UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM
________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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
________________________________________________
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbol |
Name of Each Exchange on which Registered |
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.
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).
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.
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Accelerated filer |
Non-accelerated filer |
Smaller reporting company |
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Emerging growth company |
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of July 26, 2024, there were
Frontdoor, Inc.
Quarterly Report on Form 10-Q
GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS
In order to aid the reader, we have included certain defined terms and abbreviations used throughout this Quarterly Report on Form 10-Q as set forth below:
Term / Abbreviation |
Definition |
2023 Form 10-K |
Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2023 |
2-10 HBW |
The businesses operated by 2-10 Holdco, Inc. and all of its subsidiaries |
2-10 HBW Acquisition |
The acquisition of 2-10 HBW by Frontdoor pursuant to the terms of the Purchase Agreement |
AOCI |
Accumulated other comprehensive income or loss |
ASC |
FASB Accounting Standards Codification |
ASU |
FASB Accounting Standards Update |
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 |
Home Warranty |
A home service contract, sometimes called a residential service contract, home warranty or home protection contract, provides for the repair and/or replacement of certain home systems and appliances for breakdowns that occur as a result of normal wear and tear |
HVAC |
Heating, ventilation and air conditioning |
IRS |
U.S. Internal Revenue Service |
NASDAQ |
Nasdaq Global Select Market |
Omnibus Plan |
Frontdoor, Inc. 2018 Omnibus Incentive Plan |
Purchase Agreement |
Share Purchase Agreement dated June 3, 2024, by and among Frontdoor, Inc., 2-10 HBW Acquisition, L.P. and 2-10 Holdco, Inc. pursuant to which Frontdoor acquires all of the issued and outstanding stock of 2-10 Holdco, Inc. |
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 |
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®, the Streem logo 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.
1
TABLE OF CONTENTS
2
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)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue |
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$ |
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$ |
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$ |
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Cost of services rendered |
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Gross Profit |
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Selling and administrative expenses |
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Depreciation and amortization expense |
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Restructuring charges |
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— |
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Interest expense |
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Interest and net investment income |
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Income before Income Taxes |
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Provision for income taxes |
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Net Income |
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$ |
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$ |
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$ |
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$ |
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Other Comprehensive (Loss) Income, Net of Income Taxes: |
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Unrealized (loss) gain on derivative instruments, net of income taxes |
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— |
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Total Other Comprehensive (Loss) Income, Net of Income Taxes |
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— |
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Comprehensive Income |
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$ |
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$ |
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$ |
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$ |
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Earnings per Share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average Common Shares Outstanding: |
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Basic |
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Diluted |
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See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
3
Frontdoor, Inc.
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions, except share data)
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As of |
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June 30, |
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December 31, |
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2024 |
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2023 |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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Receivables, less allowance of $ |
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Prepaid expenses and other current assets |
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Contract asset |
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Total Current Assets |
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Other Assets: |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating lease right-of-use assets |
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Deferred customer acquisition costs |
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Other assets |
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Total Assets |
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$ |
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$ |
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Liabilities and Shareholders' Equity: |
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Current Liabilities: |
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Accounts payable |
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Accrued liabilities: |
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Payroll and related expenses |
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Home warranty claims |
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Other |
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Deferred revenue |
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Current portion of long-term debt |
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Total Current Liabilities |
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Long-Term Debt |
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Other Long-Term Liabilities: |
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Deferred tax liabilities, net |
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Operating lease liabilities |
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Other long-term liabilities |
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Total Other Long-Term Liabilities |
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Shareholders' Equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Less treasury stock, at cost; |
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Total Shareholders' Equity |
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Total Liabilities and Shareholders' Equity |
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$ |
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See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
4
Frontdoor, Inc.
