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Frontdoor(FTDR) - 2023 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) Frontdoor, Inc. reported Q1 2023 revenue of $367 million and net income of $22 million, a significant increase from $2 million in Q1 2022 Notes to Condensed Consolidated Financial Statements Notes detail revenue recognition, assets, debt, and leases, including a LIBOR to SOFR transition and $238 million available for share repurchases Revenue by Customer Acquisition Channel (Q1) | Channel | 2023 Revenue (in millions) | 2022 Revenue (in millions) | | :--- | :--- | :--- | | Renewals | $278 | $247 | | Real estate | $33 | $45 | | Direct-to-consumer | $44 | $46 | | Other | $11 | $13 | | Total | $367 | $351 | - In March 2023, the company amended its Credit Facilities to replace LIBOR with SOFR as the benchmark interest rate, with the transition effective in March 2023 for Term Loan A and the Revolving Credit Facility, and June 2023 for Term Loan B53 - As of March 31, 2023, the company had $238 million remaining available for future repurchases under its $400 million share repurchase authorization. No shares were repurchased in Q1 2023, while 1.1 million shares were repurchased for $40 million in Q1 20226869 - The effective tax rate for Q1 2023 was 25.2%, a significant decrease from 51.1% in Q1 2022, primarily due to impacts of share-based awards and state income taxes on limited pre-tax income in the prior year45 Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :--- | :--- | :--- | | Revenue | $367 | $351 | | Gross Profit | $170 | $144 | | Income before Income Taxes | $29 | $3 | | Net Income | $22 | $2 | | Diluted EPS | $0.27 | $0.02 | Condensed Consolidated Statements of Financial Position | Metric | As of March 31, 2023 (in millions) | As of December 31, 2022 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $381 | $330 | | Total Assets | $1,128 | $1,082 | | Total Current Liabilities | $396 | $364 | | Total Liabilities | $1,045 | $1,021 | | Total Shareholders' Equity | $83 | $61 | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :--- | :--- | :--- | | Net Cash Provided from Operating Activities | $60 | $47 | | Net Cash Used for Investing Activities | ($8) | ($8) | | Net Cash Used for Financing Activities | ($7) | ($47) | | Cash Increase (Decrease) During the Period | $45 | ($8) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes 4% revenue growth to renewals, improving gross profit to 46% and Adjusted EBITDA to $54 million Key Factors and Trends Macroeconomic conditions and a challenging housing market constrained demand, while favorable Q1 2023 weather positively impacted claims costs - A challenging home seller's market, with low inventory and rising interest rates, constrained demand for home service plans in the first-year real estate channel90 - Contractors continued to face inflation in labor, fuel, and parts costs. Frontdoor is mitigating these impacts by increasing direct sourcing of parts and utilizing lower-cost preferred contractors90 - Favorable weather trends in Q1 2023 compared to Q1 2022 had a positive impact on contract claims costs86 Results of Operations Q1 2023 revenue increased 4% to $367 million due to renewals, with gross profit up 18% and net income surging to $22 million Revenue Channel Performance (Q1 2023 vs Q1 2022) | Channel | 2023 Revenue (in millions) | 2022 Revenue (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Renewals | $278 | $247 | +13% | | Real estate | $33 | $45 | -28% | | Direct-to-consumer | $44 | $46 | -5% | | Total | $367 | $351 | +4% | - Cost of services rendered decreased from $207 million to $197 million, primarily due to a $6 million favorable adjustment for prior period claims (vs. a $9 million unfavorable adjustment in Q1 2022) and a $6 million favorable weather impact106 Net Income to Adjusted EBITDA Reconciliation (Q1) | Metric | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net Income | $22 | $2 | | Depreciation and amortization | $9 | $8 | | Restructuring charges | $1 | $0 | | Provision for income taxes | $7 | $2 | | Non-cash stock-based compensation | $5 | $6 | | Interest expense | $10 | $7 | | Adjusted EBITDA | $54 | $25 | - The total number of home service plans decreased by 4% to 2.09 million as of March 31, 2023, from 2.19 million a year prior, impacted by declines in new real estate and direct-to-consumer plans. However, the customer retention rate improved to 75.9% from 74.1%105 Liquidity and Capital Resources Liquidity strengthened with cash and cash equivalents rising to $337 million, net cash from operations improving to $60 million - As of March 31, 2023, the company had cash and cash equivalents of $337 million and an available borrowing capacity of $248 million under its Revolving Credit Facility119 Free Cash Flow (Q1) | Metric | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net cash provided from operating activities | $60 | $47 | | Property additions | ($8) | ($9) | | Free Cash Flow | $52 | $39 | - Net cash used in financing activities was $7 million in Q1 2023, compared to $47 million in Q1 2022, primarily because the company did not repurchase any common stock in Q1 2023, unlike the $40 million spent in the prior-year period135136 Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks from the 2022 Annual Report, with primary exposure to interest rate changes managed - There have been no material changes to the market risk associated with debt obligations from the risks described in the 2022 Form 10-K139 Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls - Based on an evaluation as of March 31, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective140 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls141 Part II. Other Information Legal Proceedings Legal proceedings information is in Note 7, with management expecting no material adverse effect from pending actions - Information regarding legal proceedings is located in Note 7 to the condensed consolidated financial statements142 Risk Factors No material changes to risk factors previously disclosed in the 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the 2022 Form 10-K during the three months ended March 31, 2023143 Unregistered Sales of Equity Securities and Use of Proceeds No common stock repurchases occurred in Q1 2023, with $238 million remaining available under authorization - The company did not repurchase any shares during the three months ended March 31, 2023144 - As of March 31, 2023, $238 million remained available for future repurchases under the company's $400 million share repurchase program, which runs through September 3, 2024144 Exhibits Lists filed exhibits, including CEO/CFO certifications and various agreements, notably Amendment No. 1 to the Credit Agreement