July 21, 2011

RV, Boat & ATV Warranties:

All that's left now are the survivors, after a big drop in sales proved fatal to some of their peers. Looking back, it's revealing how some of those survivors handled their warranty expense accounts through the recession.

With all the heat enveloping the U.S. this summer, perhaps it makes sense to take a look at the warranty expenses of some of the best-known makers of pleasure boats, recreational vehicles and all-terrain vehicles. It's the first of several outdoor-themed warranty snapshot collections we plan in the weeks ahead.

Most of these leisure sports vehicle companies are counted as part of the automotive industry, as either OEMs or as parts suppliers. So they frequently get lost in the crowd, because of the sheer size of the warranty operations of the top passenger car makers.

Marine Warranties

So let's first turn to the sea, where Brunswick Corp. is both an OEM and a supplier, making boats under numerous brand names such as Bayliner, Boston Whaler and Sea Ray, as well as boat engines under the Mercury and Mariner brand names. It also makes exercise equipment and operates bowling centers, and still manufactures the product its founder began making in 1845: billiard tables.

Though that makes the company's product line sound extremely diverse, well over half its revenue is earned from the sale of boat engines, and an additional 27% comes from the sale of the boats themselves. But because some of those engines are sold internally to the boat division, the marine segment accounts for just shy of 75% of the company's external revenue.

In warranty terms, we've excluded the non-warranted revenue sources from the calculations we're making in Figure 1 for Brunswick's claims rate and accrual rate. That has the effect of elevating these rates above what they'd be if we instead used total revenue as the divisor in our fractions. However, it also more closely aligns the company's warranty expenses with the sources of those warranty expenses.

As can be seen in Figure 1, Brunswick was able to keep both its claims and accrual rates below three percent until late 2008, when falling sales began to drive these rates upwards. It's an effect we've seen across the automotive sector: a sudden rise in warranty expense rates caused not by deteriorating product quality but instead by the recent recession. And indeed, in early 2011, as things got back to normal, the warranty expense rates both again dropped below three percent.


Figure 1
Brunswick Corp.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 1


The telltale sign that it's sales-related rather than expense-related can be found in the blue bars representing total quarterly claims expenses. The $33.5 million Brunswick paid in claims during the summer of 2008 was one of its highest quarterly totals ever, yet there were enough sales to keep the ratio below three percent. And then, in every quarter since, the claims total has been lower. But because of falling sales, the claims rate has been higher.

It's the recessionary bulge, and it's a common sight in these warranty charts. The blue bars remain more or less the same, but the claims rate shoots skyward, because of the plunge in sales. However, in the Brunswick chart, the accrual rate also rises, which suggests that its accountants were tracking the expenses rather than their product's quality.

Accruals vs. Sales

In other words, if it's more or less the same product being sold in 2009 and 2010, it should have the same accrual rate as it did in 2008 or 2007. Sales plunge and claims rates soar, but accrual rates should always remain proportional to sales. For an example of this, take a look at Figure 2.

Marine Products Corp. is an order of magnitude smaller than Brunswick, with 2010 sales of $101 million compared to Brunswick's $3.4 million. Yet its principal subsidiaries, Chaparral Boats and Robalo Marine, have a healthy share of the recreational boating marketplace.

In Figure 2, the company's claims rate absolutely soared in 2009, hitting eight percent right at the end of the year. But look at the accrual rate. Though it rose above two percent, it didn't follow the claims rate skyward.


Figure 2
Marine Products Corp.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 2


Notice also that the blue bars, representing claims payments, have actually been decreasing steadily for the past few years. Therefore, one would suspect that sales revenue must have absolutely plunged in 2009 in order to produce such a spike in the claims rate. And indeed, Marine Products' net sales dropped from $175.6 million in 2008 to only $39.4 million in 2009. But sales recovered somewhat to $101 million in 2010.

Though Brunswick is seeing more of a seasonal rise and fall in actual warranty payments, its quarterly claims totals have also been headed down over time. It paid out $116 million in 2008; $96 million in 2009; and $89 million in 2010. But again, because sales fell faster than claims, the claims rate rose.

Off-Road Vehicles

Now let's turn to the land, and more specifically off the road, where Polaris Industries and Arctic Cat make an assortment of vehicles used for both sport and for transportation in both summer and winter. Polaris makes ATVs, snowmobiles and motorcycles, as well as golf carts and small electric vehicles. Arctic Cat makes ATVs and snowmobiles, as well as two-seater and even-three seater off-road vehicles.

As can be seen in Figures 3 and 4, both Polaris and Arctic Cat follow a heavily seasonal pattern with their warranty expenses. At Polaris, the peaks in both the claims payments and the claims rate always occur in winter, while at Arctic Cat the payments peak in winter while the rate usually peaks in the spring.

We can't explain this difference, except to point out that roughly 69% of Polaris Industries' revenue comes from ATVs while only 10% comes from snowmobiles. But its sales are strongest towards the end of each calendar year.

At Arctic Cat, sales of ATVs and snowmobiles each account for roughly 39% of total revenue, and sales are strongest in the third calendar quarter (the second quarter of the company's fiscal year ending March 31). So the product mix, the sales cycle and the repair cycle are each a little different.