Condensed Consolidated Statement of Changes in Equity (Unaudited)
(In millions)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Common Stock: |
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Balance at beginning of period |
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Balance at end of period |
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Additional Paid-in Capital: |
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Balance at beginning of period |
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Stock-based compensation expense |
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Exercise of stock options |
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Taxes paid related to net share settlement of equity awards |
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Balance at end of period |
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Retained Earnings: |
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Balance at beginning of period |
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Net income |
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Balance at end of period |
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Accumulated Other Comprehensive Income (Loss): |
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Balance at beginning of period |
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Other comprehensive (loss) income, net of tax |
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Balance at end of period |
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Treasury Stock: |
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Balance at beginning of period |
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Repurchase of common stock |
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Balance at end of period |
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Total Shareholders' Equity |
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$ |
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See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
5
Frontdoor, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
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Six Months Ended |
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June 30, |
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2023 |
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Cash and Cash Equivalents at Beginning of Period |
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Cash Flows from Operating Activities: |
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Net Income |
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Adjustments to reconcile net income to net cash provided from operating activities: |
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Depreciation and amortization expense |
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Deferred income tax benefit |
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Stock-based compensation expense |
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Restructuring charges |
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Payments for restructuring charges |
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Other |
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Changes in working capital: |
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Receivables |
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Prepaid expenses and other current assets |
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Accounts payable |
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Deferred revenue |
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Accrued liabilities |
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Current income taxes |
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Net Cash Provided from Operating Activities |
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Cash Flows from Investing Activities: |
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Purchases of property and equipment |
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Net Cash Used for Investing Activities |
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Cash Flows from Financing Activities: |
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Repayments of debt |
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Repurchase of common stock |
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Other financing activities |
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Net Cash Used for Financing Activities |
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Cash Increase During the Period |
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Cash and Cash Equivalents at End of Period |
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$ |
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See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
6
Frontdoor, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
Frontdoor is the leading provider of home warranties in the United States, as measured by revenue, and operates primarily under the American Home Shield brand. Our customizable home warranties 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 warranty customers usually subscribe to an annual service plan agreement that covers the repair or replacement of major components of more than
Ju
f
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2023 Form 10-K. There have been no material changes to our significant accounting policies during the six months ended June 30, 2024.
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 2023 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 Issued Accounting Standards
In 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the guidance should be applied retrospectively to all periods presented in the financial statements, unless it is impracticable. We intend to adopt the provisions of this guidance in conjunction with our 2024 Annual Report on Form 10-K for the year ended December 31, 2024. We are currently evaluating the impact of this ASU on our enhanced disclosures.
In 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), which improves income tax disclosure requirements, primarily through enhanced disclosures related to the rate reconciliation and income taxes paid information. This guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and the guidance should be applied on a prospective basis. Retrospective application is permitted. We are currently evaluating the impact of this ASU on our enhanced disclosures.
7
Note 3. Revenue
The majority of our revenue is generated from home warranty contracts entered into with our customers. Home warranty contracts are typically
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:
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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(In millions) |
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2024 |
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2023 |
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2024 |
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2023 |
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Renewals |
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$ |
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$ |
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$ |
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$ |
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Real estate(1) |
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Direct-to-consumer(1) |
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Other |
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Total |
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$ |
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$ |
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$ |
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$ |
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Our home warranty contracts have one primary 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 warranties 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 warranty contracts, which were previously initiated in the real estate or direct-to-consumer channel are classified as renewal revenue 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 warranty contract. Customer payments for renewals are primarily received in installments over the new contract period.
Real estate
Real estate home warranties 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 warranties sold in this channel is classified as renewal revenue as described above.
Direct-to-consumer
Direct-to-consumer home warranties 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 warranties 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 warranty contracts.
8
Deferred Customer Acquisition Costs
We capitalize the incremental costs of obtaining a contract with a customer and recognize the related expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period. Deferred customer acquisition costs were $
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 warranties 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 warranty 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 $
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 six months ended June 30, 2024 is as follows:
(In millions) |
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Balance at December 31, 2023 |
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$ |
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Deferral of revenue |
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Recognition of deferred revenue |
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( |
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Balance at June 30, 2024 |
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$ |
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There was approximately $
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. We perform our annual assessment for impairment on October 1 of every year.
