FRONTDOOR, INC. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and related notes thereto included in our 2021 Form 10-K and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. The cautionary statements discussed in "Cautionary Statement Concerning Forward-Looking Statements" and elsewhere in this report should be read as applying to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in "Cautionary Statement Concerning Forward-Looking Statements" as well as the risk factors discussed in Part I, Item 1A. "Risk Factors" in our 2021 Form 10-K. OverviewFrontdoor is the leading provider of home service plans inthe United States , as measured by revenue, and operates under theAmerican 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. AtJune 30, 2022 , we had 2.2 million active home service plans across all 50 states and theDistrict of Columbia . For the three months endedJune 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of$487 million ,$33 million and$77 million , respectively, and$462 million ,$40 million and$114 million , respectively. For the six months endedJune 30, 2022 and 2021, we generated revenue, net income and Adjusted EBITDA of$838 million ,$35 million and$102 million , respectively, and$791 million ,$45 million and$150 million , respectively. For the six months endedJune 30, 2022 , our total operating revenue included 71 percent of revenue derived from existing customer renewals, while 12 percent and 13 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels. For the six months endedJune 30, 2021 , our total operating revenue included 68 percent of revenue derived from existing customer renewals, while 17 percent and 12 percent were derived from new home service plan sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and three percent was derived from other revenue channels.
New CEO Appointment
OnMay 20, 2022 , we announced the appointment ofWilliam Cobb , Chairman of the Board of Directors of the Company, as Chief Executive Officer of the Company, effectiveJune 1, 2022 .Mr. Cobb has served as Chairman of the Board sinceOctober 2018 and continues to hold that office.
Key Factors and Trends Affecting Our Results of Operations
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 impactthe United States as a whole, we believe our nationwide presence limits the risk of poor economic conditions in any particular region ofthe United States . 20
--------------------------------------------------------------------------------
During the first six months of 2022, our financial condition and results of operations were adversely impacted by the following:
?The challenging home 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. Given the emergence of COVID-19 variants and surges in COVID-19 cases, a significant number of people may continue to spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs. We also expect that industry-wide supply chain challenges may continue to contribute to increased costs and impact the customer experience, which may affect customer retention. Accordingly, the COVID-19 situation remains very fluid, and we continue to adjust our response in real time. It remains difficult to predict the overall continuing impact the COVID-19 pandemic will have on our business.
Seasonality
Our business is subject to seasonal fluctuations, which drives variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of central HVAC work orders in the summer months. In 2021, we continued to experience additional variations as the COVID-19 pandemic resulted in an elevated level of service requests in the appliance trade compared to pre-pandemic levels as our customers spent more time at home. In 2021, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 4 percent, 31 percent, 60 percent and 5 percent of our net income, and approximately 12 percent, 38 percent, 41 percent and 9 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.
Effect of Weather Conditions
The demand for our services, and our results of operations, are affected by weather conditions. Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability. For example, contract claims costs were unfavorably impacted by the extremely hot weather across the country during the second quarter of 2022 as compared to 2021. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency. While weather variations as described above may affect our business, major weather events and other similar Acts of God, such as hurricanes, flooding and tornadoes, typically do not increase our obligations to provide service. Generally, repairs associated with such isolated events are addressed by homeowners' and other forms of insurance as opposed to the home service plans that we offer.
Tariff and Import/Export Regulations
Changes inU.S. tariff and import/export regulations may impact the costs of parts, appliances and home systems. Import duties or restrictions on components and raw materials that are imposed, or the perception that they could occur, may materially and adversely affect our business by increasing our costs. For example, rising costs due to blanket tariffs on imported steel and aluminum could increase the costs of our parts, appliances and home systems. 21
--------------------------------------------------------------------------------
Competition
We compete in theU.S. home service plan category and the broaderU.S. home services industry. The home service plan category is highly competitive. The principal methods of competition, and by which we differentiate ourselves from our competitors, are quality and speed of service, contract offerings, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals.