Polaris has twice seen its claims rate exceed five percent: during the winters of 2006 and 2009. At Arctic Cat, the claims rate exceeded that threshold only once: in the spring of 2009. But because both sales and the inevitable repairs that follow sales are so seasonal, given the nature of their product lines, we'd suggest it would be more useful to track their accrual rates, as represented by the green lines in Figures 3 and 4 below.


Figure 3
Polaris Industries Inc.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 3


Though Polaris has a claims rate that resembles a bouncing ball, its accrual rate is generally around three percent. However, it's been falling lately. In the first quarter of 2011, the company's accrual rate was just barely above two percent, its lowest level since early 2006. This is a sign that the company is confident in its product quality and in its ability to control repair costs.

Seasonal Accrual Rates?

At Arctic Cat, for the past two fiscal years the accrual rate has itself followed a seasonal pattern. It's lowest in the quarter ending in June, and highest in the quarter ending in March. But in the six previous years, it was almost always between two and three percent, with only an occasional and slight seasonal pattern.


Figure 4
Arctic Cat Inc.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 4


Now let's turn to the recreational vehicle market, which has been smacked around by the market in recent years. First, RVs are of course vehicles, and sales of vehicles fell when credit became scarce. Second, these are for many people second homes, and sales of homes are far below their peak. And third, these are for the most part luxury purchases, and many consumers have gone back to basics.

So we won't even talk about sales. What we have below are the survivors. Thor Industries, Winnebago, Spartan Motors and Skyline are what's left of an industry segment that used to be twice as large, both in terms of units sold and manufacturers selling.

Sales Dried Up in 2008

At Winnebago Industries, sales in the fiscal year ended August 2009 -- basically the first year after the Lehman Brothers panic began on Sept. 15, 2008 -- more or less collapsed to a level of $179 million from $556 million the year before and $815 million in the year ended August 25, 2007. That sales decline is not charted in Figure 5 below, but its effects are plain to see in the bulge in the claims rate.


Figure 5
Winnebago Industries Inc.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 5


For years, Winnebago kept its claims and accrual rates below two percent. But then came that horrible year. Still, the company kept its accrual rate the same throughout the recession -- as did Marine Products in Figure 2. And sure enough, in the past 18 months the claims rate has returned to normal. In fact, during the second calendar quarter of 2010, the claims rate dipped as low as 0.4%.

At Skyline, there was an even more dramatic spike during the first quarter of 2009. In Figure 6, one can see where the claims rate soared to 13.5% and the accrual rate jumped to 11%, for just one quarter. Then just as quickly, the rates went back to normal.


Figure 6
Skyline Corp.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 6


Part of the reason was a sudden drop in sales. But notice that the blue bar also rose, meaning that the claims payout increased. In fact, it more than doubled, from $1.25 million in the final calendar quarter of 2008 to $3.3 million in the first calendar quarter of 2009. And then it fell back, to $1.6 million in the second quarter of 2009.

At Thor Industries, there was a somewhat similar spike in the first quarter of 2009, with a few important differences. First, the claims rate rose to only 5.1%. Second, the accrual rate actually fell significantly, to 1.1%. And third, as the blue bars can attest, the actual payout didn't change by much.

Figure 7
Thor Industries Inc.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 7


This suggests that the spike in the claims rate was caused not by a jump in repair bills, but by a decline in sales. And that sales decline was accompanied by an even bigger decline in accruals.

In numbers, the story is thus: In the fourth quarter of 2008, Thor Industries set aside $11.6 million in accruals and paid $14.5 million in claims, while reporting $439 million in sales. Then in the first quarter of 2009, the company still paid out $11.4 million in claims, but accruals plunged to $2.4 million, and sales fell to $227 million.

Finally, we'll take a look at Spartan Motors, for which there was no recession-related spike or trough. In Figure 8, in fact, one can see that the company's claims rates were below one percent throughout 2008, and that the quarterly payments were lower in 2008 than in 2007.


Figure 8
Spartan Motors Inc.
Warranty Claims & Accrual Rates, 2003-2011
(as a percentage of product revenue)

Figure 8


The sad part of the story is that Spartan's sales continue to fall, failing to surpass the $100 million mark in the first quarter of 2011. For the sake of comparisons, the first quarter of 2010 was $123 million while the first quarter of 2008 was $264 million.

Requiem for the RV Makers

However, we said we wouldn't mention sales figures. Didn't we? Suffice it to say that the RV business is a small fraction of what it was a few short years ago. Several major names are gone from the list with the lucky (Monaco Coach) acquired (by Navistar), and the unlucky (Fleetwood Enterprises, All American Group, National RV Holdings, Featherlite, and Rexhall Industries, among others) simply liquidated.

So these are the survivors of the RV industry, just as Brunswick is one of the survivors of the downturn in the boating industry and Polaris and Arctic Cat are among the survivors of the snowmobile and ATV industry. The recession, so clearly visible in several of their warranty expense charts, has now given way to the recovery.





Assurant Solutions Shed The Light
Pegasystems Inc.
Fulcrum Analytics
GWSCA First Annual Conference on Service Contracts
Sign up for a free subscription to Warranty Week:
     subscribe     change of address     unsubscribe