September 29, 2003 |
ISSN 1550-9214 |
Warranty in the Air, |
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
General Electric Co. (1) | $174 | 3.0% | 23 |
Rockwell Collins Inc. | $13 | 2.8% | 31 |
General Motors Corp. | $1,036 | 2.8% | 25 |
United Technologies | $125 | 2.2% | 27 |
Brunswick Corp. | $23 | 2.2% | 23 |
Goodrich Corp. | $12 | 1.0% | 16 |
Honeywell International | $45 | 0.8% | 17 |
Boeing Co. | $79 | 0.6% | 33 |
L-3 Communications | $7.1 | 0.6% | 26 |
General Dynamics | $19 | 0.4% | 34 |
Other | $44 | ||
Total | $1,576 | 2.1% | 25 |
Key: increases in black,
decreases in red.
- (1) GE has chosen to disclose warranty claims data just once a year,
so estimates derived from 2002 data were used.
Source: SEC Form 10-Q & Form 10-K
General Electric is on top of this list, though it probably doesn't belong there. The company reported $694 million in warranty claims for 2002, most of which it said arose in its GE Power Systems turbine business unit, not its appliance or aerospace units. However, the company has not provided any warranty data so far in 2003, and won't do so until it files its next annual report. So it won't be known until early in 2004 whether the company experiences any warranty claims for the aircraft engines it sold in 2003.
Rockwell Collins is a prominent maker of avionics systems for both commercial and military aircraft. General Motors is in this category by virtue of its ownership of Hughes Electronics, which is being sold to News Corp. Brunswick is here for its Mercury boat engines and its Sea Ray, Bayliner, Maxum, Hatteras, Meridian and Sealine pleasure boats. Besides boats, the company's other divisions are market leaders in billiards and bowling.
Goodrich makes jet airplane parts, avionics, and landing gear, among other items. Despite its name being associated with car tires, it's largely out of the automotive business. Honeywell, which is included in the HVAC category thanks to its leadership in thermostats and other controls, is in the aerospace category thanks to its manufacture of turboprop aircraft engines.
Noteworthy Anomalies
L-3 Communications is best-known as a manufacturer of military avionics and satellite communications systems, but it also is the maker of the "black box" flight data recorders loaded into all large commercial aircraft. Its warranty claims jumped from $4.1 million in the first quarter to $7.1 million in the second quarter. Its accruals, meanwhile, fell from $7.9 million to $1.3 million over the same period. That left the company with a warranty reserve fund large enough to pay the next 26 months of claims, down from the 44 warranty-months it held in reserve at the end of the first quarter. Obviously, we need a few more quarters of data to make sense of these curious oscillations.
Speaking of curious data, General Dynamics reported $9 million in claims during the first quarter, and $19 million in claims during the second quarter. The company made an upwards $81 million change of estimate during the first quarter, and another upwards $65 million change of estimate in the second quarter. So far in 2003, its warranty reserves have grown from $137 million to $217 million, while claims have edged up from 0.3% to 0.4% of sales. To understand how peculiar this is, consider that only 20 companies now have a larger warranty reserve than General Dynamics, and only two of them experience claims of less than $40 million per quarter.
There are 45 other companies on the list, including several that, like GE, also make it onto the electrical power generation list below. But before we get to that, let's take a look at the HVAC industry. Covered in detail in the June 30 edition of Warranty Week, this is the home of not only the window-mounted air conditioners and central heating/cooling units, but also all of the commercial freezers, refrigerators, beverage dispensers, and ice machines used by restaurants, food markets, and perishable freight haulers.
Warranty in the Heating, Ventilation,
Air Conditioning & Refrigeration Industry
Top Spenders on Claims,
Second Quarter, 2003
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
Whirlpool Corp. | $48 | 2.4% | 9 |
United Technologies | $125 | 2.2% | 27 |
Manitowoc Co. Inc. | $7.9 | 1.7% | 15 |
York International Corp. | $16 | 1.5% | 17 |
American Standard Cos. | $25 | 1.2% | 39 |
Ingersoll-Rand Co. Ltd. | $18 | 0.9% | 23 |
SPX Corp. | $10 | 0.9% | 21 |
Honeywell International | $45 | 0.8% | 17 |
Rockwell Automation | $8.0 | 0.7% | 12 |
Johnson Controls Inc. | $13 | 0.2% | 16 |
Other | $43 | ||
Total | $358 | 0.8% | 23 |
Key: increases in black,
decreases in red.
Source: SEC Form 10-Q & Form 10-K
By virtue of the inclusion of manufacturers such as Fedders, Whirlpool, Maytag, and the Holmes Group Inc., this category also covers the consumer end of the heating, cooling, and ventilation industry. But most of the companies among the 35 that make up this category are decidedly aimed more at the commercial and construction ends of the business.
Not included in this go-round is General Electric, whose HVAC division was sold in 1982 to Trane (which itself was acquired by American Standard in 1984). Nortek Inc., which went private earlier this year, is still reporting its warranty details, but AAF-McQuay Inc., which was bought by a Malaysian company in February, is not. With a few more minor changes from the list used in the June 30 HVAC report, we're left with a market that reported $391 million in claims during the first quarter and $386 million in claims during the second quarter. Because reported product revenue for the 35 companies fell from $46.25 billion to $43.5 billion, however, the claims rate increased slightly from 0.8% to 0.9%. Obviously, seasonality is a big factor in both HVAC sales and claims, though, so don't read too much into these oscillations until we have at least a year's data.
Missing from the list are HVAC vendors such as Dectron Internationale Inc.; Eaton Corp.; Global Energy Group Inc.; Masco Corp.; Mestek Inc.; MFRI Inc.; Parker Hannafin Corp.; and Wabash National Corp. None have made any disclosures to date concerning their warranty claims and accruals. Emerson Electric Co. and TurboChef Technologies Inc., meanwhile, disclosed only the beginning and ending balance in their respective warranty reserve funds.
When the Lights Went Out
With all the blackouts that have plagued the eastern U.S. and western Europe in recent weeks, electrical power generation is suddenly something that a lot of people are thinking about. People not accustomed to having their lights go out are now thinking about backup power sources, be they of the battery type or the gasoline-powered generator type. And of course, all the hand-wringers are looking closely at the existing grids, wondering what can be done to make sure they don't fail again.
Warranty Week found 39 companies engaged in the electrical power generation business in some way who reported details about their warranty claims and accruals during the second quarter. We also fashioned a placeholder estimate for GE Power Systems, based upon its 2002 claims data. Among the non-reporters are American companies such as Dewey Electronics Corp.; Roper Industries Inc.; Surge Technologies Corp.; and Telenetics Corp. Among the internationally-based power equipment manufacturers are ABB Ltd.; Alstom; Invensys plc; Mitsubishi Corp.; Schneider Electric SA; and Siemens AG. Those in the former group are supposed to comply with FIN 45. Those in the latter group don't have to file statements with the SEC.
The top ten manufacturers in the electrical power generation business are on the list below, ranked in descending order by their claims rates.
Warranty in the Electrical Power Industry
Top Spenders on Claims,
Second Quarter, 2003
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
Global Power Equipment | $3.2 | 5.1% | 18 |
Cummins Inc. | $43 | 3.1% | 23 |
General Electric Co. (1) | $174 | 3.0% | 23 |
Exide Technologies | $16 | 2.8% | 11 |
American Power Conv. | $8.8 | 2.7% | 6 |
Caterpillar Inc. | $115 | 2.3% | 18 |
Briggs & Stratton Corp. | $7.2 | 1.8% | 20 |
Carlisle Cos. Inc. | $4.7 | 0.9% | 5 |
SPX Corp. | $10 | 0.9% | 21 |
Flowserve Corp. | $4.4 | 0.7% | 10 |
Other | $15 | ||
Total | $400 | 2.0% | 21 |
Key: increases in black,
decreases in red.
- (1) GE has chosen to disclose warranty claims data just once a year,
so estimates derived from 2002 data were used.
Source: SEC Form 10-Q & Form 10-K
What's remarkable is how there seems to be no pattern in the data. The highest claims rate is 5.1% and the lowest is 0.7%. In fact, the data for all 39 manufacturers ranges from 390% to 0%. We kid you not. During the first six months of 2003, fuel cell manufacturer Proton Energy Systems Inc. reported $1.36 million in warranty claims, and only $350,000 in product revenue. That means claims exceeded revenue by almost four-to-one -- a 390% claims rate. At the other end of the spectrum, Evergreen Solar Inc., a company that makes solar power packs for roadside callboxes and illuminated signs, reported no warranty claims, though it still accrued $50,000 to cover possible future claims. There's just no pattern to the data, although 23 of the 45 manufacturers experienced claims rates under 1%, and only four were over 5%.
The industry average is 2.0%, though the median is only 0.9%. This, no doubt, is caused by the large skewing effect of the big diesel engine manufacturers Cummins and Caterpillar, as well as battery makers Exide Technologies and C&D Technologies. Possibly, much of their warranty claims volume arises from their automotive lines of business, where 2% is nothing unusual.
Medical Warranties
Warranty Week found 101 companies engaged in the manufacture of medical equipment and scientific instruments. They averaged only a 1.1% claims rate. The median also was close to that figure. Eight companies saw claims rates over 5% and nine were under 0.1%. This data set might make the perfect bell curve.
Warranty in the Medical Equipment
and Scientific Instrument Industries
Top Spenders on Claims,
Second Quarter, 2003
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
Candela Corp. | $3.6 | 8.0% | 6 |
Varian Medical Systems | $7.0 | 3.2% | 15 |
Beckman Coulter Inc. | $14 | 2.7% | 3 |
Waters Corp. | $4.7 | 2.1% | 6 |
Eastman Kodak Co. | $11 | 1.8% | 12 |
Agilent Technologies Inc. | $18 | 1.5% | 12 |
Hillenbrand Industries Inc. | $5.0 | 1.3% | 13 |
Thermo Electron Corp. | $5.1 | 1.0% | 17 |
La-Z-Boy Inc. | $4.1 | 0.9% | 14 |
Baxter International Inc. | $6.0 | 0.3% | 26 |
Other | $44 | ||
Total | $122 | 1.1% | 13 |
Key: increases in black,
decreases in red.
Source: SEC Form 10-Q & Form 10-K
One could make a case that Agilent Technologies Inc. and Eastman Kodak Co. don't belong on a list of medical and laboratory equipment vendors. Further down the list, numerous X-ray and laser system vendors manufacture their products for both the traditional medical markets as well as new applications such as weld inspections and fiber-optic communications. In fact, at least seven companies on the list would be equally at home as semiconductor equipment manufacturers.
Warranty claims in this sector were down by $3 million, but the claims rate edged up from 0.8% because of falling product sales volumes. The reserve-to-claims ratio was up only slightly, from 12.8 to 13.3 warranty-months, reflecting accrual rates that closely matched product sales. Interestingly, three companies reported no claims, and four made no accruals during the second quarter.
Down on the Farm
While one could vigorously debate what is and isn't a medical/scientific company, there's no doubt about the list of farm equipment vendors. Or is there? We're including here not only the systems and machines that a production farmer might use, but also the lawn mowers and garden utensils that a weekend/backyard "gentleman farmer" might use. Thus, the list includes well-known farm equipment vendors such as Caterpillar Inc. and Deere & Co., as well as more suburban names such as Toro Co., Briggs & Stratton, and Stanley Works. Meanwhile, all but Stanley Works were counted two weeks ago in the Sept. 15 column as automotive vendors.
Confusing? It gets worse. Tecumseh Products Co. also qualifies as an HVAC vendor, and Twin Disc Inc. makes boats as well as farm tractors. Featherlite makes recreational vehicles as well as horse trailers. Park-Ohio Holdings Corp. makes aluminum castings for farm equipment as well as landing gear for airplanes. Briggs & Stratton also makes generators, and Caterpillar also makes electrical power equipment.
The only "pure play" farm equipment makers on the list of 20 are Ag-Bag International Ltd., makers of plastic agricultural feed bags, and Paul Mueller Co., makers of dairy farm equipment. The 20 farm equipment manufacturers identified so far generated $239 million in warranty claims during the second quarter, although nearly half that total came from just Caterpillar. Claims during the first quarter were around $225 million, though because of lower sales volumes the claims rate was also close to 2.0% back then. As with the HVAC industry, readers are cautioned that there is likely to be a high degree of seasonality around both sales and claims volumes in this industry segment.
Warranty in the Farm Equipment Industry
Top Spenders on Claims,
Second Quarter, 2003
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
Caterpillar Inc. | $115 | 2.3% | 18 |
Toro Co. | $7.6 | 2.1% | 23 |
Twin Disc Inc. | $1.2 | 2.1% | 15 |
Deere & Co. | $79 | 2.1% | 15 |
Briggs & Stratton Corp. | $7.2 | 1.8% | 20 |
AGCO Corp. | $16 | 1.8% | 17 |
Gehl Co. | $0.9 | 1.3% | 14 |
Tecumseh Products Co. | $3.8 | 0.8% | 26 |
Stanley Works | $3.9 | 0.6% | 5 |
Park-Ohio Holdings | $0.9 | 0.5% | 7 |
Other | $2.7 | ||
Total | $239 | 2.0% | 17 |
Key: increases in black,
decreases in red.
Source: SEC Form 10-Q & Form 10-K
Finally, there's the mining industry. As with the farming sector, virtually none of the materials produced are warranted, though virtually all of the equipment used is warranted. This is certainly not the case in either the automotive or the IT industries, where sophisticated (and warranted) equipment is typically used to manufacture even more sophisticated (and warranted) products. But in the food growing and processing industry, as well as with the mining and processing of raw materials, generally all of the inputs are warranted but none of the outputs are.
We purposefully excluded Caterpillar from this segment, because with only $55 million in total claims among the 19 other vendors, the industry average would have otherwise in effect become Caterpillar's numbers. Perhaps that isn't fair, because companies such as Terex and Manitowoc that sell both construction and mining equipment are on the list below. If you must, add Caterpillar at the top of the list and cut Donaldson from the bottom.
Warranty in the Mining Industry
Top Spenders on Claims,
Second Quarter, 2003
Warranty | Claims as | Warranty- | |
Claims | % of Product | Months in | |
Company | 2Q ($m) | Sales | Reserves |
Terex Corp. | $22 | 1.9% | 8 |
Joy Global Inc. | $5.6 | 1.9% | 17 |
Manitowoc Co. Inc. | $7.9 | 1.7% | 15 |
NACCO Industries Inc. | $8.0 | 1.6% | 16 |
Gardner Denver Inc. | $1.5 | 1.3% | 14 |
Input/Output Inc. | $0.5 | 0.9% | 21 |
FMC Technologies Inc. | $5.0 | 0.8% | 7 |
Robbins & Myers Inc. | $1.4 | 0.6% | 19 |
Lone Star Technologies | $0.7 | 0.3% | 10 |
Donaldson Co. Inc. | $0.5 | 0.1% | 54 |
Other | $1.7 | ||
Total | $55 | 0.9% | 13 |
Key: increases in black,
decreases in red.
Source: SEC Form 10-Q & Form 10-K
Claims for these ten vendors plus the nine not on the chart came in at $55 million in the second quarter and $43 million in the first quarter. No doubt, some seasonality is to blame for the Spring spike in claims. Even though warranty claims were up 28% sequentially, the claims rate rose only from 0.8% to 0.9%, reflecting higher sales. Though only five of the 19 manufacturers saw claims rates fall, none saw it fall by more than 0.3%. Though 14 saw an increased rate of claims, only one increase was over 0.3%. In other words, both claims and sales rise proportionally with the increasingly warm weather. In future quarters we will see whether claims and sales also trail off together during the colder seasons.
No More Lists
So what's left? Virtually untouched is the whole home building and home furnishing industry, where everything from carpets and countertops to appliances and home entertainment systems are sold with product warranties. There also are a significant number of materials handling and heavy industry equipment makers who don't sell into the mining, farming, or air conditioning markets who didn't make any of these six lists. And there are numerous machine tool companies whose products don't find much use in either the medical field or the semiconductor industry, and who therefore aren't represented on any of these lists. But we'll save those for the third quarter reports, which by the way will begin arriving this week. Next week's column will take a look at manufacturers' warranty reserve funds, then we'll shift back to other topics.
As mentioned, we're tracking 750 companies that are now making the required FASB FIN 45 disclosures regarding product warranties. We're tracking at least 180 more who have made only partial disclosures, primarily of their reserve fund balance. Then there are countless others who are making no warranty disclosures at all. For instance, despite the fact that most wrist watches have warranties, not one watch manufacturer has made even the slightest bit of disclosure.
Together these manufacturers have reported nearly $1.7 trillion in revenue for the year so far, which means they represent roughly a third of U.S. GDP. If that sounds like a shockingly low percentage, remember that whole industries such as banking, insurance, food service, energy, and telecommunications services report almost no warranties at all. Even among these 750 firms, less than 70% of their total revenue came from warranted product sales.
