March 14, 2013

Top 100 Warranty Providers of 2012:

While most of the largest manufacturers continued to reduce their warranty costs last year, some saw dramatic increases. Here are the top up and down percentage changes of the year for three warranty metrics: claims, accruals, and reserves.

The annual reports are out and the year-end warranty data is in. This week, we begin the annual examination of the warranty metrics of American manufacturers with a look at those that saw their numbers change the most.

The theory behind this exercise is that while you can't reliably compare the warranty expenses of two different companies against each other, you definitely can compare each company against itself. And then you can compare the annual changes, and make a list of the companies that changed the most.

We started with a list of all U.S.-based manufacturers that regularly report their warranty expenses, and found the Top 100 warranty providers among them, as determined by the amount of claims they reported for the calendar year of 2012. Some report only their annual expenses while others disclose those numbers quarterly. Most end their fiscal years in December, though others choose to end their fiscal years in June, September, October, January, or some other month.

Fiscal vs. Calendar Year

In all cases where fiscal years did not line up precisely with the calendar year, what we did was to count warranty expenses reported in the quarter ended in October, November, or December 2012, and the three quarters that preceded it. So if a company ended its fiscal year on June 30, we counted its third and fourth quarters of one fiscal year and the first and second quarters of the following year. If its fiscal year ended on October 31, we counted the months of November 2011 through October 2012 -- their first through fourth quarters. If the company's fiscal year ended January 31, we would also count the period of November through October, meaning their fourth through third quarters.

After finding our top 100, we found incomplete warranty data from Emerson Electric Co. and Exide Technologies, so they were excluded from the Top 100. And as of this week, we still had no new warranty data from Nortek Inc., so they also were excluded. In their place, to get the list back up to 100 companies, we added Herman Miller Inc., Visteon Corp., and Gardner Denver Inc., which came in as warranty providers number 101 through 103.

With those substitutions in mind, all of the Top 100 warranty providers of 2012 reported more than $21 million in claims paid. Their accrual totals for the year were about the same, though Itron Inc. and Nvidia Corp. set aside significantly less than $21 million last year.

The reason we made the list based on claims instead of accruals or reserves has to do with the meaning of these metrics. Technically, the "provision" of the warranty is the accrual, while the claim is the utilization of that provision. But the amount of warranty coverage actually provided to the customer is the claim. The accrual is simply an estimate of that amount, calculated at the time of the product sale based on the company's own projections.

Claims vs. Accruals

Had we ranked the Top 100 based on total accruals made during the year rather than on total claims paid in 2012, the list would have had a few different members. Itron and Nvidia would not have made the cut, nor would have D.R. Horton Inc., Dana Holding Corp., or Visteon Corp. In their place would have been Hill-Rom Holdings Inc., SanDisk Corp., SunPower Corp., Foster Wheeler AG, and Medtronic Inc.

Once we had the Top 100 list, we determined their claims rate, accrual rate, and warranty reserve balance at the end of 2001 and 2012. The six tables below contain the ten biggest increases and the ten biggest decreases among that group.

In Figure 1, we start with the biggest annual claims rate reductions. For instance, by all accounts, computer graphics card supplier Nvidia has by now put its warranty problems behind it, which caused its claims payments to soar in 2009-2011. The company paid out $50 million in 2008. After the defects were found, that bill more than tripled to $187 million in 2009. And it peaked at $205 million in 2010, as computer OEMs and end users returned their products in droves.

But then in 2011 Nvidia's warranty claims total fell to $114 million -- 1.1% of its total revenue. And in 2012, its annual warranty bill fell further, to $36 million or 0.24% of revenue. That decrease, from 1.1% to 0.24%, earned it the top spot in Figure 1.

Others that managed to cut their warranty claims rates by the most among their peers include three homebuilders, a disk drive maker, a datacomm equipment company, an HVAC company, an automotive supplier, and two huge warranty providers. General Electric, the seventh largest warranty provider of 2011, and United Technologies, the tenth largest of 2011, cut their claims payments by 25% and 36%, respectively, in 2012.

Figure 1
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Reductions,
Calendar Year 2012 vs. 2011
(claims in $ millions and % of sales)

   Claims   Claims   Claims   Claims  Rate Now
  Paid Rate Paid Rate vs.
  Company  2011   Dec '11   2012   Dec '12   Year Ago 
  Nvidia Corp. $114 1.1% $36 0.24% -79%
  Lennar Corp. $55 2.1% $46 1.3% -37%
  Western Digital $166 2.1% $223 1.3% -37%
  United Technologies $440 1.1% $277 0.68% -36%
  Hovnanian Enterprises $38 3.6% $34 2.4% -33%
  Juniper Networks $48 1.4% $31 0.93% -32%
  PulteGroup Inc. $55 1.4% $45 1.0% -28%
  Dana Holding Corp. $44 0.58% $31 0.43% -26%
  General Electric $881 1.3% $723 1.0% -25%
  Lennox International $28 1.0% $22 0.76% -24%

    Source: Warranty Week from SEC data

A year ago, as was detailed in the March 15, 2012 newsletter, Nvidia had only the second-largest claims rate reduction, when it fell from 6.4% to 1.1%. In that edition, Garmin topped the list, after cutting its claims rate from 3.3% in 2010 to only 0.26% in 2011. But this year the navigation device manufacturer's claims rate jumped to 1.8%, so unfortunately this time around it leads the top gainers list in Figure 2.

