November 1, 2012 |
ISSN 1550-9214 |
Most Improved Warranty Metrics, Part 3:While the short-term changes in warranty expense rates have a lot to do with the recession, the comparisons with 2003 and 2006 data have also identified numerous warranty cost-cutters.Year after year, many American manufacturers have reduced the percentage of sales revenue they spend on warranty, as product reliability rises and both the cost and frequency of repairs declines. It's a trend that gets lost in the rhetoric, but is plain to see in the industry data: American manufacturers are spending a smaller share of their revenue than ever before on warranty. In the quarter ended in June 2012, their warranty costs averaged only about 1.3% of sales, down from roughly 1.5% to 1.6% in 2006 and about 1.8% in 2003. As can be seen in the chart below, the cost of paying claims, as a percentage of sales, soared during the recession. But that had more to do with falling sales than with rising claims. The proof is in the fact that accrual rates, which are largely unaffected by sales fluctuations, continued to fall throughout the 2008-2010 period. Figure 1 |
Claims | Claims | Claims | |
Rate | Rate | Rate | |
Company | June 2006 | June 2012 | Reduction |
Cymer Inc. | 4.0% | 0.77% | -3.2% |
Nvidia Corp. | 1.5% | 0.33% | -1.2% |
Woodward Inc. | 0.56% | 0.17% | -0.39% |
Waters Corp. | 2.0% | 0.64% | -1.3% |
Raytheon Co. | 0.81% | 0.27% | -0.54% |
Harris Corp. | 1.4% | 0.48% | -1.0% |
Newport Corp. | 1.6% | 0.56% | -1.1% |
Juniper Networks | 2.5% | 1.0% | -1.6% |
Medtronic Inc. | 0.43% | 0.17% | -0.26% |
Valspar Corp. | 0.69% | 0.27% | -0.42% |
Source: Warranty Week from SEC data
We won't get too deep into the reasons for these rate reductions, but basically they boil down to either that 1) things were bad back then, 2) things are great right now, 3) it's a little of both, or 4) none of the above.
Nvidia, for instance, definitely falls into the first group, reducing its claims rate from 5.8% back then to only 0.33% now. For a printed circuit board manufacturer in the computer industry, 0.33% is normal and 5.8% is a clear sign of manufacturing problems.
For an automotive supplier such as Valspar Corp., however, an 0.69% claims rate is more or less normal for its industry and 0.27% is really, really good. Same story for Medtronic Inc. in the pacemaker industry. They're both having really good years, in terms of claims costs.
A Question of Timing
For most companies, it's a little of both. But then there are all the companies that fall into the fourth category. Perhaps because of the unfortunate timing of a past claims payment or the fortunate arrival of a reimbursement from a supplier, the claims rate was artificially too high or too low for reasons that had nothing to do with repair costs. One company laid off some warranty clerks, and then congratulated itself when claims fell. But then it found out why: the claims processing was all backed up because of the labor shortage.
However, that's why we're looking at one-, three-, six-, and nine-year trends. They can't always be lucky (or unlucky). A company can disconnect its phones and cut its claims rate to zero, but not for long. They can cut their warranties to 90 days or 90 minutes. In the long run, that's going to hurt more than it helps.
The bigger danger in relying on the claims rate, however, is two-fold. First, there is a lag time between when the product revenue is earned and when the repair cost is incurred. So we might be comparing one year's sales to another year's repair cost. Also, in a time of generally rising sales volumes, such as 2012, that lag time artificially depresses the recent percentages and makes the improvement look better.
Those factors are not present with accrual data. In every case, we compare current accruals to current sales, with no lag time. And since accruals are set aside as each unit is sold, the percentage rates should stay the same as sales and accruals rise and fall together.
If there is a massive decrease in accrual rates, it could mean one of four things: 1) product quality was really bad back then, 2) product quality is really good now, 3) a little of both, or 4) none of the above.
