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Frontdoor(FTDR) - 2023 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The company's Q2 2023 profitability significantly increased, driven by revenue growth and cost reductions, strengthening its balance sheet and improving operating cash flow Condensed Consolidated Statements of Operations and Comprehensive Income In Q2 2023, revenue grew 7% year-over-year to $523 million, while a 9% decrease in service costs drove a 28% rise in gross profit and more than doubled net income Three Months Ended June 30 | Financial Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $523 million | $487 million | +7.4% | | Gross Profit | $270 million | $211 million | +28.0% | | Net Income | $70 million | $33 million | +112.1% | | Diluted EPS | $0.85 | $0.40 | +112.5% | Six Months Ended June 30 | Financial Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $890 million | $838 million | +6.2% | | Gross Profit | $440 million | $355 million | +23.9% | | Net Income | $91 million | $35 million | +160.0% | | Diluted EPS | $1.12 | $0.42 | +166.7% | Condensed Consolidated Statements of Financial Position As of June 30, 2023, total assets grew to $1.136 billion, supported by an increase in cash and a substantial rise in total shareholders' equity to $131 million | Balance Sheet Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $344 million | $292 million | | Total Assets | $1,136 million | $1,082 million | | Total Liabilities | $1,005 million | $1,021 million | | Total Shareholders' Equity | $131 million | $61 million | Condensed Consolidated Statements of Cash Flows For the first six months of 2023, net cash from operating activities increased to $112 million, while financing cash outflows decreased due to lower share repurchases | Cash Flow Activity (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided from Operating Activities | $112 million | $94 million | | Net Cash Used for Investing Activities | ($15) million | ($19) million | | Net Cash Used for Financing Activities | ($44) million | ($69) million | | Cash Increase During the Period | $52 million | $6 million | Notes to Condensed Consolidated Financial Statements The notes detail revenue growth from customer renewals, a total debt of $601 million, and an ongoing share repurchase program - The company is the leading provider of home service plans in the U.S., operating primarily under the American Home Shield brand, with 2.1 million active home service plans as of June 30, 202325 Revenue by Channel | Revenue by Channel (Six Months Ended June 30) | 2023 | 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Renewals | $677 million | $593 million | +14.2% | | Real estate | $75 million | $102 million | -26.5% | | Direct-to-consumer | $103 million | $112 million | -8.0% | | Other | $35 million | $31 million | +12.9% | | Total | $890 million | $838 million | +6.2% | - Total debt as of June 30, 2023 was $601 million, consisting primarily of a $233 million Term Loan A and a $368 million Term Loan B58 - Under its share repurchase program, the company bought back 1.1 million shares for $34 million in the first six months of 2023, with $205 million remaining available for future repurchases7677 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes Q2 2023 revenue growth to price realization, while cost reductions from favorable weather significantly boosted gross profit and Adjusted EBITDA Key Factors and Trends Affecting Our Results of Operations Performance is influenced by macroeconomic conditions, with a challenging housing market constraining demand while favorable weather trends reduced claims costs - The challenging home seller's market, low inventory, and rising interest rates continued to constrain demand for home service plans in the first-year real estate channel100 - Contractors faced inflationary pressures from higher labor, parts, and equipment costs, which the company is mitigating through preferred contractor usage and direct parts sourcing100 - Favorable weather in H1 2023 resulted in fewer service requests per customer, which favorably impacted contract claims costs96 - The business is seasonal, with a higher number of HVAC work orders in the summer months, which drives variations in quarterly revenue and profit95 Results of Operations Q2 2023 revenue grew 7% driven by strong pricing in renewals, while lower service costs due to favorable weather significantly increased net income and Adjusted EBITDA - Q2 2023 revenue increased 7% YoY, driven by a 15% increase in renewal revenue from improved price realization, while real estate and direct-to-consumer revenues declined 25% and 11%, respectively113114 - Cost of services rendered in Q2 2023 decreased by 9% YoY, reflecting a $17 million favorable impact from cooler weather and a $4 million favorable adjustment for prior period claims119 - Selling and administrative expenses increased 16% in Q2 2023, mainly due to higher sales and marketing costs associated with the launch of the Frontdoor brand122 Key Performance Metrics | Metric (Q2 2023 vs Q2 2022) | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $70 million | $33 million | +112% | | Adjusted EBITDA | $121 million | $77 million | +57% | Liquidity and Capital Resources The company maintains a strong liquidity position with $344 million in cash and $248 million in available credit, supporting operations and continued share repurchases - As of June 30, 2023, the company had $344 million in cash and cash equivalents and an available borrowing capacity of $248 million under its Revolving Credit Facility138 - The company repurchased $34 million of its common stock in the first six months of 2023 and has $205 million remaining under its share repurchase authorization143 Cash Flow Summary | Cash Flow Metric (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided from operating activities | $112 million | $94 million | | Free Cash Flow | $96 million | $75 million | Quantitative and Qualitative Disclosures About Market Risk The company's market risk profile, primarily related to interest rate changes on its variable-rate debt, has not materially changed since its 2022 Form 10-K - The company is exposed to interest rate changes and manages this risk using variable-rate debt, fixed-rate debt, and an interest rate swap, with no material changes to this risk profile since the 2022 Form 10-K159 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - Based on an evaluation as of June 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective160 - There were no changes during Q2 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting161 Part II. Other Information Legal Proceedings The company is subject to ordinary course legal actions that are not expected to have a material adverse effect on its financial condition or results - The company is subject to various legal proceedings arising in the ordinary course of business, but management does not expect them to have a material adverse effect on the company's financials54162 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K163 Issuer Purchases of Equity Securities In Q2 2023, the company repurchased approximately 1.1 million shares for $34 million, with $205 million remaining under its repurchase authorization Share Repurchases in Q2 2023 | Period (2023) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April | 0 | $0.00 | | May | 439,478 | $31.29 | | June | 634,381 | $31.53 | | Total Q2 | 1,073,859 | $31.43 | - As of June 30, 2023, $205 million remained available for future repurchases under the company's stock repurchase program, which runs through September 3, 2024164 Other Information On July 28, 2023, the company's board adopted amended and restated bylaws to update procedures for stockholder director nominations - On July 28, 2023, the company adopted amended and restated bylaws to update provisions regarding stockholder director nominations, including requirements related to the SEC's universal proxy Rule 14a-19166 Exhibits This section lists the exhibits filed with the Form 10-Q, including amended bylaws and required CEO and CFO certifications - The list of exhibits filed with the report includes the company's Amended and Restated Bylaws and required CEO/CFO certifications170