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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 March 31, 2022

or

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

________________________________________________

Picture 2

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.)

150 Peabody Place, Memphis, Tennessee 38103

(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

The number of shares of the registrant’s common stock outstanding as of April 29, 2022: 82,257,974 shares of common stock, par value $0.01 per share.


Frontdoor, Inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

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

Term/Abbreviation

Definition

2021 Form 10-K

Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2021

2026 Notes

6.750% senior notes in the aggregate principal amount of $350 million

AOCI

Accumulated other comprehensive income or loss

ASC

FASB Accounting Standards Codification

ASC 740

ASC Topic 740, Income Taxes

Credit Agreement

The agreements governing the Credit Facilities

Credit Facilities

The Term Loan Facilities together with the Revolving Credit Facility

Exchange Act

Securities Exchange Act of 1934, as amended

FASB

U.S. Financial Accounting Standards Board

HVAC

Heating, ventilation and air conditioning

IRS

Internal Revenue Service

Omnibus Plan

Frontdoor, Inc. 2018 Omnibus Incentive Plan

ProConnect

Our membership-based home services business, which includes on-demand home services offerings, marketed under the American Home Shield ProConnect brand name and other names

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

Spin-off

Terminix’s separation and distribution of the ownership and operations of the businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names into Frontdoor, Inc., which was completed on October 1, 2018

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

Terminix

Terminix Global Holdings, Inc. (formerly known as ServiceMaster Global Holdings, Inc.), a Delaware corporation, and its consolidated subsidiaries

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,” or “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. Effective June 25, 2021, we changed our name from frontdoor, inc. to Frontdoor, Inc.

We hold various service marks, trademarks and trade names, such as Frontdoor®, American Home Shield®, HSA™, OneGuard®, Landmark Home Warranty®, ProConnect®, 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

4

Condensed Consolidated Statements of Financial Position

5

Condensed Consolidated Statements of Changes in Equity (Deficit)

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

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

29

Item 4. Controls and Procedures

29

Part II. Other Information

30

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6. Exhibits

31

Signature

32

 

 

3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)

Three Months Ended

March 31,

2022

2021

Revenue

$

351

$

329

Cost of services rendered

207

181

Gross Profit

144

148

Selling and administrative expenses

125

118

Depreciation and amortization expense

8

9

Restructuring charges

1

Interest expense

7

13

Loss on extinguishment of debt

1

Income before Income Taxes

3

5

Provision for income taxes

2

1

Net Income

$

2

$

5

Other Comprehensive Income, Net of Income Taxes:

Net unrealized gain on derivative instruments

13

7

Total Comprehensive Income

$

15

$

12

Earnings per Share:

Basic

$

0.02

$

0.06

Diluted

$

0.02

$

0.06

Weighted-average Common Shares Outstanding:

Basic

82.3

85.4

Diluted

82.6

86.0

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.


 

4


Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

As of

March 31,

December 31,

2022

2021

Assets:

Current Assets:

Cash and cash equivalents

$

255

$

262

Receivables, less allowance of $3 and $2, respectively

5

7

Prepaid expenses and other assets

22

25

Total Current Assets

282

295

Other Assets:

Property and equipment, net

68

66

Goodwill

512

512

Intangible assets, net

157

159

Operating lease right-of-use assets

16

17

Deferred customer acquisition costs

18

16

Other assets

5

5

Total Assets

$

1,058

$

1,069

Liabilities and Shareholders' Equity:

Current Liabilities:

Accounts payable

$

73

$

66

Accrued liabilities:

Payroll and related expenses

17

24

Home service plan claims

81

88

Other

23

28

Deferred revenue

190

155

Current portion of long-term debt

17

17

Total Current Liabilities

402

378

Long-Term Debt

604

608

Other Long-Term Liabilities:

Deferred taxes

45

41

Operating lease liabilities

18

19

Other long-term obligations

9

21

Total Other Long-Term Liabilities

72

81

Commitments and Contingencies (Note 7)

