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, 2020

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

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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)

901-701-5002

(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 May 1, 2020: 85,382,950 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
2019 Form 10-K	frontdoor, inc. Annual Report on Form 10-K for the year ended December 31, 2019
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 326	ASC Topic 326, Financial Instruments–Credit Losses
ASC 740	ASC Topic 740, Income Taxes
ASU	FASB Accounting Standards Update
ASU 2016-13	ASU 2016-13, Financial Instruments–Credit Losses (Topic 326)
ASU 2018-15	ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
ASU 2020-04	ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Credit Agreement	The agreements governing the Term Loan Facility and the Revolving Credit Facility
Credit Facilities	The Term Loan Facility 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
Indenture	The indenture and supplemental indenture between Frontdoor and Wilmington Trust, National Association as trustee, that governs the 2026 Notes
IRS	Internal Revenue Service
LIBOR	London Inter-bank Offered Rate
Omnibus Plan	frontdoor, inc. 2018 Omnibus Incentive Plan
ServiceMaster	ServiceMaster Global Holdings, Inc.
Revolving Credit Facility	$250 million revolving credit facility
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Spin-off	Separation of the businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names by ServiceMaster into a stand-alone publicly traded company, which was completed on October 1, 2018
Term Loan Facility	$650 million senior secured term loan facility
U.S.	United States of America
U.S. GAAP	Accounting principles generally accepted in the U.S.

The following terms in this Quarterly Report on Form 10-Q are our trademarks: frontdoor^™, American Home Shield^®, HSA^TM, OneGuard^®, Landmark Home Warranty^®, Candu^TM, Streem^® and the frontdoor logo.

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 (Deficit) Equity	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
Cautionary Statement Concerning Forward-Looking Statements	16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	27
Item 4. Controls and Procedures	27
Part II. Other Information
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 6. Exhibits	30
Signature	31

 
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2

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,
	2020		2019
Revenue	$	294	$	271
Cost of services rendered		147		143
Gross Profit		147		128
Selling and administrative expenses		105		89
Depreciation and amortization expense		8		6
Restructuring charges		3		—
Spin-off charges		—		1
Interest expense		15		16
Interest and net investment income		(2)		(1)
Income before Income Taxes		17		18
Provision for income taxes		4		5
Net Income	$	13	$	13
Other Comprehensive Loss, Net of Income Taxes:
Net unrealized loss on derivative instruments		(15)		(5)
Total Comprehensive (Loss) Income	$	(2)	$	8
Earnings per Share:
Basic	$	0.15	$	0.15
Diluted	$	0.15	$	0.15
Weighted-average Common Shares Outstanding:
Basic		85.1		84.6
Diluted		85.4		84.7

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

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3

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

	As of
	March 31,		December 31,
	2020		2019
Assets:
Current Assets:
Cash and cash equivalents	$	482	$	428
Marketable securities		2		7
Receivables, less allowance of $2 in each period		8		11
Prepaid expenses and other assets		18		16
Total Current Assets		510		461
Other Assets:
Property and equipment, net		55		51
Goodwill		501		501
Intangible assets, net		188		191
Operating lease right-of-use assets		14		17
Deferred customer acquisition costs		18		18
Other assets		6		11
Total Assets	$	1,291	$	1,250
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable	$	55	$	48
Accrued liabilities:
Payroll and related expenses		12		17
Home service plan claims		55		66
Interest payable		3		9
Other		38		29
Deferred revenue		227		188
Current portion of long-term debt		7		7
Total Current Liabilities		398		364
Long-Term Debt		972		973
Other Long-Term Liabilities:
Deferred taxes		41		45
Operating lease liabilities		18		20
Other long-term obligations		41		27
Total Other Long-Term Liabilities		100		92
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 85,381,109 shares issued and outstanding at March 31, 2020 and 85,309,260 shares issued and outstanding at December 31, 2019		1		1
Additional paid-in capital		31		29
Accumulated deficit		(174)		(188)
Accumulated other comprehensive loss		(36)		(21)
Total Deficit		(178)		(179)
Total Liabilities and Shareholders' Equity	$	1,291	$	1,250

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

4

Condensed Consolidated Statement of Changes in (Deficit) Equity (Unaudited)

(In millions)

	Three Months Ended
	March 31,
	2020		2019
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		29		1
Taxes paid related to net share settlement of equity awards		(1)		—
Stock-based employee compensation		3		2
Balance at end of period		31		3
Accumulated Deficit
Balance at beginning of period		(188)		(336)
Net income		13		13
Balance at end of period		(174)		(323)
Accumulated Other Comprehensive Loss
Balance at beginning of period		(21)		(9)
Other comprehensive loss, net of tax		(15)		(5)
Balance at end of period		(36)		(14)
Total Deficit	$	(178)	$	(334)

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 
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5

