UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM  i 10-Q

________________________________________________

For the quarterly period ended  i June 30, 2019

or

For the transition period from                    to                    

Commission file number  i 001-36507

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 i frontdoor, inc.

(Exact name of registrant as specified in its charter)

 i 150 Peabody Place,  i Memphis,  i Tennessee  i 38103

(Address of principal executive offices) (Zip Code)

 i 901- i 701-5002

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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.

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   i x

The number of shares of the registrant’s common stock outstanding as of August 2, 2019:  i 84,648,987 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:

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

TABLE OF CONTENTS

 
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated and Combined Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)

See accompanying Notes to the unaudited Condensed Consolidated and Combined Financial Statements

‎

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

See accompanying Notes to the unaudited Condensed Consolidated and Combined Financial Statements

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

(In millions)

See accompanying Notes to the unaudited Condensed Consolidated and Combined Financial Statements

 
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Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)

(In millions)

See accompanying Notes to the unaudited Condensed Consolidated and Combined Financial Statements

 
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frontdoor, inc.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

 i 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 United States, 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  i 21 household systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. We serve customers across all  i 50 states and the District of Columbia.

On October 1, 2018, ServiceMaster completed the spin-off of its businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names (the “Separated Business”) into a stand-alone publicly traded company (the “Spin-off”). Frontdoor was formed as a wholly-owned subsidiary of ServiceMaster on January 2, 2018 for the purpose of holding the Separated Business in connection with the Spin-off. During 2018, ServiceMaster contributed the Separated Business to Frontdoor. The Spin-off was completed by a pro rata distribution to ServiceMaster’s stockholders of approximately  i 80.2% of our common stock. Each holder of ServiceMaster common stock received  i one share of our common stock for every  i two shares of ServiceMaster common stock held at the close of business on September 14, 2018, the record date of the distribution. The Spin-off was completed pursuant to a separation and distribution agreement and other agreements with ServiceMaster related to the Spin-off, including a transition services agreement, a tax matters agreement, an employee matters agreement and a stockholder and registration rights agreement.

On March 20, 2019, ServiceMaster agreed to transfer its remaining  i 16,734,092 shares of Frontdoor stock to a financial institution pursuant to an exchange agreement. Subsequent to that date, the financial institution conducted a secondary offering of those shares. The transfer was completed on March 27, 2019, resulting in the full separation of Frontdoor from ServiceMaster and the disposal of ServiceMaster's entire ownership and voting interest in Frontdoor.

Prior to the Spin-off, we did not operate as a separate company, and stand-alone financial statements were not historically prepared. The accompanying condensed consolidated and combined financial statements reflect the combined operations of the Separated Business for periods prior to the completion of the Spin-off and reflect our consolidated operations for the period after the completion of the Spin-off. These condensed consolidated and combined financial statements reflect our financial position, results of operations and cash flows in conformity with U.S. GAAP. Our financial position, results of operations and cash flows may not be indicative of our condition had we been a separate stand-alone entity during the periods presented, nor are the results stated herein necessarily indicative of our financial position, results of operations and cash flows had we operated as a separate, independent company during the periods presented.

The accompanying condensed consolidated and combined financial statements include all revenues, costs, assets and liabilities directly attributable to us. ServiceMaster’s debt and corresponding interest expense were not allocated to us for periods prior to the Spin-off since we were not the obligor of the debt. The accompanying condensed consolidated and combined statements of operations and comprehensive income include allocations of certain costs from ServiceMaster incurred on our behalf. Such corporate-level costs were allocated to us using methods based on proportionate formulas such as revenue, headcount and others. Such corporate costs include costs pertaining to: accounting and finance; legal; human resources; information technology; insurance; marketing; tax services; procurement services and other costs. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual level of expense that we would have incurred if we had operated as a separate stand-alone, publicly traded company during the periods presented nor are these costs necessarily indicative of costs we may incur in the future. See Note 9 to the accompanying condensed consolidated and combined financial statements for information regarding allocations from ServiceMaster.

Prior to the Spin-off, current and deferred income taxes and related tax expense were determined based on our stand-alone results by applying ASC 740 as if we were a separate taxpayer, following the separate return methodology. Our portion of current income taxes payable was deemed to have been remitted to ServiceMaster in the period the related tax expense was recorded. Our portion of current income taxes receivable was deemed to have been remitted to us by ServiceMaster in the period to which the receivable applies only to the extent that we could have recognized a refund of such taxes on a stand-alone basis under the law of the relevant taxing jurisdiction. See Note 6 to the accompanying condensed consolidated and combined financial statements for additional information.

We recommend that the accompanying condensed consolidated and combined financial statements be read in conjunction with the audited consolidated and combined financial statements and the notes thereto included in our 2018 Form 10-K. The accompanying condensed consolidated and combined 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.

 i  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 2018 Form 10-K. There have been no material changes to the significant accounting policies for the three and six months ended June 30, 2019, other than the adoption of ASC 842, which became effective January 1, 2019.

 i Leases

We determine if an arrangement is a lease at inception. We recognize an ROU asset and lease liability for all leases with terms of  i 12 months or more. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset is recorded net of lease incentives. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for separately for our real estate leases. See Note 5 to the accompanying condensed consolidated and combined financial statements for information related to our leases.

 i Adoption of New Accounting Standards

In February 2016, the FASB issued ASU 2016-02, which is the final standard on accounting for leases. While both lessees and lessors are affected by the new guidance, the effects on lessees are much more significant. The most significant change for lessees is the requirement under the new guidance to recognize ROU assets and lease liabilities for all leases. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and is measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

We adopted ASC 842 effective January 1, 2019. We utilized the permitted alternative transition method, which removed the requirement that the financial statements of prior periods be restated. There was  i no cumulative effect adjustment recorded to beginning equity as a result of our adoption of this standard. We also elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward our historical lease classification, our assessment on whether expired or existing contracts were or contained a lease and our initial direct costs for any leases that existed prior to adoption of the new standard. In addition, we have elected the practical expedients that allow us, by class of underlying asset, to not separate lease and non-lease components and to not recognize ROU assets and lease liabilities for leases with lease terms of  i 12 months or less.

This standard had a material impact on our condensed consolidated statements of financial position but did not have an impact on our condensed consolidated and combined statements of operations and comprehensive income or condensed consolidated and combined statements of cash flows. The most significant impact was the recognition of ROU assets and lease liabilities of approximately $ i  i 24 /  million for operating leases, while our accounting for finance leases remained unchanged.

 i Accounting Standards Issued but Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, which 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 plan to adopt this standard and related amendments on its effective date of January 1, 2020 and are currently evaluating its 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. This standard is effective for us on January 1, 2020. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements and related disclosures.

 i Note 3. Revenue

We enter into yearly 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. We regularly review our estimates of claims costs and adjust the estimates when appropriate. We derive all of our revenue from customers in the United States.

We disaggregate revenue from contracts with customers into major customer acquisition channels. We determined that disaggregating revenue into these categories 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:

 i ___

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 commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contracts, over the expected customer relationship period. As of June 30, 2019 and December 31, 2018, deferred customer acquisition costs were $ i 19 million and $ i 21 million, respectively. Amortization of these deferred acquisition costs was $ i  i 6 /  million for each of the three months ended June 30, 2019 and 2018, and $ i 10 million and $ i 11 million for the six months ended June 30, 2019 and 2018, respectively. There was  i no impairment loss in relation to these capitalized costs.

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. Additionally, when revenue is recognized on monthly-pay customers before being billed, a contract asset is created.

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 $ i 183 million and $ i 185 million as of June 30, 2019 and December 31, 2018, respectively, and as of June 30, 2019, includes a net contract liability of $ i 5 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 six months ended June 30, 2019, were as follows:

Of the $ i 185 million that was included in the deferred revenue balance as of December 31, 2018, there was approximately $ i 73 million and $ i 143 million of revenue recognized in the three and six months ended June 30, 2019, respectively.

 i 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 $ i 477 million and $ i 476 million as of June 30, 2019 and December 31, 2018, respectively. There were  i  i  i  i  i  i  i  i no /  /  /  /  /  /  /  goodwill or trade name impairment charges recorded in the three and six months ended June 30, 2019 and 2018. There were  i  i no /  accumulated impairment losses recorded as of June 30, 2019 and December 31, 2018. During the second quarter of 2019, we completed a business acquisition for $ i 3 million in cash from operations, which was primarily allocated to other intangible assets and goodwill.