 

 

Shareholders' Equity:

Common stock, $0.01 par value; 2,000,000,000 shares authorized; 85,980,791 shares issued and 82,303,166 shares outstanding at March 31, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021

1

1

Additional paid-in capital

73

70

Retained earnings

55

53

Accumulated other comprehensive loss

(5)

(18)

Less common stock held in treasury, at cost; 3,677,625 shares at March 31, 2022 and 2,566,284 shares as of December 31, 2021

(143)

(103)

Total (Deficit) Equity

(20)

2

Total Liabilities and Shareholders' Equity

$

1,058

$

1,069

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

5


Condensed Consolidated Statement of Changes in Deficit (Unaudited)

(In millions)

 

Three Months Ended

March 31,

2022

2021

Common Stock

Balance at beginning of period

$

1

$

1

Balance at end of period

1

1

Additional Paid-in Capital

Balance at beginning of period

70

46

Exercise of stock options

1

Taxes paid related to net share settlement of equity awards

(3)

(4)

Stock-based employee compensation

6

6

Balance at end of period

73

49

Retained Earnings (Accumulated Deficit)

Balance at beginning of period

53

(75)

Net income

2

5

Balance at end of period

55

(70)

Accumulated Other Comprehensive Loss

Balance at beginning of period

(18)

(33)

Other comprehensive income (loss), net of tax

13

7

Balance at end of period

(5)

(26)

Common Stock Held in Treasury

Balance at beginning of period

(103)

Repurchase of common stock

(40)

Balance at end of period

(143)

Total Deficit

$

(20)

$

(46)

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

 

6


Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

Three Months Ended

March 31,

2022

2021

Cash and Cash Equivalents at Beginning of Period

$

262

$

597

Cash Flows from Operating Activities:

Net Income

2

5

Adjustments to reconcile net income to net cash provided from operating activities:

Depreciation and amortization expense

8

9

Stock-based compensation expense

6

6

Restructuring charges

1

Payments for restructuring charges

(1)

Loss on extinguishment of debt

1

Other

(2)

Change in working capital, net of acquisitions:

Receivables

2

1

Prepaid expenses and other current assets

1

1

Accounts payable

7

11

Deferred revenue

35

40

Accrued liabilities

(13)

(8)

Accrued interest payable

(6)

Current income taxes

1

(8)

Net Cash Provided from Operating Activities

47

52

Cash Flows from Investing Activities:

Purchases of property and equipment

(9)

(7)

Net Cash Used for Investing Activities

(8)

(7)

Cash Flows from Financing Activities:

Payments of debt and finance lease obligations

(4)

(102)

Repurchase of common stock

(40)

Other financing activities

(3)

(3)

Net Cash Used for Financing Activities

(47)

(105)

Cash Decrease During the Period

(8)

(59)

Cash and Cash Equivalents at End of Period

$

255

$

538

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

 

7


Frontdoor, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Basis of Presentation

Frontdoor is the leading provider of home service plans in the United States, as measured by revenue, and operates under the American Home Shield, HSA, OneGuard and Landmark brands. 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, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps. Our operations also include our ProConnect on-demand home services business and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, help home service professionals more quickly and accurately diagnose breakdowns and complete repairs. At March 31, 2022, we had 2.2 million active home service plans across all 50 states and the District of Columbia.

We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2021 Form 10-K. The accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.

Macroeconomic Conditions

Changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability, may reduce demand for our services, increase our costs and adversely impact our business. While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the risk of poor economic conditions in any particular region of the United States.

During the first three months of 2022, our financial condition and results of operations were adversely impacted by the following:

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

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

Industry-wide parts availability challenges continued to drive elevated appliance replacement levels due to lack of parts availability, further contributing to increased costs and adversely impacting the customer experience, which was reflected in our customer retention rate.

Due to labor availability challenges, we continued to experience workforce retention issues, including difficulties in hiring and retaining employees in customer service operations and throughout our business, and we believe our contractors are experiencing similar workforce challenges.

