UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

 

or

 

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38617

________________________________________________

 

 

Frontdoor, Inc.

(Exact name of registrant as specified in its charter)

Delaware		82-3871179
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

3400 Players Club Parkway, Memphis, Tennessee 38125

(Address of principal executive offices) (Zip Code)

901-701-5000

(Registrant’s telephone number, including area code)

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

Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common stock, par value $0.01 per share	FTDR	The Nasdaq Stock Market LLC

 

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  No 

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  No 

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.

Large accelerated filer 	Accelerated filer 	Non-accelerated filer 	Smaller reporting company 
			Emerging growth company 

 

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. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No 

As of April 26, 2024 there were 77,790,340 shares outstanding of the registrant’s common stock, par value $0.01 per share.

 

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Frontdoor, Inc.

Quarterly Report on Form 10-Q

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

 

In order to aid the reader, we have included certain defined terms and abbreviations used throughout this Quarterly Report on Form 10-Q as set forth below:

 

 

Term / Abbreviation	Definition
2023 Form 10-K	Frontdoor, Inc. Annual Report on Form 10-K for the year ended December 31, 2023
AOCI	Accumulated other comprehensive income or loss
ASC	FASB Accounting Standards Codification
ASU	FASB Accounting Standards Update
Credit Agreement	The agreements governing the Credit Facilities
Credit Facilities	The Term Loan Facilities together with the Revolving Credit Facility
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	U.S. Financial Accounting Standards Board
Home Warranty	A home service contract, sometimes called a residential service contract, home warranty or home protection contract, provides for the repair and/or replacement of certain home systems and appliances for breakdowns that occur as a result of normal wear and tear
HVAC	Heating, ventilation and air conditioning
IRS	U.S. Internal Revenue Service
NASDAQ	Nasdaq Global Select Market
Omnibus Plan	Frontdoor, Inc. 2018 Omnibus Incentive Plan
Revolving Credit Facility	$250 million revolving credit facility effective June 17, 2021
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
Streem	Streem, LLC, our technology business that uses augmented reality, computer vision and machine learning to provide services
Term Loan A	$260 million term loan A facility effective June 17, 2021
Term Loan B	$380 million term loan B facility effective June 17, 2021
Term Loan Facilities	The Term Loan A together with the Term Loan B
U.S. or United States	United States of America
U.S. GAAP	Accounting principles generally accepted in the United States of America

 

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Frontdoor,” “we,” “our,” “us,” and the “company” refer to Frontdoor, Inc. and all of its subsidiaries. Frontdoor is a Delaware corporation with its principal executive offices in Memphis, Tennessee.

 

We hold various service marks, trademarks and trade names, such as Frontdoor®, American Home Shield®, HSA™, OneGuard®, Landmark Home Warranty®, Streem®, the Streem logo and the Frontdoor logo. Solely for convenience, the service marks, trademarks and trade names referred to in this Quarterly Report on Form 10-Q are presented without the SM, ®, and TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these service marks, trademarks and trade names. All service marks, trademarks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

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.

 

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TABLE OF CONTENTS

 

	Page
	No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income	3
Condensed Consolidated Statements of Financial Position	4
Condensed Consolidated Statements of Changes in Equity (Deficit)	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
Cautionary Statement Concerning Forward-Looking Statements	16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
Part II. Other Information	28
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	28
Item 6. Exhibits	29
Signature	30

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Frontdoor, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)

 

		Three Months Ended
		March 31,
		2024					2023
Revenue		$		378			$		367
Cost of services rendered				184					197
Gross Profit				195					170
Selling and administrative expenses				135					125
Depreciation and amortization expense				9					9
Restructuring charges				—					1
Interest expense				10					10
Interest and net investment income				(5	)				(3	)
Income before Income Taxes				45					29
Provision for income taxes				11					7
Net Income		$		34			$		22
Other Comprehensive Income (Loss), Net of Income Taxes:
Unrealized gain (loss) on derivative instruments, net of income taxes				2					(2	)
Total Other Comprehensive Income (Loss), Net of Income Taxes				2					(2	)
Comprehensive Income		$		35			$		20
Earnings per Share:	​	​				​	​
Basic	​	$		0.43			$		0.27
Diluted	​	$		0.43			$		0.27
Weighted-average Common Shares Outstanding:
Basic				78.3					81.5
Diluted				79.0					81.9

 

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

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Frontdoor, Inc.