Wrong Estimates
In this case, the none of the above contingent is a little larger, because accrual rates are even more susceptible to artificial manipulation. A company's chief financial officer is free to make the absurd claim that every product made in a given quarter is perfect, and therefore accruals are not necessary. If time proves that boast to be incorrect. it can be fixed with a change of estimate. But it's an estimate, and an estimate can only be proven wrong over time.
In Figure 3, there are no 0% accrual rates, but Lear Corp. set aside only $200,000 in claims to cover $7.3 billion in sales during the first half of 2012. That's only a 0.003% accrual rate, and that's going to look good no matter what year it's compared with.
Turns out, it's by far the biggest improvement in accrual rates, whether you're looking at one-, three-, six-, or nine-year trends. But it's not because Lear has suddenly begun making nearly flawless products. It's more of an accounting anomaly that won't be repeated.
Figure 3
U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
June 2012 vs. June 2006
(claims as a % of revenue)
Accrual | Accrual | Accrual | |
Rate | Rate | Rate | |
Company | June 2006 | June 2012 | Reduction |
Lear Corp. | 0.10% | 0.003% | -0.096% |
Nvidia Corp. | 1.7% | 0.18% | -1.5% |
MTS Systems | 2.3% | 0.33% | -2.0% |
Harris Corp. | 2.2% | 0.42% | -1.8% |
FLIR Systems | 2.0% | 0.38% | -1.6% |
Franklin Electric | 3.4% | 0.67% | -2.8% |
Raytheon Co. | 1.3% | 0.27% | -1.1% |
Broadcom Corp. | 0.25% | 0.05% | -0.20% |
Waters Corp. | 2.1% | 0.47% | -1.7% |
SunPower Corp. | 2.5% | 0.65% | -1.8% |
Source: Warranty Week from SEC data
Still, there is a small group of companies that are appearing again and again on our top 10 lists. Four companies are on the lists of both Figure 2 and Figure 3: Nvidia Corp.; Waters Corp.; Raytheon Co.; and Harris Corp. Two of those companies are also in the Figure 5 list.
A total of only 23 companies are represented in the four lists in this week's newsletter. There are 15 companies that made two or more lists this week. Two more made one list this week and one more in either the October 11 or October 25 newsletters. And then six more companies made only one appearance this week.
Most Frequently Improved
Meanwhile, there are only 40 companies on any of the eight top 10 lists spread across three newsletters, and half of those make only one appearance. In other words, only 20 companies account for 60 of the 80 top 10 slots.
It's not quite a new 80-20 rule, but it's close. Here are the 20 companies that make two or more appearances on this entire collection of top 10 lists. As of the middle of 2012, by virtue of their repeat appearances, they are the most improved warranty providers of all: Axcelis Technologies Inc.; Boston Scientific Corp.; Broadcom Corp.; Cymer Inc.; Harris Corp.; Hologic Inc.; Juniper Networks Inc.; Lear Corp.; LSI Corp.; MTS Systems Corp.; Newport Corp.; Nvidia Corp.; Raytheon Co.; Rofin-Sinar Technologies Inc.; SanDisk Corp.; St. Jude Medical Inc.; SunPower Corp.; Valspar Corp.; Waters Corp.; and Woodward Inc.
With two warranty metrics and four time periods, the most times a company could be on a top 10 list would be eight. None achieved that, but Harris and Lear each made five out of the eight lists.
What's amazing is the number of companies that reduced their claims and/or accrual rates, but not by enough to make a top 10 list. As mentioned, we started with a list of 225 large and medium-sized warranty providers. An incredible 78 companies reduced both their claims and accrual rates from 2003 to 2012 and from 2006 to 2012. Of those, 32 also reduced both their claims and accrual rates from 2009 to 2012 and from 2011 to 2012.
Since 2003, a total of 43 companies have reduced their claims rate by half or more. The same number of companies reduced their accrual rates by half or more since 2003. But only 31 did both at the same time. And three companies -- Rofin-Sinar Technologies Inc.; Hologic Inc.; and Axcelis Technologies Inc. -- achieved both 50% reductions and made both top 10 lists. In other words, they are the most improved since 2003.