What's remarkable is that of all the non-reporting manufacturers, only 19 had quarterly sales over $1 billion. At least among large companies, compliance is astonishingly high, given that this is only the second full quarter in which FASB FIN 45 rules applied. What's even more remarkable is the fact that 385 manufacturers reported less than $1 million in warranty claims per quarter. Of those, 58 reported less than $10,000 in claims. So despite the heavy weighting of these lists and the warranty industry in general to the top 50 or 100 manufacturers, this FASB FIN 45 compliance story is spreading throughout the ranks -- into the most unlikely market segments, and among the smallest firms.
Back to Part Three | Go to Part Five |
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This Week’s Warranty Week Headlines | ||
Aon Warranty Group to provide underwriting, marketing and claims administration of its extended service contracts for Whirlpool Corp.'s major home appliance brands. Press Release, Sept. 29, 2003 | ||
How Palm, Coca-Cola and Crutchfield excel at online customer relationship management. Internet Week, Sept. 29, 2003 | ||
AMR calls TREAD Act a "multibillion-dollar black hole," says its timetable and current execution are fundamentally flawed. The automotive industry will be unable to comply with either the letter or spirit of the law. Cost of compliance estimated at $1.7 billion. AMR Research Alert, Sept. 26, 2003 | ||
MSI Magazine names Entigo Corp. one of the Top 100 software vendors in the supply chain, product lifecycle and plant operations software markets. Press Release, Sept. 25, 2003 | ||
American Electric Power signs CASCOR Inc. to handle its utility fleets in-house warranty administration program. Press Release, Sept. 25, 2003 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Dana chairman & CEO Joe Magliochetti passes away, Glen Hiner named acting chairman, Bill Carroll named acting president. Press Release, Sept. 23. 2003 | ||
When your car warranty runs out of gas. Liquidation of big insurer National Warranty Risk Retention Group leaves drivers stranded; How to protect yourself. Wall Street Journal, Sept. 23. 2003 | ||
Briggs & Stratton Corp. uses SAP system to support its worldwide warranty operations. Information Week, Sept. 22, 2003 | ||
Entigo Corp. names John Catlos vice president of product development. Press Release, Sept. 22, 2003 | ||
Warrantech founder Joel San Antonio proposes taking the company private by buying all outstanding shares for $1.65, cites being publicly-traded in a largely private industry as a "competitive disadvantage." Press Release, Sept. 19, 2003 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Aon Warranty Group and John Deere announce a multi-year agreement to jointly deliver extended warranty and recommended maintenance service plans. Press Release, Sept. 17, 2003 | ||
Nearly a million vehicle owners lose extended warranties underwritten by the National Warranty Insurance Group. Most customers unaware that the company is being liquidated. KIRO tv.com Seattle, Sept. 16, 2003 | ||
Cypress Corp. implements a document management strategy for TREAD Act reporting. Press Release, Sept. 15, 2003 | ||
Auto firms rush to share crash data. New federal TREAD Act law to track, report complaints, injuries, deaths hits broad reach of companies. The Detroit News, Sept. 14, 2003 | ||
How one local dealer evaded NWIG woes. Thousands of other auto dealers nationwide were worried when the National Warranty Insurance Risk Retention Group of Lincoln went into court protection in June. Lincoln (NE) Journal-Star, Sept. 14, 2003 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Consumer groups are challenging new federal rules limiting public access to vehicle warranty, defect and repair data filed with NHTSA in compliance with TREAD Act. The Detroit News, Sept. 12, 2003 | ||
VAC Service Corp. promotes two executives to run Canadian subsidiary and teleservices division. Press Release, Sept. 12, 2003 | ||
New Mitsubishi North American boss Finbarr O'Neill may pull off a miracle, as he did at Hyundai five years ago. The Detroit News, Sept. 11, 2003 | ||
Gateway to cut 1,300 jobs, including 650 customer support and warranty service workers in Sioux Falls, SD. CNET News.com, Sept. 10, 2003 | ||
AnchorDesk editor finds ZDNet sales team likes the ViewSonic PJ501 projector for its three-year warranty. ZDNet, Sept. 10, 2003 | ||
More Warranty Headlines below |
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