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

 

		As of
		March 31,					December 31,
		2024					2023
Assets:
Current Assets:
Cash and cash equivalents		$		378			$		325
Receivables, less allowance of $4 and $5, respectively				4					6
Prepaid expenses and other current assets				30					32
Total Current Assets				412					363
Other Assets:
Property and equipment, net				64					60
Goodwill				503					503
Intangible assets, net				143					143
Operating lease right-of-use assets				7					3
Deferred customer acquisition costs				11					12
Other assets				6					5
Total Assets		$		1,146			$		1,089
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable		$		70			$		76
Accrued liabilities:
Payroll and related expenses				18					38
Home warranty claims				64					76
Other				33					22
Deferred revenue				158					102
Current portion of long-term debt				17					17
Total Current Liabilities				360					331
Long-Term Debt				573					577
Other Long-Term Liabilities:
Deferred tax liabilities, net				25					25
Operating lease liabilities				20					16
Other long-term liabilities				5					5
Total Other Long-Term Liabilities				51					46
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized; 86,871,669 shares issued and 78,296,296 shares outstanding as of March 31, 2024 and 86,553,387 shares issued and 78,378,511 shares outstanding as of December 31, 2023				1					1
Additional paid-in capital				120					117
Retained earnings				330					296
Accumulated other comprehensive income				7					6
Less treasury stock, at cost; 8,575,373 shares as of March 31, 2024 and 8,174,876 shares as of December 31, 2023				(296	)				(283	)
Total Shareholders' Equity				162					136
Total Liabilities and Shareholders' Equity		$		1,146			$		1,089

 

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

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Frontdoor, Inc.

Condensed Consolidated Statement of Changes in Equity (Unaudited)

(In millions)

 

		Three Months Ended
		March 31,
		2024					2023
Common Stock:
Balance at beginning of period		$		1			$		1
Balance at end of period				1					1
Additional Paid-in Capital:
Balance at beginning of period				117					90
Stock-based compensation expense				7					5
Taxes paid related to net share settlement of equity awards				(4	)				(3	)
Balance at end of period				120					92
Retained Earnings:
Balance at beginning of period				296					124
Net income				34					22
Balance at end of period				330					146
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of period				6					8
Other comprehensive income (loss), net of tax				2					(2	)
Balance at end of period				7					6
Treasury Stock:
Balance at beginning of period				(283	)				(162	)
Repurchase of common stock				(13	)				—
Balance at end of period				(296	)				(162	)
Total Shareholders' Equity		$		162			$		83

 

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

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Frontdoor, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

		Three Months Ended
		March 31,
		2024					2023
Cash and Cash Equivalents at Beginning of Period		$		325			$		292
Cash Flows from Operating Activities:
Net Income				34					22
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization expense				9					9
Deferred income tax benefit				—					(2	)
Stock-based compensation expense				7					5
Restructuring charges				—					1
Payments for restructuring charges				(1	)				(1	)
Other				1					—
Changes in working capital:
Receivables				1					(1	)
Prepaid expenses and other current assets				2					(6	)
Accounts payable				(7	)				2
Deferred revenue				57					46
Accrued liabilities				(31	)				(24	)
Current income taxes				11					9
Net Cash Provided from Operating Activities				84					60
Cash Flows from Investing Activities:
Purchases of property and equipment				(10	)				(8	)
Net Cash Used for Investing Activities				(10	)				(8	)
Cash Flows from Financing Activities:
Repayments of debt				(4	)				(4	)
Repurchase of common stock				(13	)				—
Other financing activities				(4	)				(3	)
Net Cash Used for Financing Activities				(21	)				(7	)
Cash Increase During the Period				53					45
Cash and Cash Equivalents at End of Period		$		378			$		337

 

See the accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

 

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Frontdoor, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

f

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control.

 

You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. For a discussion of other important factors that could cause our results to differ materially from those expressed in, or implied by, the forward-looking statements included in this report, you should refer to the risks and uncertainties detailed from time to time in our periodic reports filed with the SEC, including the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2023 Form 10-K.

 

SUMMARY OF MATERIAL RISKS

 

Factors, risks, trends and uncertainties that make an investment in us speculative or risky and that could cause actual results or events to differ materially from those anticipated in our forward-looking statements include the matters described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report as well as Item 1A. Risk Factors in our 2023 Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:

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Available Information

 

Our corporate website address is www.frontdoorhome.com. We use our website as a channel of distribution for company information. We will make available free of charge on the Investor section of our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our corporate website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Financial Code of Ethics. Financial and other material information regarding Frontdoor is routinely posted on our website and is readily accessible. We do not intend for information contained on our website to be part of this Quarterly Report on Form 10-Q.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 2023 Form 10-K and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 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 2023 Form 10-K.

 

Overview

 

Frontdoor is the leading provider of home warranties in the United States, as measured by revenue, and operates primarily under the American Home Shield brand. Our customizable home warranties 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 warranty 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, HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional coverages for electronics, pools, spas and pumps. Frontdoor also provides on-demand home services and a one-stop app experience for home repair and maintenance. Enabled by our Streem technology, the app empowers homeowners by connecting them in real time through video chat with qualified experts to diagnose and solve their problems. As of March 31, 2024, we had 2.0 million active home warranties across all brands in the United States.

 

For the three months ended March 31, 2024 and 2023, we generated revenue, net income and Adjusted EBITDA of $378 million, $34 million and $71 million, respectively, and $367 million, $22 million and $54 million, respectively. For a reconciliation of Adjusted EBITDA to net income, see “—Results of Operations—Adjusted EBITDA.”

 

For the three months ended March 31, 2024, our total operating revenue included 79 percent of revenue derived from existing customer renewals, while seven percent and nine percent were derived from new home warranty sales made in conjunction with existing home real estate transactions and direct-to-consumer sales, respectively, and five percent was derived from other revenue channels. For the three months ended March 31, 2023, our total operating revenue included 76 percent of revenue derived from existing customer renewals, while nine 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.

 

Key Factors and Trends Affecting Our Results of Operations

 

Macroeconomic Conditions

 

Current macroeconomic conditions, including inflation, higher interest rates, the challenging real estate market and rising global geopolitical issues, may affect existing home sales, consumer sentiment or labor availability. These conditions may reduce demand for our services, increase our costs or otherwise adversely impact our business. While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the impact on us of unfavorable economic conditions in any particular region of the United States.

 

During the three months ended March 31, 2024, our financial condition and results of operations continued to be adversely impacted by the following:

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The ultimate implications of the current macroeconomic conditions on our results of operations and overall financial performance remain uncertain. It remains difficult to predict the overall continuing impact these conditions will have on our business as they may reduce demand for our services, increase our costs or otherwise adversely impact our business.

 

Seasonality

 

Our business is subject to seasonal fluctuations, which drive variations in our revenue, net income and Adjusted EBITDA for interim periods. Seasonal fluctuations are primarily driven by a higher number of HVAC work orders in the summer months. In 2023, approximately 21 percent, 29 percent, 29 percent and 21 percent of our revenue, approximately 13 percent, 41 percent, 42 percent and five percent of our net income, and approximately 15 percent, 35 percent, 37 percent and 13 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, typically in the winter and summer months, can lead to an increase in service requests related to home systems, particularly HVAC systems, resulting in higher costs and lower profitability, while mild temperatures in the winter or summer months can lead to lower home systems claim frequency, resulting in lower costs and higher profitability. For example, favorable weather trends in 2023 as compared to 2022 resulted in a lower number of service requests per customer, which favorably impacted contract claims costs.

 

While weather variations as described above may affect our business, major weather events and other similar Acts of God, or natural disasters such as typhoons, hurricanes, tornadoes, wildfires or earthquakes, 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 warranties that we offer.

 

Tariff and Import/Export Regulations

 

Changes in U.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.

 

Competition

 

We compete in the U.S. home warranty category and the broader U.S. home services industry. The home warranty category is highly competitive. While we have a broad range of competitors in each locality and region, we are one of the few companies that provide home warranties nationwide. The broader U.S. home services industry is also highly competitive. We compete against businesses providing on-demand home services directly and those offering leads to contractors seeking to provide on-demand home services. 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. We believe our nationwide network of qualified professional contractor firms, in combination with our large base of contracted customers, differentiate us from other platforms in the home services industry.

 

Acquisition Activity

 

We anticipate that the highly fragmented nature of the home warranty 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.

 

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Non-GAAP Financial Measures

 

To supplement our results presented in accordance with U.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, and Adjusted EBITDA is also a component of our incentive compensation program. 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 with U.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. The majority of our revenue is generated from annual home warranty contracts entered into with our customers. Home warranty 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 warranty sales, customer retention and acquisitions. We derive substantially all of our revenue from customers in the United States.

 

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, if any, of stock options, performance options (which are stock options that become exercisable 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), restricted stock units (“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.

 

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Adjusted EBITDA and Adjusted EBITDA margin. We evaluate our operating and financial performance primarily based on Adjusted EBITDA, which is a financial measure not calculated in accordance with U.S. GAAP. We define Adjusted EBITDA as net income before: depreciation and amortization expense; goodwill and intangibles impairment; 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. Free Cash Flow is a financial measure that is not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions.

 

Number of Home Warranties and Customer Retention Rate. We report on our number of home warranties and customer retention rate as measurements of our operating performance. These measurements are presented on a rolling 12-month basis in order to avoid seasonal anomalies. The number of home warranties is representative of our recurring home warranty customer base and is measured as the number of customers with active contracts as of the respective period-end date. Our customer retention rate is calculated as the ratio of the number of end-of-period home warranty contracts to the sum of the number of beginning-of-period home warranty contracts and the number of new home warranty sales and acquired accounts during the respective period.

 

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 2023 Form 10-K. There have been no material changes to our critical accounting policies for the three months ended March 31, 2024.

 

 

 

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Results of Operations

 

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

 

																	% of Revenue
		Three Months Ended										Increase					Three Months Ended
		March 31,										(Decrease)					March 31,
(In millions)		2024					2023					%					2024					2023
Revenue		$		378			$		367				3		%			100		%			100		%
Cost of services rendered				184					197				(7	)				49					54
Gross Profit				195					170				14					51					46
Selling and administrative expenses				135					125				9					36					34
Depreciation and amortization expense				9					9				(3	)				2					2
Restructuring charges				—					1				(55	)				—					—
Interest expense				10					10				2					3					3
Interest and net investment income				(5	)				(3	)			40					(1	)				(1	)
Income before Income Taxes				45					29				55					12					8
Provision for income taxes				11					7				50					3					2
Net Income		$		34			$		22				56		%			9		%			6		%

 

Revenue

 

We reported revenue of $378 million and $367 million for the three months ended March 31, 2024 and 2023, respectively. The following table provides a summary of our revenue by major customer acquisition channel:

 

 

		Three Months Ended
		March 31,										Increase (Decrease)
(In millions)		2024					2023					$					%
Renewals		$		298			$		278			$		20				7		%
Real estate(1)				27					33					(6	)			(17	)
Direct-to-consumer(1)				36					44					(8	)			(19	)
Other				17					11					6				49
Total		$		378			$		367			$		11				3		%

 

 

Revenue increased three percent for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase in renewal revenue primarily reflects improved price realization resulting from our prior pricing actions, offset, in part, by a decline in the number of renewed home warranties. The decrease in real estate revenue primarily reflects a decline in the number of first-year real estate home warranties driven by a continuation of the challenging real estate market, offset, in part, by improved price realization from our prior pricing actions. The decrease in direct-to-consumer revenue primarily reflects a decline in the number of first-year direct-to-consumer home warranties, which we believe was driven by a decline in the overall category demand for home warranties. The increase in other revenue was primarily driven by growth in on-demand home services, primarily new HVAC sales.

 

 

The following table provides a summary of the number of home warranties, reduction in number of home warranties and customer retention rate:

 

		As of
		March 31,
(In millions)		2024					2023
Number of home warranties			1.96					2.09
Reduction in number of home warranties			(6	)	%			(4	)	%
Customer retention rate			76.3		%			75.9		%

 

The reduction in the number of home warranties as of March 31, 2024 was primarily impacted by a decline in the number of first-year real estate home warranties, which was driven by a continuation of the challenging real estate market, as well as a decline in the number of direct-to-consumer home warranties, which we believe was driven by a decline in the overall category demand for home warranties.

 

Cost of Services Rendered

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We reported cost of services rendered of $184 million and $197 million for the three months ended March 31, 2024 and 2023, respectively. The following table provides a summary of the changes in cost of services rendered:

 

 

(In millions)
Three Months Ended March 31, 2023		$		197
Impact of change in revenue				(3	)
Contract claims costs				(10	)
Three Months Ended March 31, 2024		$		184

 

 

The impact of change in revenue is driven by the reduction in number of home warranties, offset, in part, by growth in on-demand home services.

The decrease in contract claims costs primarily reflects the impact of higher trade service fees, which drove a lower number of service requests per customer and a lower net cost per service request. Ongoing inflationary cost pressures were offset, in part, by the favorable impact of continued process improvement initiatives specifically relating to better cost management across our contractor network. Additionally, contract claims costs reflects a $1 million favorable adjustment related to the development of prior period claims, compared to a $6 million favorable adjustment in the first quarter of 2023.

 

 

Selling and Administrative Expenses

 

We reported selling and administrative expenses of $135 million and $125 million for the three months ended March 31, 2024 and 2023, respectively. The following table provides a summary of the components of selling and administrative expenses:

 

		Three Months Ended
		March 31,
(In millions)		2024					2023
Sales and marketing costs		$		66			$		59
Customer service costs				25					26
General and administrative costs				45					40
Total		$		135			$		125

 

 

The following table provides a summary of the changes in selling and administrative expenses:

 

(In millions)
Three Months Ended March 31, 2023		$		125
Sales and marketing costs				7
Customer service costs				(1	)
Stock-based compensation expense				2
Other general and administrative costs				3
Three Months Ended March 31, 2024		$		135

 

 

Sales and marketing costs increased primarily due to our investment in marketing associated with our direct-to-consumer channel. The decrease in customer service costs was primarily driven by a lower number of service requests. General and administrative costs increased primarily due to increased personnel costs.

 

Depreciation and Amortization Expense

 

Depreciation expense was $8 million for each of the three months ended March 31, 2024 and 2023. Amortization expense was $1 million for each of the three months ended March 31, 2024 and 2023.

Restructuring Charges

 

We had restructuring charges of less than $1 million and $1 million during the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, these charges primarily include expenses related to the exit of certain operating leases and severance costs. For the three months ended March 31, 2023, these charges primarily include severance costs.

 

Interest Expense

 

Interest expense was $10 million for each of the three months ended March 31, 2024 and 2023.

 

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Interest and Net Investment Income

 

Interest and net investment income was $5 million and $3 million for the three months ended March 31, 2024 and 2023, respectively. The increase driven was by higher interest rates on our cash and cash equivalent balances.

 

Provision for Income Taxes

 

The effective tax rate on income before income taxes was 24.4 percent and 25.2 percent for the three months ended March 31, 2024 and 2023, respectively. The decrease in the effective tax rate for the three months ended March 31, 2024 compared to 2023 was primarily due to the impact of share-based awards, offset, in part, by a decrease in income tax credits.

 

Net Income

 

Net income was $34 million and $22 million for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily driven by the operating results discussed throughout “—Results of Operations” above.

 

Adjusted EBITDA

 

Adjusted EBITDA was $71 million and $54 million for the three months ended March 31, 2024 and 2023, respectively.

 

The following table provides a summary of the changes in our Adjusted EBITDA:

 

(In millions)
Three Months Ended March 31, 2023		$		54
Impact of change in revenue				14
Contract claims costs				10
Sales and marketing costs				(7	)
Customer service costs				1
General and administrative costs				(3	)
Interest and net investment income				1
Three Months Ended March 31, 2024		$		71

 

 

The impact of change in revenue is driven by the reduction in number of home warranties.

The decrease in contract claims costs primarily reflects the impact of higher trade service fees, which drove a lower number of service requests per customer and a lower net cost per service request. Ongoing inflationary cost pressures were offset, in part, by the favorable impact of continued process improvement initiatives specifically relating to better cost management across our contractor network. Additionally, contract claims costs reflects a $1 million favorable adjustment related to the development of prior period claims, compared to a $6 million favorable adjustment in the first quarter of 2023.

Sales and marketing costs increased primarily due to our investment in marketing associated with our direct-to-consumer channel. The decrease in customer service costs was primarily driven by a lower number of service requests. General and administrative costs increased primarily due to increased personnel costs.

 

A reconciliation of Net Income to Adjusted EBITDA is as follows:

 

		Three Months Ended
		March 31,
(In millions)		2024					2023
Net Income		$		34			$		22
Depreciation and amortization expense				9					9
Restructuring charges(1)				—					1
Provision for income taxes				11					7
Non-cash stock-based compensation expense(2)				7					5
Interest expense				10					10
Adjusted EBITDA		$		71			$		54

 

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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 of March 31, 2024, we were in compliance with the covenants under the Credit Agreement. We do not believe current macroeconomic conditions will affect our ongoing ability to meet our debt covenants.

 

Cash and cash equivalents totaled $378 million and $325 million as of March 31, 2024 and December 31, 2023, respectively. Our cash and cash equivalents include balances associated with regulatory requirements in our business. See “—Limitations on Distributions and Dividends by Subsidiaries.” As of March 31, 2024 and December 31, 2023, the total net assets subject to these third-party restrictions were $165 million and $157 million, respectively. As of March 31, 2024, there was $2 million of letters of credit outstanding under our $250 million Revolving Credit Facility, and the available borrowing capacity under the Revolving Credit Facility was $248 million. The letters of credit are posted in lieu of cash to satisfy regulatory requirements in certain states in which we operate. We currently believe that cash generated from operations, our cash on hand and available borrowing capacity under the Revolving Credit Facility as of March 31, 2024 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, primarily cash deposits. 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.

 

We have a diversified investment strategy for our cash investments and give priority to the major financial institutions that serve as lenders under the Credit Agreement. Generally, our cash deposits may be redeemed on demand and are maintained with major financial institutions with solid credit ratings, although our holdings exceed insured limits in substantially all of our accounts.

 

We may, from time to time, issue new debt, 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 new debt issuance, open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be issued, repurchased or otherwise retired or refinanced, if any, and the price of such issuances, repurchases, retirements or refinancings will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.

 

On September 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 of March 31, 2024, we have repurchased a total of 8,483,316 outstanding shares at a cost of $294 million, which is included in treasury stock on the condensed consolidated statements of financial position, and we had $106 million remaining available for future repurchases under this program. 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, through September 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.

 

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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 regulatory restrictions on the ability of certain of our subsidiaries to transfer funds to us. 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. 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 Quarterly Report on Form 10-Q are summarized in the following table:

 

		Three Months Ended
		March 31,
(In millions)		2024					2023
Net cash provided from (used for):
Operating activities		$		84			$		60
Investing activities				(10	)				(8	)
Financing activities				(21	)				(7	)
Cash increase during the period		$		53			$		45

 

 

Operating Activities

 

Net cash provided from operating activities was $84 million and $60 million for the three months ended March 31, 2024 and 2023, respectively.

 

Net cash provided from operating activities for the three months ended March 31, 2024 comprised $51 million in earnings adjusted for non-cash charges and $34 million in cash provided from working capital, offset, in part, by $1 million in payments for restructuring charges. Cash provided from working capital was primarily driven by seasonality, offset, in part, by payments of accrued bonuses and a decline in the number of first-year real estate home warranties, which are typically paid for upfront at the time of closing on the home sale.

 

Net cash provided from operating activities for the three months ended March 31, 2023 comprised $35 million in earnings
adjusted for non-cash charges and $26 million in cash provided from working capital, offset, in part, by $1 million in payments for restructuring charges. Cash provided from working capital was primarily driven by seasonality.

 

Investing Activities

 

Net cash used for investing activities was $10 million and $8 million for the three months ended March 31, 2024 and 2023, respectively.

 

Capital expenditures were $10 million and $8 million for the three months ended March 31, 2024 and 2023, respectively, and included recurring capital needs and technology projects. We expect capital expenditures for the full year 2024 relating to committed, recurring capital needs and the continuation of investments in information systems and productivity enhancing technology to be approximately $35 million to $45 million. We have no additional material capital commitments at this time.

 

Financing Activities

 

Net cash used for financing activities was $21 million and $7 million for the three months ended March 31, 2024 and 2023, respectively.

 

For the three months ended March 31, 2024, we made scheduled principal payments of debt of $4 million and purchased outstanding shares of our common stock at an aggregate cost of $13 million. Repurchases of common stock included associated commissions and taxes of less than $1 million.

 

For the three months ended March 31, 2023, we made scheduled principal payments of debt of $4 million.

 

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Free Cash Flow

 

The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable U.S. GAAP measure, to Free Cash Flow using data derived from the condensed consolidated statements of cash flows in Part 1, Item 1 of this Quarterly Report on Form 10-Q:

 

		Three Months Ended
		March 31,
(In millions)		2024					2023
Net cash provided from operating activities		$		84			$		60
Property additions				(10	)				(8	)
Free Cash Flow		$		73			$		52

 

 

Contractual Obligations

 

Our 2023 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2023. We continue to make the contractually required payments associated with these commitments. There are no significant additions to our obligations and commitments since those reported in the 2023 Form 10-K.

 

Financial Position

 

A summary of the significant changes in our financial position from December 31, 2023 to March 31, 2024 is as follows:

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing an interest rate swap. There have been no material changes to the market risk associated with debt obligations and other significant instruments from the risks described in Part II, Item 7A in our 2023 Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Exchange Act) the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of March 31, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The information required with respect to this Part II, Item 1 can be found under Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

ITEM 1A. RISK FACTORS

 

For information regarding factors that could affect our business, financial condition or results of operations, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our 2023 Form 10-K. There have been no material changes to the risk factors disclosed in our 2023 Form 10-K during the three months ended March 31, 2024. The risks described in our 2023 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial could also materially and adversely affect our business, financial condition or results of operations.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Issuer Purchases of Equity Securities

 

On September 7, 2021, we announced a three-year repurchase authorization of up to $400 million of outstanding shares of our common stock over the three-year period from September 3, 2021 through September 3, 2024. As of March 31, 2024, we have repurchased a total of 8,483,316 outstanding shares at a cost of $294 million, and we had $106 million remaining available for future repurchases under this program. See Liquidity and Capital Resources – Liquidity in Part I, Item 2 of this Quarterly Report on Form 10-Q for more information.

 

Period		Total number of shares purchased				Average price paid per share(1)				Total number of shares purchased as part of publicly announced plans or programs				Maximum dollar value of shares that may yet be purchased under the plans or programs (in millions)
Jan. 1, 2024 through Jan. 31, 2024			—			$	—				—			$	119
Feb. 1, 2024 through Feb 29, 2024			—				—				—				119
Mar. 1, 2024 through Mar. 31, 2024			400,497				31.21				400,497				106
Total			400,497			$	31.21				400,497			$	106

 

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ITEM 6. EXHIBITS

 

 

Exhibit Number		Description
2.1		Separation and Distribution Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and Frontdoor, Inc. (incorporated by reference to Exhibit 2.1 to Frontdoor’s Current Report on Form 8-K filed on October 1, 2018).
3.1		Restated Certificate of Incorporation of Frontdoor, Inc. (incorporated by reference to Exhibit 3.1 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).
3.2		Amended and Restated Bylaws of Frontdoor, Inc. (incorporated by reference to Exhibit 3.2 to Frontdoor’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023).
10.1*#		Form of Performance Share Grant Notice under the Frontdoor, Inc. 2018 Omnibus Incentive Plan, effective March 2024.
10.2*#		Form of Restricted Stock Unit Agreement under the Frontdoor, Inc. Omnibus Incentive Plan, effective March 2024.
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a - 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents.
104*		Cover page formatted as Inline XBRL and included in Exhibit 101.

 

 

# Denotes management compensatory plans, contracts or arrangements.

* Filed herewith.

 

 

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by Frontdoor in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	FRONTDOOR, INC.
Date: May 2, 2024	By:	/s/ Jessica P. Ross
		Name:		Jessica P. Ross
		Title:		Senior Vice President and Chief Financial Officer (principal financial officer)

 

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