The balance of goodwill was $
9
The following table provides a summary of the components of our intangible assets:
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As of June 30, 2024 |
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As of December 31, 2023 |
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Accumulated |
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Accumulated |
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(In millions) |
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Gross |
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Amortization |
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Net |
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Gross |
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Amortization |
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Net |
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Trade names(1) |
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$ |
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$ |
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— |
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$ |
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$ |
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$ |
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— |
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$ |
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Customer relationships |
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( |
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— |
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( |
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— |
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Developed technology |
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( |
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Other |
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( |
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— |
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( |
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— |
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Total |
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$ |
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$ |
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( |
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$ |
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$ |
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$ |
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( |
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$ |
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Amortization expense was $
Note 5. Leases
We have operating leases for our corporate headquarters located in Memphis, Tennessee, a collaboration center located in Scottsdale, Arizona and a technology collaboration center in Pune, India. We also continue to lease certain office space in other geographies, which we have either exited or subleased. Our leases have remaining lease terms ranging from
The weighted-average remaining lease term and weighted-average discount rate related to our operating leases are as follows:
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As of |
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June 30, |
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December 31, |
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2024 |
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2023 |
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Weighted-average remaining lease term (years) |
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Weighted-average discount rate |
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% |
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% |
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We recognized operating lease expense of less than $
Supplemental balance sheet information related to our operating lease liabilities is as follows:
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As of |
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June 30, |
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December 31, |
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(In millions) |
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2024 |
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2023 |
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Other accrued liabilities |
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$ |
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$ |
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Operating lease liabilities |
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Total operating lease liabilities |
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$ |
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$ |
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Supplemental cash flow information related to our operating leases is as follows:
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Six Months Ended |
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June 30, |
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(In millions) |
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2024 |
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2023 |
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Cash paid on operating lease liabilities(1) |
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$ |
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$ |
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Right-of-use assets obtained in exchange for lease obligations |
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— |
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In conjunction with the operating leases of our corporate headquarters located in Memphis, Tennessee, and our collaboration center located in Scottsdale, Arizona, we recognized $
10
The following table presents the maturities of our operating lease liabilities as of June 30, 2024:
(In millions) |
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2024 (remainder)(1) |
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$ |
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2025(1) |
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2026(1) |
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2027 |
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2028 |
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2029 |
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Thereafter |
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Total future lease payments(1) |
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Less imputed interest |
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( |
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Total operating lease liabilities(1) |
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$ |
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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 and six months ended June 30, 2024 and 2023 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
Note 7. Acquisitions
On
In conjunction with the 2-10 HBW Acquisition, we recognized acquisition-related costs of $
Note 8. Commitments and Contingencies
Accruals for home warranty 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 warranty claims take approximately
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.
11
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 $
A summary of awards granted under the Omnibus Plan during the six months ended June 30, 2024 is as follows:
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Weighted- |
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Weighted- |
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Weighted- |
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Number of |
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Average |
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Average |
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Average |
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Awards |
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Exercise |
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Grant Date |
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Vesting |
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Granted |
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Price |
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Fair Value |
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Period |
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Stock options |
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Restricted stock units |
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Performance shares(1) |
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As of June 30, 2024, there was $
Note 10. Long-Term Debt
Long-term debt is summarized in the following table:
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As of |
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June 30, |
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December 31, |
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(In millions) |
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2024 |
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2023 |
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Term Loan A maturing in 2026(1) |
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$ |
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$ |
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Term Loan B maturing in 2028(2) |
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Revolving Credit Facility maturing in 2026 |
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Total debt |
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Less current portion |
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( |
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( |
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Total long-term debt |
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$ |
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$ |
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As of June 30, 2024, we had $
12
Scheduled Debt Payments
The following table presents future scheduled debt payments as of June 30, 2024:
(In millions) |
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2024 (remainder) |
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$ |
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2025 |
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2026 |
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2027 |
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2028 |
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Total future scheduled debt payments |
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Less unamortized debt issuance costs |
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( |
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Less unamortized discount |
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( |
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Total debt |
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$ |
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Note 11. Supplemental Cash Flow Information
Supplemental information relating to our accompanying condensed consolidated statements of cash flows is as follows:
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Six Months Ended |
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June 30, |
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(In millions) |
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2024 |
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2023 |
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Cash paid for (received from): |
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Interest expense |
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$ |
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$ |
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Interest income |
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( |
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( |
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Income tax payments, net of refunds |
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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: