May 24, 2012

Fixtures, Furniture & Building Material Warranties:

Though few of the companies in these segments are reducing their warranty expenses, some are actually seeing sales increases. In other words, some of the suppliers are seeing the beginning of a turnaround before the builders. How can that be?

One would assume that since the makers of building materials are suppliers to the builders, they would be experiencing many of the same trends as those builders. But in terms of warranty expenses, they're not all on the same path.

In last week's newsletter, we saw that appliance makers are surviving the construction downturn by selling to the owners of existing homes. But how can the makers of doors, windows, floors and roofing depend on that sales channel?

One would expect that the furniture makers would have the easiest time going after the existing home market, but it turns out their sales are still falling. And for several years after new home sales peaked, warranty costs continued to rise.

Claims Payment Trends

In terms of claims payments, at least, 2009 turns out to have been the top year. The 95 manufacturers we tracked in this industry spent $852 million on warranty claims in 2009, up a surprising 9% from 2008 levels.

We further divided the 95 manufacturers into three segments: 20 makers of plumbing and electrical fixtures, 27 furniture manufacturers, and 48 manufacturers of building materials such as carpeting, tiles, shingles, doors, windows and floors.

The latter group dominated not only in terms of number, but also in terms of warranty expense. It regularly accounts for more than 60% of the total amount of claims paid by all the manufacturers. But what was surprising was the different timeline each group seemed to be following.

As can be seen in Figure 1, claims payments by the fixtures, furniture, and building material segments peaked in different years. On a combined basis, their highest annual claims totals came in 2009, when the building materials segment also hit its peak. But the fixtures segment peaked in 2006, and the furniture segment saw claims peak in 2007.


Figure 1
Fixtures, Furniture & Building Materials
Claims Paid by U.S.-based Manufacturers
(in US$ millions, 2003-2011)

Figure 1


The reason for the unusually late peak for the basic materials segment may have something to do with Mohawk Industries Inc. The company had a catastrophic quality problem with its adhesive-backed carpet tile product line, and saw claims soar to $167 million in 2009. Last year, after that product line was discontinued, the company's claims payments returned to a more manageable level of $57 million. But 2009 was the year that most of the damage was done to the company's finances.

However, 2009 was also a year which saw claims rise for suppliers such as Building Materials Corp. of America and RPM International Inc. And Ply Gem Holdings Inc. also paid more claims for its doors and windows that year. So perhaps it wasn't all caused by one company's misfortune?

Annual Accrual Totals

In terms of accruals, the suppliers as a group peaked in 2007, although only the furniture manufacturers' segment actually peaked that year. Fixture manufacturers peaked way back in 2004, while the building material manufacturers peaked in 2006. But together, they all peaked at $886 million in 2007.


Figure 2
Fixtures, Furniture & Building Materials
Accruals Made by U.S.-based Manufacturers
(in US$ millions, 2003-2011)

Figure 2


In terms of product revenue, the fixtures segment saw sales rise 6% last year. The furniture companies that we track saw a 1% drop in revenue from 2010 to 2011. But the building material companies saw a 14% increase in sales last year. And that in turn lent its weight to a 9% annual sales increase for the entire group, from 2010 to 2011.

That's astonishing, considering how damaged the construction industry is still said to be, five years after its peak. Based on the data we saw on appliance sales in the May 17 newsletter and on new home sales in the May 10 newsletter, we would have expected the reverse. While the new home market continued to decline, appliance manufacturers seemed to be making up for lost opportunities by selling replacement units to owners of existing homes. So we would have expected better results from the furniture replacement market and worse results from the segments that are naturally dependent on new construction.

However, with this week's data, it appears that the makers of everything that's nailed down seem to be increasing sales and reducing warranty costs while those making the moveable and replaceable furniture are seeing flat sales and flat warranty expenses. Granted, the furniture makers saw only a one percent drop in claims from 2010 to 2011 -- about the same as their sales decline. But the fixture manufacturers saw a 12% decline in claims payments while building material manufacturers saw a 23% decline. And they both saw sales rise.

Warranty Expense vs. Sales

The claims rate and the accrual rate are calculated by taking sales into account. So we can measure the pain level for the furniture makers and how it changes over time by dividing the claims and accrual totals by product sales. We've done that in Figures 3, 4 and 5 for each of the three segments, charting the claims rate in red and the accrual rate in green. The percentages on the side reveal the portion of revenue spent on warranty expenses.

In Figure 3, we see a plumbing and electrical fixture segment whose warranty expense rates haven't really changed that much over the past nine years. They've generally been range-bound between 0.6% and 0.8%, except during the recession, when sales declines drove the percentage rates upward. And in 2011, they returned to that range, albeit towards the lower end of it.


Figure 3
Plumbing & Electrical Fixture Manufacturers
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2011)

Figure 3


Furniture manufacturers, as we mentioned, are paying out a little less in warranty claims and are getting a little less in revenue. One can see the result of that trend in Figure 4, where the claims and accrual rates are little-changed from the end of 2010 to the end of 2011. The group has seen their claims and accrual rates rise from 0.6% back in 2003 to 0.8% and above by 2007. Though the trend is downwards in recent years, it remains stubbornly close to that 0.8% level.


Figure 4
Furniture Manufacturers
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2011)

Figure 4


With the largest group, the makers of building materials, the trend is up for claims and down for accruals. In terms of peak years, their claims rates are down from a volatile and expensive 2010. Accrual rates peaked in 2008, and have settled in around the 0.7% level. But both lines have shown a strong seasonal pattern, as one could expect with any of the building trades.


Figure 5
Building Material Manufacturers
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2011)

Figure 5


We couldn't have placed all three in a single chart, because of the overlap. And we also didn't chart the averages for all 95 companies together, though we can report that the lines flatten out considerably. But they remain within that 0.6% to 0.8% range common to all three segments. And none show the kind of cost-cutting improvements that we know are possible from looking at the track record of other industries such as telecom equipment and computer OEMs.

Warranty Reserve Totals

The other warranty metric we collect is the balance in the warranty reserve fund, after all the accruals have been made and all the claims have been paid. In Figure 6, it's clear that the peak year for warranty reserves was 2007, and for once, all three segments are in agreement. At the end of that year, the 95 companies we're tracking had $1.075 billion in their warranty reserve funds, up from $845 million at the end of 2006.


Figure 6
Fixtures, Furniture & Building Materials
Reserves Held by U.S.-based Manufacturers
(in US$ millions, 2003-2011)

Figure 6


The collected warranty reserve balances of the fixtures, furniture and building material makers remained above $1 billion for two more years before once again slipping below that level. Notably, for the past two years the balance among just the furniture manufacturers has risen slightly while the balance for the other two segments has fallen. The overall contraction in balances from 2010 to 2011 among all 95 manufacturers was -1.2%, from $936 million to $925 million.

Normally, the accrual rate is very closely tied to sales. In other words, the green lines in Figures 3 through 5 should be close to flat. But of course they're not, because manufacturers are always tinkering with their accrual rates based on factors besides product quality, reliability, or the cost of repair/replacement.

Warranty "Market Shares"

In Figures 7 and 8, we've taken the annual accrual totals listed in Figure 2 and assigned each manufacturer a "market share" based on the percentage of the total that each manufacturer represents. If there were a flat and consistent correlation between sales and accruals it would indeed be a representation of market share. But of course they're not, so let's just call it a percentage share of accruals.

There are different market leaders in each of the three segments. Among the makers of building materials, the top warranty providers include Stanley Black & Decker Inc., Mohawk Industries, Sherwin Williams Co., Nortek Inc., Armstrong World Industries Inc., and Owens Corning. In Figure 7 below, all six of those seven companies are present.

In addition, there were two acquisitions to note. In 2010, the Stanley Works acquired the Black & Decker Corp., combining what had been two of the biggest warranty providers in the segment into a single company. The Building Materials Corporation of America, meanwhile, was acquired by the privately-held GAF Materials Corp. So it discontinued reporting its financial figures in 2009. The results of those acquisitions can be seen in the data in the chart below.


Figure 7
Fixture & Building Material Manufacturers
Accruals Made per Year
(as a % share of the total in Figure 2)

Figure 7


Notice that the Black & Decker share has always been the larger of the two. But also notice that after the acquisition was complete, the merged company's accruals represented more or less the same share of the overall total as the two companies did previously. In fact, they've always been around 14% to 16% of the total.

The other notable item in Figure 8 is the 2008 bulge in the Mohawk Industries data. That was the year the company began to notice and prepare for the pervasive defect in its carpet tile product line, although 2009 was when the claims actually began to get paid.

Within the plumbing and electrical fixtures segment, the leading warranty providers include Pentair Inc., Masco Corp., Fortune Brands Home & Security Inc., Hubbell Inc., and Acuity Brands Inc. The top three of those made it into the list in Figure 8.

Skipping Over Furniture?

So that means eight came from the building materials segment and three came from fixtures. And none at all came from the furniture segment. That's because the biggest furniture warranty provider -- Herman Miller Inc. -- was smaller than Nortek, Armstrong, Fortune Brands, or Owens Corning, at least in terms of accruals made per year.

Yet we can't just skip over the whole furniture segment. So what we've done is to take just the furniture totals from Figure 2, and divide them among the top 11 furniture manufacturers. The "market share" results are in Figure 8.


Figure 8
Furniture Manufacturers
Accruals Made per Year
(as a % share of the total in Figure 2)

Figure 8


There's a couple of notable items in Figure 8. First, there was a year in which Steelcase reduced its accruals to only $1.9 million, so it looks like the width of their band shrank to near 0% in 2005. That's not an optical illusion, though perhaps it was a mistake. By 2009, Steelcase was accruing $22 million per year, so its share widened accordingly. But it never should have fallen below 10%.

Second, though the data for Simmons is a bit hard to see in any year, it does actually disappear in 2010 and 2011. That's not an optical illusion. It disappeared because Simmons went bankrupt at the end of 2009 and was taken private. So while the company continues to sell bedding and pay warranty claims, it no longer reports these figures to the U.S. Securities and Exchange Commission.

Room For Consolidation

Overall, the top 11 plumbing and electrical fixture and building material manufacturers listed in Figure 7 account for 55% to 60% of the entire industry in any given year. This suggests that there's plenty of room for additional consolidation.

In Figure 8, the top 11 furniture manufacturers account for 75% to 95% of the segment's accruals in any given year, with the exception of 2007. In that year, an outdoor furniture and decking manufacturer called Trex Company Inc. suddenly increased its accruals to $65.5 million after noticing surface defects in some of its wood products.

After that sudden increase in accruals, Trex never again accrued more than $15 million per year. In fact, that $65.5 million for 2007 was so far above and beyond what was ultimately needed that the company made no net accruals in 2008 and accrued only $250,000 in 2009. Instead, it simply paid claims and allowed its reserve balance to decline, from $22 million in 2008 and 2009 to $14.5 million in 2010 and $16.3 in 2011.

Ninth Annual Product Warranty Reports

As we wrap up our annual survey of U.S.-based warranty providers, here are the links to the online editions of all the other parts of this series:

Readers needing more detailed snapshots of individual companies in either a PowerPoint or Excel format are invited to view the list of charts and spreadsheets available on the Warranty Statistics page.





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