In Figure 4, the top 10 long-term claims reduction champions are listed. Rofin-Sinar leads the list, thanks to its massive claims rate reduction, from 3.9% in 2003 to under 0.47% in 2012. But that has more to do with the high rates in 2003 than with the most recent rates. The same goes for Hologic, and most obviously, Axcelis. They were having a really bad year in 2003 and returned to normal in 2012.
Figure 4
U.S.-based Warranty Providers:
Top Ten Claims Rate Reductions,
June 2012 vs. June 2003
(claims as a % of revenue)
Claims | Claims | Claims | |
Rate | Rate | Rate | |
Company | June 2003 | June 2012 | Reduction |
Rofin-Sinar | 3.9% | 0.47% | -3.4% |
Cymer Inc. | 6.3% | 0.77% | -5.5% |
Hologic Inc. | 3.0% | 0.44% | -2.6% |
Axcelis | 12% | 1.9% | -10% |
JDS Uniphase | 2.7% | 0.47% | -2.2% |
Valspar Corp. | 1.4% | 0.27% | -1.2% |
Juniper Networks | 5.0% | 1.0% | -4.0% |
Newport Corp. | 2.9% | 0.56% | -2.3% |
Trinity Industries | 0.89% | 0.18% | -0.71% |
Woodward Inc. | 0.81% | 0.17% | -0.64% |
Source: Warranty Week from SEC data
Our final chart in this series compared accrual rates in 2003 and 2012. To make this long-term list, a company had to reduce its accrual rate by three-quarters or better. And unfortunately, that leaves out 23 companies that reduced their accrual rates by a mere one-half to three-quarters.
The Top Long-Term Cost-Cutters
We love lists and don't want to slight anyone, so here are the 23 companies, in addition to the top ten in the Figure 5 list, which cut their accrual rates by half or more since 2003: Atmel Corp.; Carlisle Cos. Inc.; Cavco Industries Inc.; Cohu Inc.; Dell Inc.; EMC Corp.; FEI Co.; Franklin Electric Co. Inc.; KB Home; KLA-Tencor Corp.; L-3 Communications Corp.; Modine Manufacturing Co.; Newport Corp.; OSI Systems Inc.; Rockwell Collins Inc.; Ryland Group Inc.; Select Comfort Corp.; St. Jude Medical Inc.; Thermo Fisher Scientific Inc.; United Technologies Corp.; Valspar Corp.; Westinghouse Air Brake Technologies Corp.; and Woodward Inc.
Figure 5
U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
June 2012 vs. June 2003
(claims as a % of revenue)
Accrual | Accrual | Accrual | |
Rate | Rate | Rate | |
Company | June 2003 | June 2012 | Reduction |
Lear Corp. | 0.08% | 0.003% | -0.07% |
Rofin-Sinar | 3.8% | 0.38% | -3.4% |
Tellabs Inc. | 3.3% | 0.42% | -2.9% |
Axcelis | 12% | 1.7% | -10% |
Broadcom Corp. | 0.35% | 0.05% | -0.29% |
Waters Corp. | 2.8% | 0.47% | -2.3% |
Hologic Inc. | 2.7% | 0.48% | -2.2% |
Harris Corp. | 2.2% | 0.42% | -1.8% |
MTS Systems | 1.7% | 0.33% | -1.4% |
SanDisk Corp. | 1.5% | 0.38% | -1.1% |
Source: Warranty Week from SEC data
Again, what we're doing here is comparing each company to itself over time, and then ranking the comparisons from the biggest reduction on down. And some of these companies are successfully cutting costs on a consistent basis.
Out of the 33 companies that reduced their accrual rates by half or more since 2003, 24 were also down by half or more since 2006. Of those 24, only nine were also down by half or more since 2009. And of those nine, only Lear and Broadcom were down by half or more since a year ago.
Top Warranty Cost-Cutters
We've already mentioned how freakishly small Lear's accruals have been in 2012. However, there doesn't seem to be anything freakish about Broadcom's cost-cutting. The company accrued $2 million in the first half of 2012 -- slightly less than it did in 2003. But in the intervening nine years, product sales have grown more than five-fold, with no proportional increase in warranty expenses. And that's the sign of a true cost-cutting champion.
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This Week’s Warranty Week Headlines | ||
Snapdeal & Gadget Cops offer extended warranties on mobile phones in India. The Mobile Indian, November 1, 2012 | ||
Samsung Electronics introduces e-warranty service for customers. Business Ghana, November 1, 2012 | ||
Peugeot Ireland to offer 5-year warranties on passenger cars in 2013. Kilkenny People, November 1, 2012 | ||
CAA Insurance Ontario introduces home equipment breakdown coverage. Canadian Underwriter, November 1, 2012 | ||
AmTrust Financial Services to acquire Car Care Plan from Ally for $70 million. Press Release, November 1, 2012 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
McCusker & Co. gets service contract provider license in Puerto Rico. Press Release, October 31, 2012 | ||
Seiko ColorPainter printers now part of the 3M MCS Warranty Programme. Print Week, October 30, 2012 | ||
Fortegra Financial launches glass protection plans for mobile electronics. Press Release, October 30, 2012 | ||
National Auto Care promotes Paul Leary to executive vice president. Press Release, October 30, 2012 | ||
Linuo Power launches Solarsafe warranty insurance through Aon-COFCO Press Release, October 30, 2012 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Consumer Reports examines extended warranties & service plans. Press Release, October 30, 2012 | ||
American Musical Supply adds extra year's warranty for Bose PA systems. Press Release, October 29, 2012 | ||
Bankers Warranty Group makes Dawn Morris GM; Rich Martens returns as VP of sales. Press Release, October 29, 2012 | ||
Newspaper endorses new home warranty bill in Alberta. Calgary Herald, October 29, 2012 | ||
Riverside OH service line warranty program pays 10% royalties to city. Dayton Daily News, October 27, 2012 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Tesco and SquareTrade to challenge competitors with cut-price warranties. The Grocer, October 27, 2012 | ||
EU warranty directive doesn't cover business-to-business contracts. Financial Times, October 26, 2012 (bottom of page) | ||
Alberta proposal makes builders provide warranties for new homes. CBC News, October 25, 2012 | ||
New legislation to give new home buyers in Alberta more warranty protection. CTV News, October 25, 2012 | ||
Verizon uses warranty-voiding photo to sell Total Equipment Coverage Plan. The Consumerist, October 25, 2012 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
North Little Rock mayor says sewer line solicitation letter not from him. Arkansas Business, October 24, 2012 | ||
Sky employee leaked customer data to a competing warranty company. Information Age, October 24, 2012 | ||
Businesses should explain warranties better, says legal expert. Pinsent Masons LLP, October 23, 2012 | ||
Satcon gets bankruptcy court approval to continue paying warranty claims. Press Release, October 23, 2012 | ||
Richard Edward Mace joins ServicePower board of directors. Stock Market Wire, October 22, 2012 | ||
More Warranty Headlines below |
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Warranty Headlines (cont’d) | ||
Former Circuit City CEO Alan Wurtzel writes tell-all book. This Week in Consumer Electronics, October 22, 2012 | ||
Hyundai covers Equus & Rohens models with 5-year warranty in China. China Daily, October 22, 2012 | ||
Dunster House reduces RV warranty coverage and pulls out of UK trade show. Caravan Times, October 19, 2012 | ||
Beware of engine additive warranty scam. WKYT-TV Lexington KY, October 19, 2012 | ||
List of companies selling extended warranties for vehicles in Canada. Toronto Star, October 19, 2012 | ||
More Warranty Headlines below |
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