The COVID-19 Pandemic

The implications of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. In response to the COVID-19 pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business. The COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2021 Form 10-K. There have been no material changes to the significant accounting policies for the three months ended March 31, 2022.

 

8


Note 3. Revenue

The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Our home service plan agreements have one performance obligation, which is to provide for the repair or replacement of essential home systems and appliances, as applicable per the contract. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Those costs bear a direct relationship to the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer. 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. This adjustment to the straight-line revenue creates a contract asset or contract liability, as described under the heading “Contract balances” below. We regularly review our estimates of claims costs and adjust our estimates when appropriate. 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

March 31,

(In millions)

2022

2021

Renewals

$

247

$

224

Real estate(1)

45

57

Direct-to-consumer(1)

46

41

Other

13

8

Total

$

351

$

329

_____________________________

(1)First-year revenue only.

Renewals

Revenue from all customer renewals, whether initiated via the real estate or direct-to-consumer channel, are classified as renewals above. Customer payments for renewals are received either at the commencement of the renewal period or in installments over the contract period.

Real estate

Real estate home service plans are sold through annual contracts in connection with a real estate sale, and payments are typically paid in full at closing. First-year revenue from the real estate channel is classified as real estate above.

Direct-to-consumer

Direct-to-consumer home service plans are sold through annual contracts when customers request a service plan in response to marketing efforts or when third-party resellers make a sale. Customer payments are received either at the commencement of the contract or in installments over the contract period. First-year revenue from the direct-to-consumer channel is classified as direct-to-consumer above.

Other

Other revenue includes revenue generated by ProConnect and Streem, as well as administrative fees and ancillary services attributable to our home service plan agreements.

Costs to obtain a contract with a customer

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $18 million and $16 million as of March 31, 2022 and December 31, 2021, respectively. Amortization of these deferred acquisition costs was $4 million for each of the three months ended March 31, 2022 and 2021. There were no impairment losses in relation to these capitalized costs.

 

9


Contract balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers, including contracts resulting from customer renewals, are generally for a period of one year. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivable are recorded within Receivables, less allowances, in the accompanying condensed consolidated statements of financial position. We invoice our monthly-pay customers on a straight-line basis over the contract term. As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed.

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts. Deferred revenue was $190 million and $155 million as of March 31, 2022 and December 31, 2021, respectively, and, as of March 31, 2022, included a net contract liability of $45 million related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the three months ended March 31, 2022 were as follows:

(In millions)

Deferred

Revenue

Balance as of December 31, 2021

$

155

Deferral of revenue

106

Recognition of deferred revenue

(72)

Balance as of March 31, 2022

$

190

There was approximately $60 million of revenue recognized in the three months ended March 31, 2022, that was included in the deferred revenue balance as of December 31, 2021. Deferred revenue increased during the three months ended March 31, 2022, reflecting the net contract liability discussed above, offset, in part, by a decline in the number of first-year real estate home service plans.

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. The balance of goodwill was $512 million as of March 31, 2022 and December 31, 2021. There were no goodwill or trade name impairment charges recorded in the three months ended March 31, 2022 and 2021. There were no accumulated impairment losses recorded as of March 31, 2022 and December 31, 2021.

The table below summarizes the other intangible asset balances:

As of March 31, 2022

As of December 31, 2021

(In millions)

Gross

Accumulated
Amortization

Net

Gross

Accumulated
Amortization

Net

Trade names(1)

$

141

$

$

141

$

141

$

$

141

Customer relationships

173

(172)

173

(172)

Developed technology

25

(14)

12

25

(12)

13

Other

37

(32)

5

37

(32)

5

Total

$

375

$

(218)

$

157

$

375

$

(216)

$

159

_____________________________

(1)Not subject to amortization.

Amortization expense was $2 million and $3 million for the three months ended March 31, 2022 and 2021, respectively. The following table outlines expected amortization expense for existing intangible assets for the remainder of 2022 and the next five years: