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Dynamic quotes 
OFFON

FRONTDOOR, INC.

(FTDR)
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FRONTDOOR : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/04/2021 | 05:27pm EDT
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 and
combined financial statements and related notes thereto included in our 2020
Form 10-K and with the information under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our 2020 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 those factors discussed in "Risk Factors" included in Part I, Item 1A.
"Risk Factors" in our 2020 Form 10-K.

Overview


Frontdoor is the leading provider of home service plans in the United States, as
measured by revenue, and operates 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
plan customers 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, central HVAC systems, water heaters,
refrigerators, dishwashers and ranges/ovens/cooktops, as well as optional
coverages for electronics, pools, spas and pumps. Our operations also include
our ProConnect on-demand home services business and Streem, a technology
platform that uses augmented reality, computer vision and machine learning to,
among other things, help home service professionals more quickly and accurately
diagnose breakdowns and complete repairs. At June 30, 2021, we had over two
million active home service plans across all 50 states and the District of
Columbia.

For the three months ended June 30, 2021 and 2020, we generated revenue, net
income and Adjusted EBITDA of $462 million, $40 million and $114 million,
respectively, and $417 million, $49 million and $100 million, respectively. For
the six months ended June 30, 2021 and 2020, we generated revenue, net income
and Adjusted EBITDA of $791 million, $45 million and $150 million, respectively,
and $711 million, $62 million and $147 million, respectively.

For the six months ended June 30, 2021, our total operating revenue included 68
percent of revenue derived from existing customer renewals, while 17 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.

For the six months ended June 30, 2020, our total operating revenue included 69
percent of revenue derived from existing customer renewals, while 18 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 one percent was derived from other revenue channels.

Key Factors and Trends Affecting Our Results of Operations

Impact of the COVID-19 Pandemic


On March 11, 2020, the WHO characterized COVID-19 as a pandemic, and on March
13, 2020, the United States declared a national emergency concerning the
outbreak. The broader implications of the COVID-19 pandemic on our results of
operations and overall financial performance remain uncertain. Included under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our 2020 Form 10-K are the steps we took in 2020 and
have continued to take in response to the COVID-19 pandemic to protect the
well-being of our employees, customers and contractors. We continue to respond
to the real-time needs of our business.

During the first six months of 2021, our financial condition and results of operations were adversely impacted by the COVID-19 pandemic as follows:


?The tight existing home sales market continues to constrain demand for home
service plans in the first-year real estate channel. Additionally, due to the
annual nature of our home service plan agreements, real estate revenue for the
first quarter of 2021 was adversely impacted by the decline in U.S. existing
home sales that occurred in the second quarter of 2020.

?We experienced an increase in appliance and plumbing claims primarily due to
the increased usage of home systems and appliances driven by customers spending
greater time at home in response to COVID-19. In addition, industry-wide parts
availability challenges in the appliance trade have caused increased cost
pressure, and, more specifically, additional replacements due to lack of parts
availability, further contributing to the increased costs.

                                       20

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?We incurred incremental wages at our customer care centers due to a higher
number of service requests in the appliance and plumbing trades, which is
primarily a result of customers spending greater time at home in response to
COVID-19. Additionally, due to labor availability challenges, we continue to
experience difficulties in hiring and retaining customer care center personnel.

Although there are effective vaccines for COVID-19 that have been approved for
use, we are unable to predict how widely utilized the vaccines will be, whether
they will be effective in preventing the spread of COVID-19 (including its
variant strains) and when or if normal economic activity and business operations
will fully resume. We expect that a significant number of people will continue
to spend greater time at home, which may result in a continued increase in usage
of home systems and appliances and demand for our services and a resulting
increase in service-related costs. Accordingly, the COVID-19 situation remains
very fluid, and we continue to adjust our response in real time. It remains
difficult to predict the overall impact the COVID-19 pandemic will have on our
business.

Macroeconomic Conditions

Macroeconomic conditions that may affect customer spending patterns, and thereby
our results of operations, include home sales, consumer confidence and
employment rates. The COVID-19 pandemic has increased economic uncertainty in
these areas. We believe our ability to acquire customers through the
direct-to-consumer channel helps to mitigate the effects of challenges in the
real estate channel, while our nationwide presence limits the risk of poor
economic conditions in any particular geography.

Seasonality


Our business is subject to seasonal fluctuations, which drives variations in our
revenue, net income and Adjusted EBITDA for interim periods. Seasonal
fluctuations are primarily driven by a higher number of central HVAC work orders
in the summer months. In the first six months of 2021 and throughout 2020,
additional variations were experienced as the COVID-19 pandemic resulted in an
elevated level of service requests, primarily in the appliance and plumbing
trades, as our customers spent more time at home. In 2020, approximately 20
percent, 28 percent, 30 percent and 22 percent of our revenue, approximately 12
percent, 43 percent, 43 percent and 2 percent of our net income, and
approximately 17 percent, 37 percent, 34 percent and 12 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 can lead to an increase in service
requests related to home systems, particularly central HVAC systems, resulting
in higher claim frequency and costs and lower profitability. Weather conditions
that have a potentially favorable impact to our business include mild winters or
summers, which can lead to lower home systems claim frequency. For example,
unfavorable weather trends, as compared to 2020, negatively impacted contract
claims costs in the first quarter of 2021.

While weather variations as described above may affect our business, major
weather events and other similar Acts of God, such as hurricanes, flooding and
tornadoes, 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 service plans
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 service plan category and the broader U.S. home
services industry. The home service plan category is highly competitive. 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.

                                       21

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Acquisition Activity


We anticipate that the highly fragmented nature of the home service plan
category will continue to create strategic opportunities for acquisitions. In
particular, we intend to focus strategically on underserved regions where we can
enhance and expand service capabilities. 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. In 2019, we acquired Streem to support the service experience for
our customers, reduce costs and create potential new revenue opportunities
across a variety of channels. We expect to use Streem's services in our core
home service plan business and in ProConnect's on-demand business to deliver a
superior service experience and reduce our costs. In 2020, we acquired a
business to expand our ProConnect on-demand offering via their intellectual
capital and know-how, technology platform capabilities and geographic presence.

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 measure of Adjusted
EBITDA. See "Results of Operations - Adjusted EBITDA" for a reconciliation of
net income to Adjusted EBITDA, as well as "Key Business Metrics - Adjusted
EBITDA" for further discussion of Adjusted EBITDA. Management uses Adjusted
EBITDA to facilitate operating performance comparisons from period to period. We
believe this non-GAAP financial measure provides investors, analysts and other
interested parties useful information to evaluate our business performance as it
facilitates company-to-company operating performance comparisons. While we
believe this non-GAAP financial measure is useful in evaluating our business, it
should be considered as supplemental in nature and is 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, this non-GAAP financial measure may
not be the same as similarly entitled measures reported by other companies,
limiting its usefulness as a comparative measure.

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,

?operating expenses,

?net income,

?earnings per share,

?Adjusted EBITDA,

?Adjusted EBITDA margin,

?net cash provided from operating activities,

?Free Cash Flow,

?growth in number of home service plans, and

?customer retention rate.


Revenue. The majority of our revenue is generated from annual home service plan
agreements entered into with our customers. Home service plan 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 service plan 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 health care;
contractor costs; home systems, appliances and repair costs; tariffs; insurance
premiums; and various regulatory compliance costs.

                                       22

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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 of stock options, 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.

Adjusted EBITDA and Adjusted EBITDA margin. We evaluate performance and allocate
resources based primarily 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; 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, which is a financial measure not calculated in accordance with U.S. GAAP and represents net cash provided from operating activities less property additions.


Growth in Number of Home Service Plans and Customer Retention Rate. We report
our growth in number of home service plans and customer retention rate in order
to track the performance of our business. Home service plans represent our
recurring customer base, which includes customers with active contracts for
recurring services. Our customer retention rate is calculated as the ratio of
ending home service plans to the sum of beginning home service plans, new home
service plan sales and acquired accounts for the applicable period. These
measures are presented on a rolling, 12-month basis in order to avoid seasonal
anomalies.

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 2020 Form 10-K. There have been no material changes to our
critical accounting policies for the six months ended June 30, 2021, certain of
which are described below.

Goodwill and Intangible Assets


In accordance with applicable accounting standards, goodwill and
indefinite-lived intangible assets are not amortized and are subject to
assessment for impairment on an annual basis, or more frequently, if
circumstances indicate a potential impairment. As of June 30, 2021, we do not
believe there are any circumstances, including those related to COVID-19, that
would indicate a potential impairment of our goodwill or indefinite-lived
intangible assets. We will continue to monitor the macroeconomic impacts on our
business in our ongoing evaluation of potential impairments.


?

                                       23

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Results of Operations


Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30,
2020

                                              Three Months Ended        Increase
                                                   June 30,            (Decrease)           % of Revenue
(In millions)                                  2021         2020      2021 vs. 2020      2021          2020
Revenue                                     $       462$    417             11 %      100 %         100 %
Cost of services rendered                           221        200             10         48            48
Gross Profit                                        242        218             11         52            52
Selling and administrative expenses                 136        125              9         29            30
Depreciation and amortization expense                 9         10            (3)          2             2
Restructuring charges                                 1          1              *          -             -
Interest expense                                     12         14           (15)          3             3
Interest and net investment (income) loss             -          3              *          -             1
Loss on extinguishment of debt                       30          -              *          7             -
Income before Income Taxes                           54         65           (17)         12            16
Provision for income taxes                           14         17           (15)          3             4
Net Income                                  $        40$     49           (17) %        9 %          12 %

________________________________

* not meaningful


Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

                                              Six Months Ended        Increase
                                                  June 30,           (Decrease)           % of Revenue
(In millions)                                 2021        2020      2021 vs. 2020      2021          2020
Revenue                                     $     791$    711             11 %      100 %         100 %
Cost of services rendered                         402        347             16         51            49
Gross Profit                                      390        364              7         49            51
Selling and administrative expenses               254        229             11         32            32
Depreciation and amortization expense              19         18              5          2             2
Restructuring charges                               2          4              *          -             1
Interest expense                                   25         29           (13)          3             4
Interest and net investment (income) loss         (1)          1              *          -             -
Loss on extinguishment of debt                     31          -              *          4             -
Income before Income Taxes                         60         83           (28)          8            12
Provision for income taxes                         15         21           (30)          2             3
Net Income                                  $      45$     62           (27) %        6 %           9 %

________________________________

* not meaningful

                                       24

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Revenue


We reported revenue of $462 million and $417 million for the three months ended
June 30, 2021 and 2020, respectively, and $791 million and $711 million for the
six months ended June 30, 2021 and 2020, respectively. Revenue by major customer
acquisition channel is as follows:

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30,
2020

                            Three Months Ended
                                 June 30,
(In millions)             2021                2020         Increase (Decrease)
Renewals               $       316$ 289  $         26                9 %
Real estate(1)                  77               74             3                4
Direct-to-consumer(1)           57               51             6               12
Other                           13                3            10                *
Total revenue          $       462$ 417  $         45               11 %

________________________________

* not meaningful

(1)First-year revenue only.


Revenue increased 11 percent for the three months ended June 30, 2021 compared
to the three months ended June 30, 2020, primarily driven by higher renewal
revenue due to improved price realization and growth in the number of renewed
home service plans, due, in part, to customer retention initiatives. The
increase in real estate revenue primarily reflects improved price realization.
The tight existing home sales market continues to constrain demand for home
service plans in this channel. Additionally, due to the annual nature of our
home service plan agreements, real estate revenue for the prior year was
adversely impacted by the decline in U.S. existing home sales that occurred in
the second quarter of 2020. The increase in direct-to-consumer revenue primarily
reflects growth in the number of first-year direct-to-consumer home service
plans, mostly driven by increased investments in marketing. The increase in
other revenue was driven by growth in ProConnect and Streem.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

                           Six Months Ended
                               June 30,
(In millions)            2021             2020         Increase (Decrease)
Renewals               $     539$ 489  $         50               10 %
Real estate(1)               134            130             4                3
Direct-to-consumer(1)         98             87            12               14
Other                         20              6            14                *
Total revenue          $     791$ 711  $         80               11 %

________________________________

* not meaningful

(1)First-year revenue only.


Revenue increased 11 percent for the six months ended June 30, 2021 compared to
the six months ended June 30, 2020, primarily driven by higher renewal revenue
due to improved price realization and growth in the number of renewed home
service plans, due, in part, to customer retention initiatives. The increase in
real estate revenue primarily reflects improved price realization. The tight
existing home sales market continues to constrain demand for home service plans
in this channel. Additionally, due to the annual nature of our home service plan
agreements, real estate revenue for both the first quarter of 2021 and the
second quarter of 2020 was adversely impacted by the decline in U.S. existing
home sales that occurred in the second quarter of 2020. The increase in
direct-to-consumer revenue primarily reflects growth in the number of first-year
direct-to-consumer home service plans, mostly driven by increased investments in
marketing. The increase in other revenue was driven by growth in ProConnect and
Streem.

                                       25

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Number of home service plans, growth in number of home service plans and customer retention rate are presented below.


                                            As of
                                           June 30,
(In millions)                            2021    2020
Number of home service plans            2.24    2.18
Growth in number of home service plans     3 %     3 %
Customer retention rate                   75 %    75 %


Cost of Services Rendered

We reported cost of services rendered of $221 million and $200 million for the
three months ended June 30, 2021 and 2020, respectively, and $402 million and
$347 million for the six months ended June 30, 2021 and 2020, respectively. The
following tables provide a summary of changes in cost of services rendered:

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020


(In millions)
Three Months Ended June 30, 2020$ 200
Impact of change in revenue          14
Contract claims costs                 6
Other                                 1

Three Months Ended June 30, 2021$ 221



The increase in contract claims costs reflects increased cost pressures in the
appliance, plumbing and HVAC trades due to industry-wide availability challenges
and inflation, offset, in part, by lower service request incidence across all
trades and process improvement benefits. Appliance parts availability challenges
continued to drive additional replacements, contributing to the increased cost
pressures. Results for the prior year reflect higher service request incidence
in the appliance and plumbing trades compared to 2021, which was primarily a
result of customers sheltering at home in response to COVID-19.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020


(In millions)
Six Months Ended June 30, 2020$ 347
Impact of change in revenue        22
Contract claims costs              32
Other                               1

Six Months Ended June 30, 2021$ 402



The increase in contract claims costs reflects increased cost pressures in the
appliance and plumbing trades due to industry-wide availability challenges and
inflation. Additionally, contract claims costs reflect higher service request
incidence in the first quarter of 2021 primarily in the appliance trade driven
by customers continuing to spend greater time at home and in the HVAC trade
driven by unfavorable weather trends, offset, in part, by process improvement
benefits. Appliance parts availability challenges continued to drive additional
replacements, contributing to the increased cost pressures.

                                       26

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Selling and Administrative Expenses


We reported selling and administrative expenses of $136 million and $125 million
for the three months ended June 30, 2021 and 2020, respectively, $254 million
and $229 million for the six months ended June 30, 2021 and 2020, respectively.
For the three months ended June 30, 2021 and 2020, selling and administrative
expenses comprised sales, marketing and customer service costs of $97 million
and $90 million, respectively, and general and administrative expenses of $39
million and $35 million, respectively. For the six months ended June 30, 2021
and 2020, selling and administrative expenses comprised sales, marketing and
customer service costs of $178 million and $164 million, respectively, and
general and administrative expenses of $76 million and $65 million,
respectively. The following tables provide a summary of changes in selling and
administrative expenses:

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020


(In millions)
Three Months Ended June 30, 2020$ 125
Sales and marketing costs             4
Customer service costs                3
Stock-based compensation expense      2
General and administrative costs      1
Three Months Ended June 30, 2021$ 136


The increase in sales and marketing costs was primarily driven by increased
investments to drive sales growth in the home service plan direct-to-consumer
channel, ProConnect and Streem. The increase in customer service costs was
primarily related to investments in customer retention initiatives and customer
growth. General and administrative costs increased compared to prior year
primarily due to increased personnel costs and investments in technology. Prior
year general and administrative costs include incremental direct costs related
to COVID-19 of $1 million.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020


(In millions)
Six Months Ended June 30, 2020$ 229
Sales and marketing costs             9
Customer service costs                5
Stock-based compensation expense      5
General and administrative costs      6
Six Months Ended June 30, 2021$ 254


The increase in sales and marketing costs was primarily driven by increased
investments to drive sales growth in the home service plan direct-to-consumer
channel, ProConnect and Streem. The increase in customer service costs was
primarily related to managing a higher number of service requests, investments
in customer retention initiatives and customer growth. General and
administrative costs increased compared to prior year primarily due to increased
personnel costs and investments in technology. Prior year general and
administrative costs include incremental direct costs related to COVID-19 of $1
million.

Depreciation Expense

Depreciation expense was $6 million and $5 million for the three months ended
June 30, 2021 and 2020, respectively, and $12 million and $10 million for the
six months ended June 30, 2021 and 2020, respectively.

Amortization Expense


Amortization expense was $3 million and $4 million for the three months ended
June 30, 2021 and 2020, respectively, and $6 million and $7 million for the six
months ended June 30, 2021 and 2020, respectively.

Restructuring Charges


Restructuring charges were $1 million for each of the three months ended June
30, 2021 and 2020 and $2 million and $4 million for the six months ended June
30, 2021 and 2020, respectively.

For the three months ended June 30, 2021 and 2020, restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

                                       27

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For the six months ended June 30, 2021, restructuring charges comprised $1
million of accelerated depreciation of certain technology systems driven by
efforts to enhance our technological capabilities and $1 million of severance
and other costs. For the six months ended June 30, 2020, restructuring charges
comprised $2 million of lease termination costs and $1 million of severance and
other costs related to the decision to consolidate the operations of Landmark
with those of OneGuard, which was completed during the first quarter of 2020, as
well as $1 million of accelerated depreciation of certain technology systems.

Interest Expense


Interest expense was $12 million and $14 million for the three months ended June
30, 2021 and 2020, respectively, and $25 million and $29 million for the six
months ended June 30, 2021 and 2020, respectively. For the three and six months
ended June 30, 2021, the decrease was due to a decline in interest rates on the
unhedged portion of our variable rate debt, the February 17, 2021 partial
repayment of the Existing Term Loan Facility and the June 17, 2021 redemption of
the 2026 Notes.

Interest and Net Investment (Income) Loss


Interest and net investment (income) loss reflects income of less than $1
million for the three months ended June 30, 2021 compared to a loss of $3
million for the three months ended June 30, 2020, and income of $1 million for
the six months ended June 30, 2021 compared to a loss of $1 million for the six
months ended June 30, 2020. For the three and six months ended June 30, 2021,
amounts primarily comprised interest on our cash and cash equivalents balances.
For the three and six months ended June 30, 2020, amounts primarily comprised a
$3 million loss on investment, offset, in part, by interest on our cash and cash
equivalents balances.

Loss on Extinguishment of Debt


Loss on extinguishment of debt was $30 million and $31 million for the three and
six months ended June 30, 2021, respectively. Amounts primarily relate to the
June 17, 2021 redemption of the remaining outstanding principal amounts of $534
million of the Existing Term Loan Facility and $350 million of the 2026 Notes
and include a "make-whole" redemption premium of $21 million on the 2026 Notes
and the write-off of $9 million of debt issuance costs and original issue
discount. Additionally, $1 million relates to the February 17, 2021 partial
repayment of the Existing Term Loan Facility and includes the write-off of debt
issuance costs and original issue discount. There were no such charges for the
three and six months ended June 30, 2020.

Provision for Income Taxes


The effective tax rate on income was 26.0 percent and 25.5 percent for the three
months ended June 30, 2021 and 2020, respectively, and 24.5 percent and 25.4
percent for the six months ended June 30, 2021 and 2020, respectively. The
decrease in the effective tax rate for the six months ended June 30, 2021
compared to 2020 is primarily due to excess tax benefits for share-based awards.

Net Income


Net income was $40 million and $49 million for the three months ended June 30,
2021 and 2020, respectively, and $45 million and $62 million for the six months
ended June 30, 2021 and 2020, respectively. For the three and six months ended
June 30, 2021 compared to 2020, the decrease was driven by the loss on
extinguishment of debt, offset in part, by the aforementioned operating results
and a decrease in the provision for income taxes.

                                       28

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Adjusted EBITDA


Adjusted EBITDA was $114 million and $100 million for the three months ended
June 30, 2021 and 2020, respectively, and $150 million and $147 million for the
six months ended June 30, 2021 and 2020, respectively. The following tables
provide a summary of changes in our Adjusted EBITDA:

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020


(In millions)
Three Months Ended June 30, 2020$ 100
Impact of change in revenue          31
Contract claims costs               (6)
Sales and marketing costs           (4)
Customer service costs              (3)
General and administrative costs    (3)
Other                               (1)

Three Months Ended June 30, 2021$ 114



The increase in contract claims costs reflects increased cost pressures in the
appliance, plumbing and HVAC trades due to industry-wide availability challenges
and inflation, offset, in part, by lower service request incidence across all
trades and process improvement benefits. Appliance parts availability challenges
continued to drive additional replacements, contributing to the increased cost
pressures. Results for the prior year reflect higher service request incidence
in the appliance and plumbing trades compared to 2021, which was primarily a
result of customers sheltering at home in response to COVID-19.

The increase in sales and marketing costs was primarily driven by increased
investments to drive sales growth in the home service plan direct-to-consumer
channel, ProConnect and Streem. The increase in customer service costs was
primarily related to investments in customer retention initiatives and customer
growth. General and administrative costs increased compared to prior year
primarily due to increased personnel costs and investments in technology.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020


(In millions)
Six Months Ended June 30, 2020$  147
Impact of change in revenue           58
Contract claims costs               (32)
Sales and marketing costs            (9)
Customer service costs               (5)
General and administrative costs     (7)
Other                                (2)

Six Months Ended June 30, 2021$ 150



The increase in contract claims costs reflects increased cost pressures in the
appliance and plumbing trades due to industry-wide availability challenges and
inflation. Additionally, contract claims costs reflect higher service request
incidence in the first quarter of 2021 primarily in the appliance trade driven
by customers continuing to spend greater time at home and in the HVAC trade
driven by unfavorable weather trends offset, in part, by process improvement
benefits. Appliance parts availability challenges continued to drive additional
replacements, contributing to the increased cost pressures.

The increase in sales and marketing costs was primarily driven by increased
investments to drive sales growth in the home service plan direct-to-consumer
channel, ProConnect and Streem. The increase in customer service costs was
primarily related to managing a higher number of service requests, investments
in customer retention initiatives and customer growth. General and
administrative costs increased compared to prior year primarily due to increased
personnel costs and investments in technology. Other primarily consists of
interest and net investment income.

                                       29

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A reconciliation of Net Income to Adjusted EBITDA is presented below.

                                               Three Months Ended           Six Months Ended
                                                    June 30,                    June 30,
(In millions)                                   2021          2020         2021          2020
Net Income                                  $         40   $       49$        45$       62
Depreciation and amortization expense                  9           10            19           18
Restructuring charges                                  1            1             2            4
Provision for income taxes                            14           17            15           21
Non-cash stock-based compensation expense              8            5            13            8
Interest expense                                      12           14            25           29
Loss on extinguishment of debt                        30            -            31            -
Other non-operating expenses(1)                        -            5             -            5
Adjusted EBITDA                             $        114$      100$       150$      147

________________________________


(1)Other non-operating expenses for the three and six months ended June 30, 2020
includes (a) a loss on investment of $3 million, (b) incremental direct costs
related to COVID-19 of $1 million, which were temporary in nature and primarily
related to incremental health and childcare benefits for our employees and
hoteling costs related to our offshore business process outsourcers and (c)
acquisition-related transaction costs of less than $1 million. For the three and
six months ended June 30, 2021, such charges were less than $1 million.

Liquidity and Capital Resources

Liquidity


A substantial portion of our liquidity needs are due to debt service
requirements on our indebtedness. The Amended 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 June 30, 2021, we were in compliance with
the covenants under the agreements that were in effect on such date. Based on
current conditions, we do not believe the COVID-19 pandemic will affect our
ongoing ability to meet the covenants in our debt instruments, including our
Amended Credit Agreement.

Cash and cash equivalents totaled $323 million and $597 million as of June 30,
2021 and December 31, 2020, 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 June 30,
2021 and December 31, 2020, the total net assets subject to these third-party
restrictions was $173 million and $180 million, respectively. As of June 30,
2021, there were $2 million of letters of credit outstanding and $248 million of
available borrowing capacity under the Amended Revolving Credit Facility. The
letters of credit are posted in lieu of cash to satisfy regulatory requirements
in certain states in which we operate. Available liquidity was $398 million at
June 30, 2021, consisting of $150 million of cash not subject to third-party
restrictions and $248 million of available borrowing capacity under the Amended
Revolving Credit Facility. We currently believe that cash generated from
operations, our cash on hand and available borrowing capacity under the Amended
Revolving Credit Facility at June 30, 2021 will provide us with sufficient
liquidity to meet our obligations for the foreseeable future.

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

                                       30

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On February 17, 2021, we repaid $100 million of outstanding principal amount of
the Term Loan Facility. In connection with the repayment, we recorded a loss on
extinguishment of debt of $1 million, which included the write-off of debt
issuance costs and original issue discount.

On June 17, 2021, we entered into the Amended Credit Agreement, providing for
the Term Loan A maturing June 17, 2026, the Term Loan B maturing June 17, 2028
and the Amended Revolving Credit Facility, which terminates June 17, 2026. The
net proceeds of the transaction, together with cash on hand, were used to redeem
the remaining outstanding principal amounts of $534 million of the Existing Term
Loan Facility and $350 million of the 2026 Notes at a price of 106.1%. In
addition, the Amended Revolving Credit Facility replaced the Existing Revolving
Credit Facility. In connection with the repayments, we recorded a loss on
extinguishment of debt of $30 million in the second quarter of 2021, which
included a "make-whole" redemption premium of $21 million on the 2026 Notes and
the write-off of $9 million of debt issuance costs and original issue discount.
See Note 10 to the condensed consolidated financial statements included in Part
1, Item 1 of this report for more information related to our indebtedness.

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.

Our subsidiaries are permitted under the terms of the Amended 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 third-party restrictions on the ability of certain of our
subsidiaries to transfer funds to us. These restrictions are related to
regulatory requirements. 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. In Texas, we are
relieved of the obligation to post 75 percent of our otherwise required reserves
because we operate a captive insurer approved by Texas regulators in order to
satisfy such obligations. 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 report, are summarized in the following table.

                                                Six Months Ended
                                                    June 30,
(In millions)                                  2021            2020
Net cash provided from (used for):
Operating activities                        $       119$  140
Investing activities                               (15)         (19)
Financing activities                              (378)          (4)

Cash (decrease) increase during the period $ (274)$ 118

Operating Activities


Net cash provided from operating activities was $119 million for the six months
ended June 30, 2021, compared to $140 million for the six months ended June 30,
2020.

Net cash provided from operating activities in 2021 comprised $112 million in
earnings adjusted for non-cash charges and an $8 million decrease in cash
required for working capital. The decrease in cash required for working capital
was driven by seasonality and growth in our underlying business, offset, in
part, by interest payments made in connection with the redemption of the 2026
Notes.

Net cash provided from operating activities in 2020 comprised $94 million in
earnings adjusted for non-cash charges and a $46 million decrease in cash
required for working capital. The decrease in cash required for working capital
was driven by seasonality and growth in our underlying business.

                                       31

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Investing Activities

Net cash used for investing activities was $15 million and $19 million for the six months ended June 30, 2021 and 2020, respectively.


Capital expenditures were $15 million for the six months ended June 30, 2021,
compared to $18 million for the six months ended June 30, 2020, and included
recurring capital needs and technology projects. We expect capital expenditures
for the full year 2021 relating to recurring capital needs and the continuation
of investments in information systems and productivity enhancing technology to
be approximately $30 million to $40 million. We have no additional material
capital commitments at this time.

Cash payments for business acquisitions, net of cash acquired, were $5 million
for the six months ended June 30, 2020. During the second quarter of 2020, we
acquired a business to expand our ProConnect on-demand offering for $5 million
in cash. There were no acquisitions for the six months ended June 30, 2021.

Cash flows provided from purchases, sales and maturities of securities, net, for
the six months ended June 30, 2020 were $5 million and were driven by the
maturities of marketable securities. There were no cash flows provided from
purchases, sales and maturities of securities, net, for the six months ended
June 30, 2021.

Financing Activities

Net cash used for financing activities was $378 million and $4 million for the six months ended June 30, 2021 and 2020, respectively.


On February 17, 2021, we repaid $100 million of outstanding principal amount of
the Existing Term Loan Facility. Additionally, on June 17, 2021, we entered into
the Amended Credit Agreement. The net proceeds of the transaction, together with
cash on hand, were used to redeem the remaining outstanding principal amounts of
$534 million of the Existing Term Loan Facility and $350 million of the 2026
Notes at a price of 106.1%. In connection with the repayments, we paid a
"make-whole" redemption premium of $21 million on the 2026 Notes and debt
issuance costs of $8 million.

Contractual Obligations

Our 2020 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2020. We continue to make the contractually required payments, and, therefore, the 2021 obligations and commitments described in our 2020 Form 10-K have been reduced by the required payments.


On June 17, 2021, we entered into the Amended Credit Agreement. The net proceeds
of the transaction, together with cash on hand, were used to redeem the
remaining outstanding principal amounts of $534 million of the Existing Term
Loan Facility and $350 million of the 2026 Notes. As of June 30, 2021, future
scheduled long-term debt payments total $640 million, and estimated long-term
debt payments for the remainder of 2021 and for each fiscal year from 2022
through 2026 are $8 million, $17 million, $17 million, $17 million, $17 million
and $205 million, respectively. Additionally, as of June 30, 2021, future
estimated interest payments, which are based on the applicable rates at June 30,
2021 plus the specified margin in the Amended Credit Agreement, total $126
million; estimated interest payments for the remainder of 2021 and for each
fiscal year from 2022 through 2026 are $14 million, $24 million, $24 million,
$23 million, $19 million and $10 million, respectively; the estimated debt
balance as of each fiscal year end from 2021 through 2026 is $632 million, $615
million, $598 million, $581 million, $564 million and $359 million,
respectively; and the weighted-average interest rate (including the impact of
the effective interest rate swap) on the estimated debt balances at each fiscal
year end from 2021 through 2026 is expected to be 3.8 percent, 3.9 percent, 3.9
percent, 4.0 percent, 2.2 percent and 2.4 percent, respectively. See Note 10 to
the condensed consolidated financial statements included in Part 1, Item 1 of
this report for the terms and maturities of the Amended Credit Facilities.

Financial Position

The following discussion describes changes in our financial position from December 31, 2020 to June 30, 2021:


?Cash and cash equivalents decreased during the six months ended June 30, 2021,
primarily due to our debt refinancing transactions, offset, in part, by cash
provided from operating activities.

?Accounts payable increased during the six months ended June 30, 2021, reflecting the timing of trade payables due to the seasonality of our business.


?Home service plans claims increased during the six months ended June 30, 2021,
reflecting the seasonality of contract claims, which increased amounts due to
contractors and suppliers.

?Deferred revenue decreased during the six months ended June 30, 2021, reflecting a shift in the mix of annual-pay customers to monthly-pay customers.

                                       32

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?Current portion of long-term debt increased during the six months ended June 30, 2021, reflecting our debt refinancing transactions.

?Long-term debt decreased during the six months ended June 30, 2021, reflecting our debt refinancing transactions.


?Total shareholders' equity was a surplus of $3 million as of June 30, 2021
compared to a deficit of $61 million as of December 31, 2020. The increase was
primarily driven by the $45 million of net income generated during the six
months ended June 30, 2021 which reduced our accumulated deficit. See the
condensed consolidated statements of changes in equity (deficit) included in
Part I, Item 1 of this report for further information.

Off-Balance Sheet Arrangements

As of June 30, 2021, we did not have any significant off-balance sheet arrangements.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

                                       33

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