Source: Warranty Week from SEC data   

There's no shame in having a high claims rate. The highest claims rate listed in Table 1 comes from a computer printer company that reports more than two-thirds of its total revenue comes from non-warranted sources such as ink and toner cartridges. That revenue has to be subtracted out of the equation, leaving only warranted product revenue at the bottom of the fraction.

In the printer industry, the business model is to keep the hardware prices low so the customer keeps coming back for the consumables. So no wonder its claims rate is close to 10%. If we put all that consumables revenue back into the fraction, Lexmark's claims rate would be closer to 3.1%.

There is, however, some cause for concern when a company such as Netgear or Standard Motor Products reports claims over 5%. They don't report any consumables revenue, so for them total revenue equals product revenue. And as the percentage following each company's latest claims rate attests, things are not improving versus a year ago.

In contrast, Novellus Systems turned in a 6.3% claims rate in 2005, and it cut that rate to 5.0% in 2006, for a 21% reduction. Anyone who cares to peek below at Table 3 will see that the size of this reduction qualifies the company as one of the ten most improved warranty providers of 2006. Others on that list include Apple Inc. and Cisco Systems, who each undoubtedly have a great warranty management story to tell.

Dell Inc. makes the chart for seeing its claims rate rise from 3.2% to 4.0%. But because Dell has now missed the filing deadlines for two quarterly and one annual report, we had to go back and compare the claims rate for the quarters ended May 5, 2006 and April 29, 2005. Among the top 100 warranty providers, only Dell and Navistar International are so seriously behind with their SEC paperwork. And, we suspect, both will report increased warranty claims once they do catch up.

Companies Off the List

One company that's not on this chart is Remy International Inc. On April 2, the company notified the SEC that it is no longer obligated to file reports under the Exchange Act. As a result, Remy said it will not file a Form 10-K with the SEC for 2006. And more importantly in this instance, Remy will no longer have to detail its warranty expenditures. So there won't ever be anything available to compare its year-ago 4.5% claims rate with.

Others that have fallen from the top hundred warranty provider chart during the past year include Lucent Technologies Inc., Maxtor Corp., and American Power Conversion Corp. All three were swept up in acquisitions -- by Alcatel, Seagate Technology, and Schneider Electric, respectively. Other sizeable warranty providers that underwent acquisitions during 2006 include Advanced Digital Information Corp., Applica Inc., Jacuzzi Brands Inc., JLG Industries Inc., McData Corp., and Symbol Technologies Inc.

At the other extreme are all the companies with sub-one-percent claims rates, as highlighted in Table 2. Many, we find, are component suppliers, who count the familiar brand names as their customers. For whatever reason, warranty costs don't seem to travel all that efficiently back up the supply chain. Therefore, it's not unusual to see OEMs in the computer, telecom, and auto industries paying out 2-4% of their revenue in warranty claims while their suppliers remain below 1%.

Source: Warranty Week from SEC data   

It's not all suppliers, of course. Medtronic manufactures cardiac monitoring equipment and pacemakers, drug pumps, heart valves and numerous other types of medical devices. In 2005, the company suffered from what it called a "field action," which others might define as a product recall. But because recalls strictly speaking aren't warranty claims, the company was able to keep its reported warranty payout below 0.6% of revenue. And now, a year later, it's fallen back to 0.3%.

Based upon that 39% annual improvement, Medtronic also made the list in Table 3. But it was only the third best reduction. First place went to Nvidia, manufacturers of graphics processors for computers, handhelds, and increasingly, cell phones. A year ago, its claims rate was 1.6%. Now it's 0.7%, less than half what it was then.

Source: Warranty Week from SEC data   

The big story here, however, has to be Apple Inc. With its newly-shortened name, the company seems to have turned a corner of sorts, putting the well-publicized iPod battery and cracked screen problems behind it. At the beginning of calendar 2006, its claims rate rose above 2% for the first time since reporting began in 2003. Now it's below 1%, and is lower than it's been in at least the last four years. Part of that change has to do with rising sales, but the fact remains that Apple's claims rate is down by 44%.

Rising Sales vs. Falling Claims

We did a quick check of the correlation between claims and sales, and here's what we found. Of the top 100 warranty providers, we have both current and year-ago sales and warranty figures for 97 companies. Of those, 39 saw their claims rates fall and 58 saw their claims rates rise in the past year.

Of the 39 who managed to lower their claims rates, fully 33 also saw their product revenue increase. Only six managed the elusive combination of falling claims rates and falling sales. Therefore, one could say that rising sales are more responsible for these rate changes than are falling warranty claims.

However, 20 of the 39 did actually pay out less in dollar terms during 2006. In fact, GM paid out $233 million less in claims last year, which placed it in 17th place in terms of most improved (because it moved its claims rate by only -12%). And between GM and Cisco there were six companies: ArvinMeritor Inc., Eaton Corp., General Electric Co., Manitowoc Co. Inc., NCR Corp., and Tyco International Ltd.

Of the 58 who saw their claims rates rise, 40 also saw sales rise, but obviously not as fast as claims did. The other 18 saw claims rise and sales fall -- a terrible combination. Interestingly, though, all 40 companies that ultimately saw their claims rate rise despite higher sales also paid out more in terms of dollars.

Among the 33 who saw lower claims rates and higher sales, 17 or slightly more than half accomplished the rate reductions despite paying out more in dollars. Fourteen reduced their claims rate and their payout amounts. Two companies -- Goodyear and Kodak -- paid out the same amount, but saw their claims rates fall slightly thanks to small sales increases.

Top Warranty Providers

Below in Tables 4 and 5, we're simply listing the top ten warranty providers in the vehicle and high-tech manufacturing industries. Historically, the automotive industry has accounted for just under half of all types of warranty claims, and the high-tech industry another third. That approximate ratio appears to be holding, though we'll leave all the details until next week, when we compute industry totals and averages.

2. Navistar has failed to file a financial statement since the quarter ended July 31, 2005. As a result, the claims total for 2005 is partially estimated and the claims total for 2006 is not available.