Frontdoor(FTDR) - 2019 Q4 - Annual Report

Part I Business Frontdoor is the largest U.S. provider of home service plans, generating $1.365 billion in 2019 revenue - Frontdoor is the largest U.S. provider of home service plans by revenue, serving over two million customers annually through a network of approximately 17,000 contractor firms[19][20] - In 2019, the company launched Candu for on-demand home services and acquired Streem, an augmented reality technology firm, to enhance diagnostic capabilities[19][23][24] - The business model is characterized by recurring revenue, with 68% of 2019 revenue from existing customer renewals[21] 2019 Financial Highlights | Metric | Value (in millions) | | :--- | :--- | | Revenue | $1,365 | | Net Income | $153 | | Adjusted EBITDA | $303 | Risk Factors The company faces significant risks from competition, its 2018 spin-off, and substantial indebtedness - Business risks include intense competition, weakening economic conditions, reliance on third-party contractors, and cybersecurity breaches[77][78][82] - Risks from the 2018 spin-off include a limited operating history as a public company and potential tax liabilities[126][129][134] - The company has substantial indebtedness of approximately $992 million as of year-end 2019, creating interest rate risk and operational limitations[162][163][165] - A one percentage point change in interest rates would alter annual interest expense by approximately $3 million on the unhedged Term Loan Facility[163] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[173] Properties The company's main properties include a leased corporate headquarters and five customer care centers - The company's corporate headquarters is located in a leased facility in Memphis, Tennessee[174] - Frontdoor operates five customer care centers, with two owned properties in Iowa and Georgia and three leased facilities in other states[174] Legal Proceedings The company is subject to ordinary course legal actions not expected to have a material adverse effect - The company is subject to legal and regulatory actions from the ordinary course of business, but management does not expect them to have a material adverse effect on financial results[175] Mine Safety Disclosures This item is not applicable to the company - None[176] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ under 'FTDR', and it does not intend to pay dividends - The company's common stock is listed on the NASDAQ under the symbol 'FTDR'[179] - Frontdoor does not intend to pay cash dividends in the foreseeable future, prioritizing earnings for debt repayment, share repurchases, and growth[180] - On December 4, 2019, the company issued 575,370 restricted shares of common stock, valued at $19 million, for the Streem acquisition[181][182] Selected Financial Data This section presents a five-year summary of key financial data showing consistent revenue growth Five-Year Financial Summary (2015-2019) | (In millions) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,365 | $1,258 | $1,157 | $1,020 | $917 | | Gross Profit | $678 | $572 | $567 | $494 | $449 | | Net Income | $153 | $125 | $160 | $124 | $120 | | Total long-term debt | $980 | $984 | $9 | $14 | $1 | | Net cash provided from operating activities | $200 | $189 | $194 | $155 | $135 | | Adjusted EBITDA | $303 | $238 | $259 | $218 | $205 | Reconciliation of Net Income to Adjusted EBITDA (2019 vs 2018) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $153 | $125 | | Depreciation and amortization | $24 | $21 | | Restructuring charges | $1 | $3 | | Spin-off charges | $1 | $24 | | Provision for income taxes | $51 | $42 | | Non-cash stock-based compensation | $9 | $4 | | Interest expense | $62 | $23 | | Other adjustments | $4 | $(5) | | Adjusted EBITDA | $303 | $238 | Reconciliation to Free Cash Flow (2019 vs 2018) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided from operating activities | $200 | $189 | | Property additions | $(22) | $(27) | | Free Cash Flow | $178 | $163 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 8% to $1.365 billion in 2019, driving a 23% increase in net income to $153 million - Revenue growth in 2019 was primarily driven by an 11% increase in renewal revenue, reflecting growth in home service plans and improved pricing[238][239] - Cost of services rendered remained flat as benefits from process improvements and mild weather were offset by inflation and tariffs[243][244] - The company ended 2019 with $434 million in cash and short-term securities and $250 million of available borrowing capacity[261][186] 2019 vs. 2018 Key Results | (In millions) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,365 | $1,258 | 8% | | Gross Profit | $678 | $572 | 18% | | Net Income | $153 | $125 | 23% | | Adjusted EBITDA | $303 | $238 | 27% | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuation on its variable-rate debt, partially hedged by a swap - The primary market risk is from interest rate changes on variable-rate debt, and the company uses an interest rate swap to hedge a portion of this exposure[289] - An interest rate swap agreement fixes the rate on a notional amount of $350 million of the Term Loan Facility until August 2025[290] - A one percentage point change in interest rates would result in an approximate $3 million change in annual interest expense on the unhedged term loan[291] Financial Statements and Supplementary Data This section contains audited financial statements with an unqualified opinion from Deloitte & Touche LLP - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and internal controls as of December 31, 2019[294][295] - The audit identified the 'Accrual for Home Service Plan Claims' as a Critical Audit Matter due to significant management judgment required[301][302] Consolidated Statement of Operations (in millions) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | $1,365 | $1,258 | $1,157 | | Gross Profit | $678 | $572 | $567 | | Income before Income Taxes | $204 | $166 | $220 | | Net Income | $153 | $125 | $160 | Consolidated Balance Sheet Highlights (in millions) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,250 | $1,041 | | Total Liabilities | $1,429 | $1,385 | | Total Deficit | $(179) | $(344) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[465] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[465] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, an assessment audited and affirmed by Deloitte & Touche LLP[467][468] Other Information The company reports no other information for this item - None[470] Part III Directors, Executive Officers and Corporate Governance Information on directors, officers, and governance is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the 2020 annual meeting of stockholders[470] Executive Compensation Information on executive compensation is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the 2020 annual meeting of stockholders[471] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the 2020 annual meeting of stockholders[472] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the 2020 annual meeting of stockholders[473] Principal Accounting Fees and Services Information on principal accounting fees is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the company's Proxy Statement for the 2020 annual meeting of stockholders[474] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the report - This section lists all financial statements, schedules, and exhibits filed with the report[476] - Includes Schedule I (frontdoor, inc. Parent Condensed Financial Information) and Schedule II (Valuation and Qualifying Accounts)[478] Form 10-K Summary The company provides no summary for this item - None[479]