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

	Three Months Ended
	March 31,
	2020		2019
Cash and Cash Equivalents at Beginning of Period	$	428	$	296
Cash Flows from Operating Activities:
Net Income		13		13
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense		8		6
Stock-based compensation expense		3		2
Restructuring charges		3		—
Payments for restructuring charges		(3)		—
Spin-off charges		—		1
Payments for spin-off charges		—		(1)
Other		—		1
Change in working capital, net of acquisitions:
Receivables		3		4
Prepaid expenses and other current assets		2		1
Accounts payable		7		8
Deferred revenue		40		34
Accrued liabilities		(15)		(10)
Accrued interest payable		(6)		(6)
Current income taxes		4		(1)
Net Cash Provided from Operating Activities		60		52
Cash Flows from Investing Activities:
Purchases of property and equipment		(8)		(4)
Purchases of available-for-sale securities		(2)		—
Sales and maturities of available-for-sale securities		7		3
Other investing activities		—		(3)
Net Cash Used for Investing Activities		(3)		(5)
Cash Flows from Financing Activities:
Payments of debt and finance lease obligations		(2)		(2)
Other financing activities		(1)		—
Net Cash Used for Financing Activities		(3)		(2)
Cash Increase During the Period		54		45
Cash and Cash Equivalents at End of Period	$	482	$	341

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 
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6

frontdoor, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

References in this Quarterly Report on Form 10-Q to “Frontdoor,” “we,” “our,” or “us” refer to frontdoor, inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee. 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.

We are the largest provider of home service plans in the U.S., as measured by revenue, and operate 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 plans cover the repair or replacement of major components of up to 21 household systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. In 2019, we launched our new on-demand home services business under the brand name Candu, and we acquired Streem, a technology startup that uses augmented reality, computer vision and machine learning to help home service professionals more quickly and accurately diagnose breakdowns and complete repairs and to help real estate professionals consult with and provide virtual tours to potential buyers and agents. We serve customers 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 and combined financial statements and the notes thereto included in our 2019 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.

Impact of COVID-19

On March 11, 2020, the World Health Organization (“WHO”) characterized the recent novel coronavirus disease (“COVID-19”) as a pandemic, and on March 13, 2020, the U.S. declared a national emergency concerning the outbreak. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. In response to the pandemic, we took several 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.

f Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2019 Form 10-K. There have been no material changes to the significant accounting policies for the three months ended March 31, 2020.

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, which was amended in parts by subsequent accounting standards updates (collectively ASC 326). This standard requires earlier recognition of credit losses while also providing additional transparency about credit risk. Further, the new credit loss model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. We adopted ASC 326 prospectively, effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard prospectively, effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

7

Accounting Standards Issued Not Yet Adopted

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. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022, when the reference rate replacement activity is expected to be completed. We are currently evaluating its impact on our consolidated financial statements and related disclosures.

Note 3. Revenue

We enter into annual service plan agreements with our customers. We 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 U.S.

We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories achieves the disclosure objective to depict 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)	2020		2019
Renewals	$	200	$	182
Real estate(1)		56		54
Direct-to-consumer(1)		35		33
Other		3		1
Total	$	294	$	271

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(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.

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 as of March 31, 2020 and December 31, 2019. Amortization of these deferred acquisition costs was $4 million for each of the three months ended March 31, 2020 and 2019. There were no impairment losses in relation to these capitalized costs.

8

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 $227 million and $188 million as of March 31, 2020 and December 31, 2019, respectively, and as of March 31, 2020, includes a net contract liability of $44 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, 2020 were as follows:

(In millions)	Deferred ‎Revenue
Balance as of December 31, 2019	$	188
Deferral of revenue		127
Recognition of deferred revenue		(87)
Balance as of March 31, 2020	$	227

There was approximately $72 million of revenue recognized in the three months ended March 31, 2020 that was included in the deferred revenue balance as of December 31, 2019.

Note 4. Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value-based test 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 $501 million as of March 31, 2020 and December 31, 2019. There were no goodwill or trade name impairment charges recorded in the three months ended March 31, 2020 and 2019. There were no accumulated impairment losses recorded as of March 31, 2020 and December 31, 2019.

The table below summarizes the other intangible asset balances:

	As of March 31, 2020						As of December 31, 2019
(In millions)	Gross		Accumulated ‎Amortization		Net		Gross		Accumulated ‎Amortization		Net
Trade names(1)	$	141	$	—	$	141	$	141	$	—	$	141
Customer relationships		173		(169)		5		173		(168)		5
Developed technology		34		(2)		31		34		(1)		33
Other		37		(26)		11		37		(25)		12
Total	$	385	$	(197)	$	188	$	385	$	(193)	$	191

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(1)Not subject to amortization.

Amortization expense was $3 million and $2 million for the three months ended March 31, 2020 and 2019, respectively. The following table outlines expected amortization expense for existing intangible assets for the remainder of 2020 and the next five years:

(In millions)
2020 (remainder)	$	8
2021		10
2022		7
2023		6
2024		5
2025		5
Total	$	42