Acquisition Activity
We anticipate that the highly fragmented nature of the home service plan category will continue to create strategic opportunities for acquisitions. Historically, we have used acquisitions to cost-effectively grow our customer base in high-growth geographies, and we intend to continue to do so. We may also explore opportunities to make strategic acquisitions that will expand our service offering in the broader home services industry. We have also used acquisitions to enhance our technological capabilities and geographic presence. In 2019, we acquired Streem to support the service experience for our customers, reduce costs and create potentially new revenue opportunities across a variety of channels. Non-GAAP Financial Measures To supplement our results presented in accordance withU.S. GAAP, we have disclosed non-GAAP financial measures that exclude or adjust certain items. We present within this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section the non-GAAP financial measures of Adjusted EBITDA and Free Cash Flow. See "Results of Operations - Adjusted EBITDA" for a reconciliation of net income to Adjusted EBITDA and "Liquidity and Capital Resources - Free Cash Flow" for a reconciliation of net cash provided from operating activities to Free Cash Flow, as well as "Key Business Metrics" for further discussion of Adjusted EBITDA and Free Cash Flow. Management uses Adjusted EBITDA and Adjusted EBITDA margin to facilitate operating performance comparisons from period to period. We believe these non-GAAP financial measures provide investors, analysts and other interested parties useful information to evaluate our business performance as they facilitate company-to-company operating performance comparisons. Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance. While we believe these non-GAAP financial measures are useful in evaluating our business, they should be considered as supplemental in nature and are not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance withU.S. GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies, limiting their usefulness as comparative measures.
Key Business Metrics
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include: ?revenue, ?operating expenses, ?net income, ?earnings per share, ?Adjusted EBITDA, ?Adjusted EBITDA margin,
?net cash provided from operating activities,
?Free Cash Flow,
?growth in number of home service plans, and
?customer retention rate.
Revenue. The majority of our revenue is generated from annual home service plan agreements entered into with our customers. Home service plan contracts are typically one year in duration. We recognize revenue at the agreed upon contractual amount over time using the input method in proportion to the costs expected to be incurred in performing services under the contracts. Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new home service plan sales, customer retention and acquisitions. We derive substantially all of our revenue from customers inthe United States . 22
-------------------------------------------------------------------------------- Operating Expenses. In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. Our operating expenses primarily include contract claims costs and expenses associated with sales and marketing, customer service and general corporate overhead. A number of our operating expenses are subject to inflationary pressures, such as: salaries and wages, employee benefits and healthcare; contractor costs; parts, appliances and home systems costs; tariffs; insurance premiums; and various regulatory compliance costs. Net Income and Earnings Per Share. The presentation of net income and basic and diluted earnings per share provides measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs, performance shares (which are contractual rights to receive a share of our common stock (or the cash equivalent thereof) upon the achievement, in whole or in part, of the applicable performance goals, pursuant to the terms of the Omnibus Plan and the award agreement) and RSAs are reflected in diluted earnings per share by applying the treasury stock method. Adjusted EBITDA and Adjusted EBITDA margin. We evaluate performance based primarily on Adjusted EBITDA, which is a financial measure not calculated in accordance withU.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; restructuring charges; provision for income taxes; non-cash stock-based compensation expense; interest expense; loss on extinguishment of debt; and other non-operating expenses. We define "Adjusted EBITDA margin" as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.
Net Cash Provided from Operating Activities and Free Cash Flow. We focus on
measures designed to monitor cash flow, including net cash provided from
operating activities and Free Cash Flow, which is a financial measure not
calculated in accordance with
Growth in Number of Home Service Plans and Customer Retention Rate. We report our growth in number of home service plans and customer retention rate in order to track the performance of our business. Home service plans represent our recurring customer base, which includes customers with active contracts for recurring services. Our customer retention rate is calculated as the ratio of ending home service plans to the sum of beginning home service plans, new home service plan sales and acquired accounts for the applicable period. These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. There have been no material changes to our critical accounting policies for the six months endedJune 30, 2022 , certain of which are described below.
In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment on an annual basis, or more frequently, if circumstances indicate a potential impairment. As ofJune 30, 2022 , we do not believe there are any circumstances, including those related to COVID-19, that would indicate a potential impairment of our goodwill or indefinite-lived intangible assets. We will continue to monitor the macroeconomic impacts on our business in our ongoing evaluation of potential impairments.
