January 10, 2008
sponsored by PCMI
ISSN 1550-9214         

Top 100 Warranty Providers:

While manufacturers' warranty costs shouldn't be compared directly against one another, they can be compared against themselves over time. And when one looks at those with the biggest percentage increases and decreases, one sees the biggest warranty winners and losers of the past year.

Welcome back. It's a new year but there's still data trickling in from 2007. By now, most American manufacturers have filed their Form 10-Q and 10-K reports with the U.S Securities and Exchange Commission for the period ending Sept. 30, and are preparing to soon file their year-end documents.

What follows is an extraction of the warranty data from those financial statements. Deep within the footnotes of those 10-Q and 10-K filings, U.S. manufacturers now reveal the amounts in their warranty reserve fund, as well as the amounts they spent on warranty claims and the amounts they set aside in warranty accruals.

Warranty Week takes those claims and accrual amounts, and compares them to product revenue to calculate a percentage figure. In the charts below, we've taken the 100 largest warranty providers, ranked by the amounts they spent on claims from Jan. 1, 2007 to Sept. 30, 2007. And we've calculated how much those percentages have changed during the past year.

We don't want to directly compare one company against another. In other words, we don't want to say that Ford's 2.5% claims rate (the percentage of auto revenue spent on warranty claims) is somehow just as good as Dell's 2.5%. Who's to say that accounting methodologies are the same at both companies? Who's to say that they both account for parts costs and labor costs the same way?

Comparing Apple Inc. to Apple Inc.

What we'd rather do is compare Ford's 2.5% in 2007 to its 2.9% in 2006 and marvel at how the company managed to cut its claims rate by 14%. Or we can look at Dell's 2.5% this year and 2.8% a year ago and catalog the 12% improvement.

In that way, we're comparing each company against itself, and then comparing the ups and downs against each other. So congratulations, Ford: so far in 2007 you have ranked 19th out of 100 in terms of warranty claims rate reductions. And Dell, you get the 23rd spot in the list below. But the winner is Thermo Fisher Scientific Inc., which managed to reduce its claims rate from 1.3% to 0.4% in a year thanks to some timely mergers and acquisitions.

Table 1
Top 100 U.S.-based Warranty Providers:
Annual Change in Claims Rates,
First 9 Mo. of 2007 vs. First 9 Mo. of 2006
(in $ millions and percent)

   Claims   Claims   Latest  vs.
  Paid Paid Claims Year
  Company  9 mo. '07   9 mo. '06   Rate   Ago 
  Thermo Fisher Scientific $27 $27 0.4% -70%
  Medtronic Inc. $21 $33 0.2% -58%
  IBM Corp. $478 $571 1.7% -56%
  Fleetwood Enterprises $53 $67 2.8% -42%
  Visteon Corp. $27 $46 0.3% -40%
  Harman Int'l Industries $47 $36 0.7% -39%
  Goodrich Corp. $31 $46 0.6% -38%
  UTStarcom Inc. $33 $41 1.9% -33%
  Nortel Networks Corp. $127 $191 1.9% -30%
  AGCO Corp. $87 $87 1.8% -30%
  Delphi Corp. $88 $120 0.4% -26%
  Dana Corp. $46 $38 0.5% -26%
  Advanced Micro Devices $22 $25 0.5% -21%
  Sun Microsystems Inc. $227 $266 3.8% -18%
  Seagate Technology $225 $187 2.2% -17%
  Standard Motor Products $35 $39 5.7% -16%
  Apple Inc. $227 $190 1.4% -15%
  Agilent Technologies Inc. $41 $51 1.2% -15%
  Ford Motor Co. $2819 $3017 2.5% -14%
  TRW Automotive Holdings $37 $25 0.3% -14%
  Netgear Inc. $28 $25 5.3% -13%
  Oshkosh Truck Corp. $39 $23 0.8% -12%
  Dell Inc. $927 $902 2.5% -12%
  Manitowoc Co. Inc. $33 $28 1.1% -12%
  3Com Corp. $31 $29 3.5% -11%
  Boeing Co. $164 $156 0.7% -11%
  EMC Corp. $96 $90 1.4% -10%
  Rockwell Collins Inc. $42 $40 1.3% -9.8%
  Hewlett-Packard Co. $1833 $1771 3.0% -9.2%
  Terex Corp. $70 $65 1.1% -8.5%
  Pulte Homes Inc. $74 $125 1.2% -7.9%
  Cummins Inc. $229 $215 2.4% -6.9%
  Fortune Brands Inc. $29 $30 0.8% -6.8%
  SPX Corp. $21 $19 0.6% -6.1%
  L-3 Communications $26 $25 0.6% -6.0%
  Jarden Corp. $95 $85 4.0% -4.9%
  Western Digital Corp. $43 $41 0.9% -4.6%
  Masco Corp. $42 $46 0.9% -4.0%
  Rockwell Automation Inc. $34 $41 1.0% -2.2%
  Ingersoll-Rand Co. Ltd. $54 $73 0.9% -2.2%
  General Dynamics Corp. $46 $40 1.3% -2.0%
  Varian Medical Systems $33 $29 2.8% -1.0%
  Novellus Systems Inc. $58 $62 4.6% -0.9%
  General Motors Corp. $3395 $3304 2.6% -0.2%
  Cisco Systems Inc. $378 $289 1.6% -0.04%
  Goodyear Tire & Rubber na $29 0.2% na
  Illinois Tool Works Inc. na $38 0.4% na
  Eaton Corp. na $62 0.7% na
  Honeywell International na $153 0.9% na
  General Electric Co. na $499 1.0% na
  Beazer Homes na $42 1.5% na
  Exide Technologies na $41 1.7% na
  Black & Decker Corp. na $89 1.8% na
  Xerox Corp. na $33 1.9% na
  Motorola Inc. na $668 2.1% na
  Navistar International na $238 2.7% na
  Monaco Coach Corp. $28 $28 3.0% +0.4%
  Lennox International $23 $23 1.0% +0.7%
  A.O. Smith Corp. $38 $35 2.2% +0.7%
  Sherwin Williams Co. $26 $26 0.4% +1.0%
  NACCO Industries Inc. $37 $33 1.5% +2.9%
  United Technologies $377 $319 1.3% +3.7%
  Textron Inc. $136 $113 1.5% +5.4%
  Brunswick Corp. $90 $87 2.6% +6.2%
  Goodman Global Inc. $31 $27 2.1% +7.4%
  Whirlpool Corp. $538 $349 3.7% +7.6%
  Deere & Co. $340 $373 2.2% +7.7%
  Dover Corp. $25 $20 0.5% +8.3%
  Danaher Corp. $75 $61 0.9% +8.4%
  Champion Enterprises $33 $40 4.6% +9.0%
  NCR Corp. $30 $34 1.7% +9.1%
  Toro Co. $31 $27 2.0% +9.8%
  Applied Materials Inc. $128 $134 1.7% +11%
  Thor Industries Inc. $45 $43 2.2% +14%
  Garmin Ltd. $48 $23 3.1% +16%
  Harley-Davidson Inc. $50 $38 1.3% +16%
  Caterpillar Inc. $677 $540 2.2% +14%
  American Standard $98 $122 2.2% +18%
  Eastman Kodak Co. $35 62$ 2.3% +18%
  NVR Inc. $34 $33 1.0% +18%
  Lexmark International $139 $118 11% +20%
  Pentair Inc. $50 $39 1.9% +20%
  Quantum Corp. $25 $23 4.9% +20%
  Johnson Controls Inc. $97 $90 0.5% +21%
  Juniper Networks Inc. $31 $24 1.7% +22%
  Polaris Industries Inc. $26 $26 1.6% +29%
  Hovnanian Enterprises $30 $18 0.8% +30%
  Mohawk Industries Inc. $42 $36 1.2% +30%
  Centex Corp. $33 $36 0.6% +39%
  KLA-Tencor Corp. $41 $30 2.8% +40%
  D.R. Horton Inc. $41 $39 0.5% +42%
  KB Home $38 $46 0.9% +44%
  Paccar Inc. $252 $190 2.4% +45%
  ArvinMeritor Inc. $45 $43 0.9% +45%
  Palm Inc. $70 $56 7.8% +47%
  Briggs & Stratton Corp. $32 $24 %4.3 +56%
  BorgWarner Inc. $36 $17 0.9% +80%
  Lennar Corp. $119 $128 1.9% +85%
  Tyco International Ltd. $49 $63 0.6% +120%
  Microsoft Corp. $291 $32 4.5% +333%

Source: Warranty Week from SEC data   

  Footnote:

1. The latest claims rates for Navistar is taken from the end of 2005, because the company is two years behind in its SEC filings. Beazer Homes is now six months late with its SEC filings. Black & Decker Corp.; Eaton Corp.; Exide Technologies; General Electric Co.; Goodyear Tire & Rubber Co.; Honeywell International Inc.; Illinois Tool Works Inc.; Motorola Inc.; and Xerox Corp. have chosen to reveal their warranty spending only once a year, so their claims rates were taken from the end of 2006. All other figures are current as of Sept. 30, 2007.

Overall, 45 of the 100 companies managed to reduce their warranty claims rates in the year between Sept. 30, 2006 and 2007. And 44 saw an increase. The remaining 11 are either late with their SEC filings or have decided (against FASB FIN 45 accounting rules) to file their warranty accounting figures only once a year (usually in March).

At the very bottom is Microsoft, which of course very publicly in the summer had to radically increase the funding for its Xbox 360 game console product line. This is also a very good example of how we calculate claims rates. We don't take a company's total revenue -- for Microsoft that figure would be $13.7 billion in the third calendar quarter of 2007. Instead, we take the revenue of just the division that makes the warranted hardware -- a much more manageable $1.9 billion in this case. And we use the $86 million in claims to calculate a 4.5% claims rate. That's on the high side, but not as high as some of the companies that have also made the news for their warranty crises in 2007.

In Tables 2 and 3, we're looking at the other side of the warranty accounting ledger. Claims are what a company must pay now to repair products sold in the past. Accruals are what a company sets aside now to finance predicted future claims. Therefore, if claims are what happens to you, accruals are what you predict will happen. And while you can't control the weather, even if you're the weatherman, you most certainly can control the weather forecast.

Quality Signals Through Accruals

In this way, the accruals rate signals what a company believes it will cost to repair product in the future. If a company believes quality is increasing, it will reduce its accrual rate. If it expects an Xbox-like shock in the future, or if labor rates for warranty work are soaring, it will radically increase the accrual rate. Changes in the accrual rate can signal changes in expected quality or repair cost, or both, especially when compared over multiple years.

The claims rate suffers from a lag between when a product is sold and when it must be repaired. For instance, a product sold in the fourth quarter of 2006 might need a warranty repair in the middle of 2007. So while we measure current claims against current sales, what we should really be doing is time-shifting the calculation so that current claims are compared against 2006 revenue. But that gets messy because companies don't announce the age of the products they're repairing -- only the cost. So time-shifting may actually introduce more uncertainty and errors than it removes.

Also, in industries such as housing, where revenue is now shrinking, the claims rates are disfigured by the sales declines, because homes sold last year are being repaired this year. If sales have fallen by half in the interim, that alone could double the calculated claims rate, even if there's been no change in quality, repair cost, or incidence per 1,000 units.

The accrual rate, however, suffers no such time lag. When a product is sold, it's up to the company to predict how much future claims will cost it, and to set that amount aside in a special fund -- the warranty reserve -- so it will be available when the time comes. In other words, if at any point sales should completely cease, there should always be enough in the warranty reserve to pay off all future warranty claims, because all that money should have been set aside at the time of sale.

The accrual rate is therefore not disfigured by changes in sales volume. If sales go down, less is set aside. If sales go up, more is set aside. So if a company believes a $100 product will cost it $3 in future warranty claims, it will set aside 3% whether it sells 10 or 10 million units.

Reasons for Changes in Accrual Rates?

In Table 2, we're looking at declines in accrual rates. It Table 3, we're looking at increases. Sometimes, the reason for the change is known, such as in the case of IBM (sold off its laptop division) or Apple (the battery crisis has passed). Sometimes it's unknown, or is just unannounced to the public. But here's how to do your own fact checking: compare Tables 2 and 3 to Table 1: If the claims rate has also changed in the same direction as accruals, the company is adjusting its set-asides to match actuals. If they don't match, the company is predicting a peak or trough before the tide actually turns.

Table 2
Top 100 U.S.-based Warranty Providers:
Ten Largest Declines in Accrual Rates,
First 9 Mo. of 2007 vs. First 9 Mo. of 2006
(in percent)

   Latest  vs.
  Accrual Year
  Company Rate  Ago 
  Thermo Fisher Scientific 0.4% -69%
  Advanced Micro Devices 0.4% -54%
  Apple Inc. 1.1% -50%
  Fleetwood Enterprises 2.4% -49%
  IBM Corp. 1.1% -48%
  UTStarcom Inc. 1.8% -38%
  United Technologies 1.0% -36%
  Pulte Homes Inc. 0.8% -29%
  Sherwin Williams Co. 0.4% -24%
  Briggs & Stratton Corp. 1.9% -20%

Source: Warranty Week from SEC data   

Take, for instance, Fleetwood Enterprises Inc. The recreational vehicle maker managed to cut its claims rate from 4.9% to 2.8%, so of course it's also cutting its accrual rate. But then there are the unexplained cases, such as Briggs & Stratton, which cut its accrual rate from 2.4% to 1.9% despite an increase in claims.

In Table 3 the list of top ten accrual increases includes warranty newsmakers such as Microsoft, Palm, and BorgWarner, but it also includes anomalies such as Tyco International. The reason Tyco made the list is because it spun off a division that generated less warranty activity than the divisions that remained behind. And because we calculate these percentages for the company as a whole, it appears on our list as a 45% increase.

Table 3
Top 100 U.S.-based Warranty Providers:
Ten Largest Increases in Accrual Rates,
First 9 Mo. of 2007 vs. First 9 Mo. of 2006
(in percent)

   Latest  vs.
  Accrual Year
  Company Rate  Ago 
  Microsoft Corp. 4.3% +285%
  BorgWarner Inc. 1.3% +179%
  Mohawk Industries Inc. 1.5% +54%
  Tyco International Ltd. 0.2% +45%
  Harman Int'l Industries 2.2% +43%
  Lexmark International 16% +37%
  Delphi Corp. 1.3% +36%
  TRW Automotive Holdings 0.4% +29%
  Palm Inc. 6.4% +29%
  KB Home 0.9% +28%

Source: Warranty Week from SEC data   

In Tables 4 and 5, we're looking at the annual change in the ending balance of the warranty reserve. In cases such as Tyco's, the spin-off resulted in a 33% reduction in the size of the parent company's warranty reserve -- from $245 million on Sept. 30, 2006 to $164 million on Sept. 30, 2007. IBM and Eastman Kodak also were making divestiture-related adjustments.

For companies such as Centex, the accrual rate is more or less stable, but sales are falling, therefore the warranty reserve is contracting in proportion. However, in other cases, such as Quantum and NCR, there doesn't seem to be any good or bad news supporting the reduction in in reserves. Claims and accrual rates are both increasing, while sales are falling, and it just so happens that the math works out that way.

Table 4
Top 100 U.S.-based Warranty Providers:
Ten Largest Declines in Warranty Reserves,
Sept. 2006 to Sept. 2007
(in $ millions and percent)

   Warranty  vs.
  Reserve Year
  Company 9/30/07  Ago 
  Advanced Micro Devices $14.0 -51%
  Tyco International Ltd. $164 -33%
  Goodman Global Inc. $40.8 -32%
  Quantum Corp. $24.1 -32%
  NCR Corp. $11.0 -31%
  IBM Corp. $412 -30%
  Eastman Kodak Co. $35.0 -30%
  Ingersoll-Rand Co. Ltd. $146 -24%
  Visteon Corp. $103 -23%
  Centex Corp. $37.4 -22%

Source: Warranty Week from SEC data   

In Table 5, we're looking at the ten largest increases in warranty reserves. Microsoft is of course the leader in this regard, having boosted its warranty reserves by almost a billion dollars in June of last year. By September it spent some and added some more, making the year-on-year comparison $857 million as of Sept. 30, 2007 and what we're estimating to be around $10.75 million as of Sept. 30, 2006. That's a 7,872% boost!

To put it another way, Microsoft boosted the size of its warranty reserve from roughly three months of coverage in 2006 to almost 30 months by 2007. That would be prudent given that its Xbox 360's warranty coverage jumped from 90 days to three years in the same period. We're not listing warranty reserve capacities here today, but it's another useful metric when comparing one company against itself over time.

Table 5
Top 100 U.S.-based Warranty Providers:
Ten Largest Increases in Warranty Reserves,
Sept. 2006 to Sept. 2007
(in $ millions and percent)

   Warranty  vs.
  Reserve Year
  Company 9/30/07  Ago 
  Microsoft Corp. $857 +7872%
  Garmin Ltd. $55.2 +91%
  BorgWarner Inc. $79.2 +73%
  Oshkosh Truck Corp. $88.2 +55%
  Netgear Inc. $23.0 +53%
  Delphi Corp. $569 +45%
  Thermo Fisher Scientific $51.1 +41%
  Lennox International Inc. $116 +32%
  Mohawk Industries Inc. $33.3 +30%
  Harley-Davidson Inc. $69.1 +29%

Source: Warranty Week from SEC data   

Taken together, the five tables provide a snapshot of how American manufacturers have managed their warranty spending over the past year. For those keeping score at home, only IBM hit the trifecta of making all three top ten decline lists. BorgWarner and Microsoft made all three top ten increase lists. Tyco and Thermo Fisher also made three lists, but in conflicting directions. And 35 other companies made at least one top ten list.

When the remainder of the 2007 data arrives in March, we'll compare not only the past year, but also the past five years of warranty spending. For while it's difficult and unwise to directly compare companies against each other, it can be highly revealing when a company is compared against itself over such a long period of time.

PCMI - Your technology partner

 

This Week’s Warranty Week Headlines

J.D. Power and Associates survey finds that quality problems have fallen 20% since 2003.
Toronto Globe and Mail, January 10, 2008
New warranty, engine and model from Renault in the UK.
Transport News Network, January 10, 2008
Tata Motors sells new models with two-year standard warranty and options for two-year extension.
Press Release, January 9, 2008
Custom ringtone installation by customer prompts Apple to invalidate an iPhone's warranty.
iPhone Atlas, January 9, 2008
Confidence in warranty contributes in shift to local computer brands in Azerbaijan.
Press Release, January 9, 2008
 

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Warranty Headlines (cont’d)

Consumer Reports survey compares auto quality perceptions to reliability ratings.
Press Release, January 8, 2008
GM CEO Rick Wagoner mentions warranty cost benefits of OnStar in CES keynote speech.
Press Release, January 8, 2008
Aftermarket Associations sue the California Air Resources Board over emissions warranties.
Press Release, January 8, 2008
Cross Country to administer power line service plans for Lee County Electric Cooperative.
Press Release, January 8, 2008
TechForward Inc. to entice consumers with buyback guarantees sold at the time of purchase.
Press Release, January 7, 2008
 

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Warranty Headlines (cont’d)

N.E.W. Customer Service Companies announces opening of NEW China (Xin Ke An) in Shanghai.
Press Release, January 7, 2008
N.E.W. Customer Service Companies launches online Customer Care Portal for service plan buyers.
Press Release, January 7, 2008
CompUSA to create Web site for gift card, rain check, rebate and service contract policies.
This Week in Consumer Electronics, January 7, 2008
Marubeni Information Systems to become a distributor of 4CS iWarranty product solutions in Japan.
Press Release, January 7, 2008
Crawford & Co. property and casualty business unit splits into Americas & EMEA regions.
Press Release, January 7, 2008 (PDF file)
 

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Warranty Chain Management Conference

 

Warranty Headlines (cont’d)

ACS to fix malfunctioning light rail ticket vending machines in Charlotte under warranty.
Charlotte Observer, January 6, 2008
Automakers say early warning efforts are preventing many defects from leaving the factory.
Detroit Free Press, January 5, 2008
Precision Camera executives head to Las Vegas to attend the 2008 Consumer Electronics Show.
Press Release, January 4, 2008
Canadians wonder why they have to pay more than Americans for AppleCare service contracts.
The Consumerist, January 4, 2008
Home Warranty of America executive explains his sales strategy for a down housing market.
Press Release, January 4, 2008
 

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Tavant

 

Warranty Headlines (cont’d)

Builder says Arizona home warranty proposal designed to force a specific contractor to unionize.
Arizona Business Gazette, January 3, 2008
DSG International, owner of Currys, Dixons & PC World, issues profit warning after slow holidays.
BBC News, January 3, 2008
Daihatsu debuts five-year unlimited mileage warranties on selected models sold in the UK.
Press Release, January 3, 2008
Directed Electronics shares plunge on word of Sirius satellite radio receiver warranty issues.
San Diego Union-Tribune, January 2, 2008
Honeywell Aerospace adding product catalogues and warranty administration to its Web site.
Destination CRM, January 1, 2008
 

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Warranty Headlines (cont’d)

Proposed Arizona Homeowners' Bill of Rights mandates 10-year warranties on new homes.
Arizona Republic, January 1, 2008
N.E.W. Customer Service Companies makes multiple product announcements at CES in Las Vegas.
Press Release, December 31, 2007
Warranty Corporation of America cited for "most refreshing perspective on customer service."
Orlando Sentinel, December 30, 2007
New Minnesota law says a "certified" used vehicle must include some form of warranty.
West Central Tribune, December 29, 2007
Deloitte & Touche to pay $38.25 million to settle Delphi investor lawsuit.
Associated Press, December 27, 2007
 

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Warranty Headlines (cont’d)

Primer on warranty law advises consumers to read the small print in product warranties.
Colorado Springs Gazette, December 27, 2007
Higher attachment rates seen as key to Circuit City's financial recovery.
Barron's, December 24, 2007
Implied warranties help to protect gift-givers.
ABC News, December 24, 2007
Check the duration, coverages and exclusions of a product's warranty before buying.
KAIT-TV Jonesboro AR, December 23, 2007
Circuit City says extended warranty sales fell to $67.4 million from $103.3 million in year-ago quarter.
Associated Press, December 21, 2007
 

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Warranty Headlines (cont’d)

General Motors orders recall after noticing pattern of rear axle fluid leaks in warranty claims.
Associated Press, December 21, 2007
Former purchasing manager seeks rule change in the Magnuson-Moss Warranty Act.
Tallahassee Democrat, December 20, 2007
Sheet Metal Worker Union proposes a minimum 10-year warranty on new homes built in Arizona.
Associated Press, December 19, 2007
NEW Customer Serrvice Cos. provides gifts for disabled job training group's holiday party.
The Connection, December 19, 2007
Sears gives customers in Boston a 12-month extension to their service contracts after complaints.
WCVB-TV Boston, December 19, 2007
SigmaQuest Inc. meets requirements for International Traffic in Arms Regulations Certification.
Press Release, December 19, 2007
Xerox India uses online payment system to cut claims payment delays from 45 to 21 days.
Channel Times, December 19, 2007
Nine Chinese-made fighter jets have crashed in Burma since the warranties expired in 1999.
Mizzima News, December 18, 2007
Palm blames Treo 755 delays and competition from iPhone and Blackberry for quarterly loss.
Reuters, December 18, 2007
 

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