85
Total	$	524	$	484	$	40	8	%

________________________________

(1)First-year revenue only.

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.

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



	Nine Months Ended
	September 30,				Increase (Decrease)
(In millions)	2023		2022		$		%
Renewals	$	1,083	$	949	$	134	14	%
Real estate⁽¹⁾		115		153		(39)	(25)
Direct-to-consumer⁽¹⁾		157		176		(19)	(11)
Other		59		44		16	35
Total	$	1,414	$	1,322	$	91	7	%

________________________________

(1)First-year revenue only.

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 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.

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



	As of
	September 30,
(In millions)	2023		2022
Number of home service plans	2.04		2.16
Reduction in number of home service plans	(6)	%	(3)	%
Customer retention rate	76.2	%	75.3	%

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



(In millions)
Three Months Ended September 30, 2022	$	274
Impact of change in revenue		3
Contract claims costs		(22)
Other		2
Three Months Ended September 30, 2023	$	256

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)
Nine Months Ended September 30, 2022	$	757
Impact of change in revenue		(6)
Contract claims costs		(48)
Other		3
Nine Months Ended September 30, 2023	$	706

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. 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 nine months of 2022.

Selling and Administrative Expenses

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				Nine Months Ended
	September 30,				September 30,
(In millions)	2023		2022		2023		2022
Sales and marketing costs	$	81	$	70	$	228	$	198
Customer service costs		27		28		80		86
General and administrative costs		44		38		131		118
Total	$	152	$	137	$	439	$	403

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

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



(In millions)
Three Months Ended September 30, 2022	$	137
Sales and marketing costs		10
Customer service costs		(1)
Stock-based compensation expense		3
General and administrative costs		4
Three Months Ended September 30, 2023	$	152

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)
Nine Months Ended September 30, 2022	$	403
Sales and marketing costs		29
Customer service costs		(6)
Stock-based compensation expense		4
General and administrative costs		10
Nine Months Ended September 30, 2023	$	439

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.

Depreciation and Amortization Expense

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

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.

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 $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 $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 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

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



(In millions)
Three Months Ended September 30, 2022	$	79
Impact of change in revenue		37
Contract claims costs		22
Sales and marketing costs		(10)
Customer service costs		1
General and administrative costs		(4)
Interest and net investment income		4
Other		(2)
Three Months Ended September 30, 2023	$	128

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

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



(In millions)
Nine Months Ended September 30, 2022	$	181
Impact of change in revenue		97
Contract claims costs		48
Sales and marketing costs		(29)
Customer service costs		6
General and administrative costs		(10)
Interest and net investment income		11
Other		(3)
Nine Months Ended September 30, 2023	$	302

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

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2023		2022		2023		2022
Net Income	$	71	$	28	$	163	$	63
Depreciation and amortization expense		9		8		28		25
Goodwill and intangibles impairment⁽¹⁾		—		14		—		14
Restructuring charges⁽¹⁾		5		5		6		18
Provision for income taxes		24		11		54		23
Non-cash stock-based compensation expense⁽²⁾		8		5		21		17
Interest expense		10		8		30		22
Adjusted EBITDA	$	128	$	79	$	302	$	181

_________________________________

(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. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

Liquidity and Capital Resources

Liquidity

A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of September 30, 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 $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 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 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. This change was effective in March 2023 for Term Loan A and the Revolving Credit Facility and in June 2023 for Term Loan B.

We closely monitor the performance of our investment portfolio, primarily cash deposits. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles.

We have a diversified investment strategy for our cash investments, and look for opportunities to improve their performance, by diversifying these financial instruments among various counterparties, with priority given for the major financial institutions that serve as lenders under the Credit Agreement. Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although our holdings exceed insured limits in substantially all of our accounts.

We may, from time to time, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, gross leverage, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, and the price of such repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash provided from operating activities. 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. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of the company’s stock, general market and economic conditions, the company’s liquidity requirements, applicable legal requirements and other business considerations. The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion.

Limitations on Distributions and Dividends by Subsidiaries

We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions.

Our subsidiaries are permitted under the terms of the Credit Agreement and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us.

Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to regulatory requirements. The payments of ordinary and extraordinary dividends by certain of our subsidiaries (through which we conduct our business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. We expect that such limitations will be in effect for the foreseeable future. In Texas, we are relieved of the obligation to post 75 percent of our otherwise required reserves because we operate a captive insurer approved by Texas regulators in order to satisfy such obligations. None of our subsidiaries are obligated to make funds available to us through the payment of dividends.

Cash Flows

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



	Nine Months Ended
	September 30,
(In millions)	2023		2022
Net cash provided from (used for):
Operating activities	$	139	$	80
Investing activities		(23)		(25)
Financing activities		(88)		(74)
Cash increase during the period	$	28	$	(19)

Operating Activities

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 $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 $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

The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable U.S. GAAP measure, to Free Cash Flow using data derived from the condensed consolidated statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q:



	Nine Months Ended
	September 30,
(In millions)	2023		2022
Net cash provided from operating activities	$	139	$	80
Property additions		(23)		(30)
Free Cash Flow	$	116	$	50

Contractual Obligations

Our 2022 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2022. We continue to make the contractually required payments associated with these commitments. There are no significant additions to our obligations and commitments since those reported in the 2022 Form 10-K.

Financial Position

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

‎

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing an interest rate swap. There have been no material changes to the market risk associated with debt obligations and other significant instruments from the risks described in Part II, Item 7A in our 2022 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Exchange Act) the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2023. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rule 13a-15(f)) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required with respect to this Part II, Item 1 can be found under Note 8 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

For information regarding factors that could affect our business, financial condition or results of operations, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K. There have been no material changes to the risk factors disclosed in our 2022 Form 10-K during the three months ended September 30, 2023. The risks described in our 2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial could also materially and adversely affect our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Issuer Purchases of Equity Securities

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, and we had $164 million remaining available for future repurchases under this program. See Liquidity and Capital Resources – Liquidity in Part I, Item 2 of this Quarterly Report on Form 10-Q for more information.



Period	Total number of shares purchased	Average price ‎paid per share(1)		Total number of ‎shares purchased as ‎part of publicly ‎announced plans or ‎programs	Maximum dollar value ‎of shares that may yet ‎be purchased under ‎the plans or programs ‎(in millions)
Jul. 1, 2023 through Jul. 31, 2023	485,798	$	33.45	485,798	$	189
Aug. 1, 2023 through Aug. 31, 2023	524,233		33.38	524,233		171
Sep. 1, 2023 through Sep. 30, 2023	231,182		32.42	231,182		164
Total	1,241,213	$	33.23	1,241,213	$	164

________________________________

(1) The average price paid per share is calculated on a trade date basis and excludes associated fees.

‎

ITEM 6. EXHIBITS


Exhibit ‎Number		Description
2.1		Separation and Distribution Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and Frontdoor, Inc. (incorporated by reference to Exhibit 2.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
3.1		Restated Certificate of Incorporation of Frontdoor, Inc. (incorporated by reference to Exhibit 3.1 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).
3.2*		Amended and Restated Bylaws of Frontdoor, Inc.
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*		Inline XBRL Extension Presentation Linkbase.
104*		Cover page formatted as Inline XBRL and included in Exhibit 101.

___________________________________

* Filed herewith.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by Frontdoor in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

‎

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	FRONTDOOR, INC.

Date: November 1, 2023	By:	/s/ Jessica P. Ross
		Name:	Jessica P. Ross
		Title:	Senior Vice President and Chief Financial Officer (principal financial officer)