During the third quarter of 2022, we will continue our evaluation of the long-term plan for the Streem reporting unit. We will be more focused on integrating Streem's technology into the core business and will be less focused on selling this technology platform to third-party customers; therefore, an impairment of goodwill and intangible assets at Streem is reasonably possible.
?
23
--------------------------------------------------------------------------------
Results of Operations
Three Months EndedJune 30, 2022 Compared to Three Months EndedJune 30, 2021 Three Months Ended Increase June 30, (Decrease) % of Revenue (In millions) 2022 2021 2022 vs. 2021 2022 2021 Revenue$ 487 $ 462 5 % 100 % 100 % Cost of services rendered 276 221 25 57 48 Gross Profit 211 242 (13) 43 52 Selling and administrative expenses 140 136 4 29 29 Depreciation and amortization expense 8 9 (9) 2 2 Restructuring charges 12 1 * 2 - Interest expense 7 12 (40) 1 3 Loss on extinguishment of debt - 30 * - 7 Income before Income Taxes 43 54 (21) 9 12 Provision for income taxes 10 14 (29) 2 3 Net Income$ 33 $ 40 (18) % 7 % 9 %
_______________________________
* not meaningful
Six Months Ended
Six Months Ended Increase
June 30, (Decrease) % of Revenue
(In millions) 2022 2021 2022 vs. 2021 2022 2021
Revenue $ 838 $ 791 6 % 100 % 100 %
Cost of services rendered 483 402 20 58 51
Gross Profit 355 390 (9) 42 49
Selling and administrative expenses 266 254 5 32 32
Depreciation and amortization expense 17 19 (10) 2 2
Restructuring charges 12 2 * 1 -
Interest expense 14 25 (45) 2 3
Interest and net investment (income) loss - (1) * - -
Loss on extinguishment of debt - 31 * - 4
Income before Income Taxes 46 60 (23) 6 8
Provision for income taxes 12 15 (21) 1 2
Net Income $ 35 $ 45 (23) % 4 % 6 %
_______________________________
* not meaningful
?
24
--------------------------------------------------------------------------------
Revenue
We reported revenue of$487 million and$462 million for the three months endedJune 30, 2022 and 2021, respectively, and$838 million and$791 million for the six months endedJune 30, 2022 and 2021, respectively. Revenue by major customer acquisition channel is as follows: Three Months EndedJune 30, 2022 Compared to Three Months EndedJune 30, 2021 Three Months Ended June 30, (In millions) 2022 2021 Increase (Decrease) Renewals$ 347 $ 316 $ 31 10 % Real estate(1) 57 77 (20) (26) Direct-to-consumer(1) 66 57 8 15 Other 18 13 5 43 Total revenue$ 487 $ 462 $ 25 5 %
________________________________
(1)First-year revenue only.
Revenue increased five percent for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans. The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller's market. The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products. The increase in other revenue was driven by growth in ProConnect.
Six Months Ended
Six Months Ended
June 30,
(In millions) 2022 2021 Increase (Decrease)
Renewals $ 593 $ 539 $ 54 10 %
Real estate(1) 102 134 (32) (24)
Direct-to-consumer(1) 112 98 14 14
Other 31 20 10 51
Total revenue $ 838 $ 791 $ 47 6 %
________________________________
(1)First-year revenue only.
Revenue increased six percent for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , primarily driven by higher renewal revenue due to improved price realization and growth in the number of renewed home service plans. The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home service plans driven by a continuation of the challenging home seller's market. The increase in direct-to-consumer revenue primarily reflects improved price realization and a mix shift to higher priced products. The increase in other revenue was driven by growth in ProConnect.
Number of home service plans, growth in number of home service plans and customer retention rate are presented below.
As of
June 30,
(In millions) 2022 2021
Number of home service plans 2.17 2.24
(Reduction) growth in number of home service plans (3) % 3 % Customer retention rate
74.4 % 74.9 %
The number of home service plans and customer retention rate as of June 30, 2022
were negatively impacted by a decline in the number of first-year real estate
home service plans, which was driven by a continuation of the challenging home
seller's market, as well as the impact on customer experience of industry-wide
supply chain challenges.
