0001562762-20-000177.txt : 20200507 0001562762-20-000177.hdr.sgml : 20200507 20200507162351 ACCESSION NUMBER: 0001562762-20-000177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200507 DATE AS OF CHANGE: 20200507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: frontdoor, inc. CENTRAL INDEX KEY: 0001727263 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TO DWELLINGS & OTHER BUILDINGS [7340] IRS NUMBER: 823871179 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38617 FILM NUMBER: 20856825 BUSINESS ADDRESS: STREET 1: 150 PEABODY PLACE CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 901-597-8289 MAIL ADDRESS: STREET 1: 150 PEABODY PLACE CITY: MEMPHIS STATE: TN ZIP: 38103 FORMER COMPANY: FORMER CONFORMED NAME: AHS Holding Company, Inc. DATE OF NAME CHANGE: 20180105 10-Q 1 ftdr-20200331x10q.htm 10-Q ftdr-20200331x10q
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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, 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

________________________________________________

Picture 1

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®, HSATM, OneGuard®, Landmark Home Warranty®, CanduTM, Streem® and the frontdoor logo.

 


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.


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.

 

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.

 

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.

 

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

_____________________________

(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

___________________________________

(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