25
--------------------------------------------------------------------------------
Cost of Services Rendered
We reported cost of services rendered of$276 million and$221 million for the three months endedJune 30, 2022 and 2021, respectively, and$483 million and$402 million for the six months endedJune 30, 2022 and 2021, respectively. The following tables provide a summary of changes in cost of services rendered: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 2022 2021 Contract claims cost$ 272 $ 217 $ 474 $ 394 Bad debt expense 4 4 9 8 Total$ 276 $ 221 $ 483 $ 402
Three Months Ended
(In millions) Three Months EndedJune 30, 2021 $ 221 Impact of change in revenue 2 Contract claims costs 53
Three Months Ended
The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter. In addition, contract claims costs for the second quarter of 2022 include a$7 million unfavorable adjustment related to the adverse development of prior period claims.
Six Months Ended
(In millions) Six Months EndedJune 30, 2021 $ 402 Impact of change in revenue 3 Contract claims costs 77 Bad debt expense 2
Six Months Ended
The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter. In addition, contract claims costs for the six months endedJune 30, 2022 include a$12 million unfavorable adjustment related to the adverse development of prior period claims.
Selling and Administrative Expenses
We reported selling and administrative expenses of$140 million and$136 million for the three months endedJune 30, 2022 and 2021, respectively, and$266 million and$254 million for the six months endedJune 30, 2022 and 2021, respectively. The following tables provide a summary of changes in selling and administrative expenses: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 2022 2021 Sales and marketing costs$ 72 $ 67 $ 128 $ 121 Customer service costs 30 30 58 57 General and administrative costs 38 39 80 76 Total$ 140 $ 136 $ 266 $ 254 26
--------------------------------------------------------------------------------
Three Months Ended
(In millions) Three Months EndedJune 30, 2021 $ 136 Sales and marketing costs 6 Stock-based compensation expense (2) General and administrative costs 1 Three Months EndedJune 30, 2022 $ 140 The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees.
Six Months Ended
(In millions) Six Months EndedJune 30, 2021 $ 254 Sales and marketing costs 10 Stock-based compensation expense (1) General and administrative costs 4 Six Months EndedJune 30, 2022 $ 266 The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees and higher personnel costs.
Depreciation and Amortization Expense
Depreciation expense was$7 million and$6 million for the three months endedJune 30, 2022 and 2021, respectively, and$13 million and$12 million for the six months endedJune 30, 2022 and 2021, respectively. Amortization expense was$2 million and$3 million for the three months endedJune 30, 2022 and 2021, respectively, and$4 million and$6 million for the six months endedJune 30, 2022 and 2021, respectively. The decrease in amortization expense was due to certain intangible assets becoming fully amortized during 2021.
Restructuring Charges
Restructuring charges were$12 million and$1 million for the three months endedJune 30, 2022 and 2021, respectively, and$12 million and$2 million for the six months endedJune 30, 2022 and 2021, respectively.
For the three and six months ended
For the three months ended
For the six months ended
Interest Expense Interest expense was$7 million and$12 million for the three months endedJune 30, 2022 and 2021, respectively, and$14 million and$25 million for the six months endedJune 30, 2022 and 2021, respectively. The decrease was driven by our debt reduction and refinancing activities in 2021. 27
--------------------------------------------------------------------------------
Loss on Extinguishment of Debt
Loss on extinguishment of debt was$30 million and$31 million for the three and six months endedJune 30, 2021 , respectively. Amounts relate to our debt reduction and refinancing activities in 2021. There were no such charges for the three and six months endedJune 30, 2022 .
Provision for Income Taxes
The effective tax rate on income was 23.2 percent and 26.0 percent for the three months endedJune 30, 2022 and 2021, respectively, and 25.1 percent and 24.5 percent for the six months endedJune 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the three months endedJune 30, 2022 compared to 2021 is primarily due to share-based awards and income tax credits, offset, in part, by an increase in state income taxes. The increase in the effective tax rate for the six months endedJune 30, 2022 compared to 2021 is primarily due to share-based awards and state income taxes, offset, in part, by an increase in income tax credits.
Net Income
Net income was$33 million and$40 million for the three months endedJune 30, 2022 and 2021, respectively, and$35 million and$45 million for the six months endedJune 30, 2022 and 2021, respectively. For both the three and six months endedJune 30, 2022 compared to 2021, the decrease in net income was primarily driven by the decrease in the aforementioned operating results and the increase in restructuring charges, offset, in part, by the decrease in interest expense and the impact of the prior year loss on extinguishment of debt.
Adjusted EBITDA
Adjusted EBITDA was$77 million and$114 million for the three months endedJune 30, 2022 and 2021, respectively, and$102 million and$150 million for the six months endedJune 30, 2022 and 2021, respectively. The following tables provide a summary of changes in our Adjusted EBITDA:
Three Months Ended
(In millions) Three Months EndedJune 30, 2021 $ 114 Impact of change in revenue 23 Contract claims costs (53) Sales and marketing costs (6) General and administrative costs (1) Three Months EndedJune 30, 2022 $ 77 The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter. In addition, contract claims costs for the second quarter of 2022 include a$7 million unfavorable adjustment related to the adverse development of prior period claims. The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees.
Six Months Ended
(In millions) Six Months EndedJune 30, 2021 $ 150 Impact of change in revenue 44 Contract claims costs (77) Sales and marketing costs (10) General and administrative costs (4) Bad debt expense (2)
Six Months Ended
?
28
-------------------------------------------------------------------------------- The increase in contract claims costs primarily reflects an acceleration of inflationary cost pressures, including rising contractor-related expenses and higher parts and equipment costs. Contract claims costs were also unfavorably impacted by the extremely hot weather across the country during the second quarter. In addition, contract claims costs for the six months endedJune 30, 2022 include a$12 million unfavorable adjustment related to the adverse development of prior period claims. The increase in sales and marketing costs was primarily driven by increased investments to drive sales growth in the home service plan direct-to-consumer channel and ProConnect. General and administrative costs increased primarily due to increased professional fees and higher personnel costs.
A reconciliation of Net Income to Adjusted EBITDA is presented below.
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Net Income $ 33 $ 40 $ 35 $ 45
Depreciation and amortization
expense 8 9 17 19
Restructuring charges(1) 12 1 12 2
Provision for income taxes 10 14 12 15
Non-cash stock-based compensation
expense(2) 6 8 12 13
Interest expense 7 12 14 25
Loss on extinguishment of debt(3) - 30 - 31
Adjusted EBITDA $ 77 $ 114 $ 102 $ 150 _________________________________
(1)We exclude restructuring charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability. (2)We exclude non-cash stock-based compensation expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability. (3)We exclude loss on extinguishment of debt from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.
Liquidity and Capital Resources
Liquidity
A substantial portion of our liquidity needs are due to debt service requirements on our indebtedness. The Credit Agreement contains covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As ofJune 30, 2022 , we were in compliance with the covenants under the agreements that were in effect on such date. Based on current conditions, we do not believe the COVID-19 pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including our Credit Agreement. Cash and cash equivalents totaled$269 million and$262 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. Our cash and cash equivalents include balances associated with regulatory requirements in our business. See "-Limitations on Distributions and Dividends by Subsidiaries." As ofJune 30, 2022 , andDecember 31, 2021 , the total net assets subject to these third-party restrictions was$159 million and$175 million , respectively. As ofJune 30, 2022 , there were$2 million of letters of credit outstanding and$248 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate. Available liquidity was$357 million atJune 30, 2022 , consisting of$109 million of cash not subject to third-party restrictions and$248 million of available borrowing capacity under the Revolving Credit Facility. We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility atJune 30, 2022 will provide us with sufficient liquidity to meet our obligations in the short- and long-term. We closely monitor the performance of our investment portfolio. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles. 29 -------------------------------------------------------------------------------- We may, from time to time, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, gross leverage, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, and the price of such repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. OnSeptember 7, 2021 , we announced a three-year repurchase authorization of up to$400 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash provided from operating activities. As ofJune 30, 2022 , we have purchased a total of 4,478,194 outstanding shares at an aggregate cost of$162 million under this program, which is included in treasury stock on the condensed consolidated statements of financial position. Purchases under the repurchase program may be made from time to time by the company in the open market at prevailing market prices (including through a Rule 10b5-1 Plan), in privately negotiated transactions, or through any combination of these methods, throughSeptember 3, 2024 . The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of the company's stock, general market and economic conditions, the company's liquidity requirements, applicable legal requirements and other business considerations. The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be suspended or discontinued at any time at our discretion.
Limitations on Distributions and Dividends by Subsidiaries
We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries' jurisdictions. Our subsidiaries are permitted under the terms of the Credit Agreement and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to regulatory requirements. The payments of ordinary and extraordinary dividends by certain of our subsidiaries (through which we conduct our business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. We expect that such limitations will be in effect for the foreseeable future. InTexas , we are relieved of the obligation to post 75 percent of our otherwise required reserves because we operate a captive insurer approved byTexas regulators in order to satisfy such obligations. None of our subsidiaries are obligated to make funds available to us through the payment of dividends.
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in
the condensed consolidated statements of cash flows included in Part I, Item 1
of this report, are summarized in the following table.
Six Months Ended
June 30,
(In millions) 2022 2021
Net cash provided from (used for):
Operating activities $ 94 $ 119
Investing activities (19) (15)
Financing activities (69) (378)
Cash (decrease) increase during the period
Operating Activities
Net cash provided from operating activities was
Net cash provided from operating activities in 2022 comprised$68 million in earnings adjusted for non-cash charges and$26 million in cash provided from working capital. Cash provided from working capital was primarily driven by seasonality. 30
-------------------------------------------------------------------------------- Net cash provided from operating activities in 2021 comprised$112 million in earnings adjusted for non-cash charges and an$8 million decrease in cash required for working capital. The decrease in cash required for working capital was driven by seasonality and growth in our underlying business, offset, in part, by interest payments made in connection with the redemption of the 2026 Notes. Investing Activities
Net cash used for investing activities was
Capital expenditures were$19 million and$15 million for the six months endedJune 30, 2022 and 2021, respectively, and included recurring capital needs and technology projects. We expect capital expenditures for the full year 2022 relating to recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately$40 million to$50 million . We have no additional material capital commitments at this time. Financing Activities
Net cash used for financing activities was
For the six months ended
For the six months endedJune 30, 2021 , as part of our debt reduction and refinancing activities in 2021, we borrowed$638 million , net of discount, under the Term Loan Facilities and redeemed the remaining outstanding principal amounts of$634 million of the Prior Term Loan Facility and$350 million of the 2026 Notes. In connection with the repayments, we paid a "make-whole" redemption premium of$21 million on the 2026 Notes and debt issuance costs of$8 million .
Free Cash Flow
The following table reconciles net cash provided from operating activities,
which we consider to be the most directly comparable
Six Months Ended
(In millions) June 30,
2022 2021
Net cash provided from operating activities $ 94 $ 119
Property additions (19) (15)
Free Cash Flow $ 75 $ 104
Contractual Obligations
Our 2021 Form 10-K includes disclosures of our contractual obligations and
commitments as of
Financial Position
The following discussion describes changes in our financial position from
?Contract asset increased during the six months endedJune 30, 2022 , reflecting a net contract asset related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.
?Accounts payable increased during the six months ended
?Home service plan claims increased during the six months endedJune 30, 2022 , reflecting the seasonality of contract claims and inflation, which increased amounts due to contractors and suppliers.
?Deferred revenue decreased during the six months ended
31
--------------------------------------------------------------------------------
?Other long-term liabilities decreased during the six months ended
?Total shareholders' equity was$6 million as ofJune 30, 2022 compared to$2 million as ofDecember 31, 2021 . The increase was primarily driven by net income and the change in valuation of our interest rate swap, offset, in part, by the repurchases of common stock. See the condensed consolidated statements of changes in equity (deficit) included in Part I, Item 1 of this report for further information. 32
--------------------------------------------------------------------------------
© Edgar Online, source