And that's the point. By spotlighting the companies with the biggest annual changes, we are highlighting those with the biggest warranty problems. For Nvidia, the pain is over. But for Garmin, the pain is returning. How do we know? Their annual change in claims rates was larger than 99 of their peers.

Also, please note that Garmin's claims payments actually fell from $55 million in 2011 to $48 million in 2012. So how could its claims rate rise? The answer is in its net sales volume. Simply put, sales fell faster than claims, so the percentage rate rose.

Rising Dollars, Falling Ratios

The opposite thing happened to Western Digital in Figure 1. Claims payments rose, but sales rose faster, so the percentage rate actually fell from 2.1% to 1.3%. It's not just the top of the fraction that goes up or down -- so does the bottom part.

Figure 2
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Increases,
Calendar Year 2012 vs. 2011
(claims in $ millions and % of sales)

   Claims   Claims   Claims   Claims  Rate Now
  Paid Rate Paid Rate vs.
  Company  2011   Dec '11   2012   Dec '12   Year Ago 
  Garmin Ltd. $55 0.26% $48 1.8% +584%
  Steris Corp. $11 0.44% $25 1.7% +285%
  Power-One Inc. $8.4 0.83% $26 2.6% +210%
  First Solar Inc. $24 0.88% $61 1.8% +104%
  Regal-Beloit $18 0.65% $33 1.1% +63%
  Itron Inc. $29 1.2% $39 1.8% +52%
  Apple Inc. $1295 0.92% $2071 1.3% +46%
  Johnson Controls $223 0.54% $242 0.79% +46%
  Visteon Corp. $19 0.24% $22 0.32% +36%
  Joy Global Inc. $33 0.74% $57 1.0% +35%

    Source: Warranty Week from SEC data

This time around, the list was fairly evenly-split between rate increases and decreases. Of the Top 100 warranty providers of 2012, 53 saw their claims rates decline since the end of 2011, while 47 saw their rates increase. In contrast, from 2010 to 2011, 59 of the Top 100 saw decreases, against 41 increases.

Now, let's turn our attention to warranty accruals. There are two things to note about warranty accruals. First, they are based upon projections made by the company itself, reflecting their best guess as to their future warranty costs. So they are frequently too high or too low, and are subject to manipulation.

Second, unlike claims, they are supposed to rise and fall in lock step with sales. For instance, if you're accruing $500 per vehicle, you would accrue $5,000 if you sold 10 vehicles, and $10,000 if you sold 20 vehicles. And if you sold only one, you would accrue only $500. In other words, the percentage rate should not change because sales are rising or falling.

Repeat Appearances

Also worth mentioning is the trend where the claims and accrual rates tend to rise and fall together. Of the 10 companies listed in Figure 1, six make an appearance in Figure 3. Of the 10 companies in Figure 2, four are repeated in Figure 4.

In fact, of the 53 Top 100 warranty providers that reduced their claims rates from 2011 to 2012, 36 also reduced their accrual rates during the same period. This is to be expected, because one of the primary reasons for an accrual rate reduction would be a decrease in claims payments, perhaps because product reliability has increased and/or repair costs have decreased.

Therefore, congratulations to the companies in Figure 3. These are the companies that have something to celebrate: their claims cost fell so accruals were reduced. And among the 100 largest warranty providers, these were the ten biggest decreases of all.

Figure 3
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
Calendar Year 2012 vs. 2011
(claims in $ millions and % of sales)

   Accrual   Accrual   Accrual   Accrual  Rate Now
  Made Rate Made Rate vs.
  Company  2011   Dec '11   2012   Dec '12   Year Ago 
  FMC Technologies $38 0.75% $26 0.43% -43%
  Dana Holding Corp. $36 0.47% $20 0.28% -42%
  Nvidia Corp. $6.6 0.19% $7.1 0.11% -40%
  General Electric $935 1.4% $611 0.84% -40%
  Hovnanian Enterprises $37 3.4% $31 2.2% -36%
  Juniper Networks Inc. $53 1.5% $32 1.0% -35%
  Terex Corp. $75 1.2% $55 0.75% -35%
  United Technologies $475 1.2% $325 0.8% -31%
  BorgWarner Inc. $48 0.67% $34 0.47% -30%
  Wabco Holdings Inc. $42 1.5% $27 1.1% -27%

    Source: Warranty Week from SEC data

Among the repeats from Figure 1 are some of the largest warranty providers of all: GE and United Technologies. Sure, their rates fell. But look at how the dollars also fell. GE cut annual accruals by $324 million. United Technologies cut accruals by $150 million. If their warranty managers got even one-half of one percent of that in a year-end bonus, they were more than deserving of it.

The Worst List of All

Conversely, Figure 4 is the list that nobody wants to be on. Imagine the warranty managers at Navistar explaining why they need an additional $164 million to pay for dirty diesel engines. Or imagine the FDA-unapproved medical device designers at Steris explaining why accruals had to be doubled. And did you hear about the problems with the grounded Boeing 787? This is where the numbers meet the news. This is the list of companies in the most warranty pain.

Worst of all, there are four companies in Figure 4 that also made the list in Figure 2: First Solar Inc.; Garmin; Steris; and Power-One Inc. In other words, not only did the lead the pack in terms of accrual rate increases, but also with claims rate increases. And Garmin also allowed its warranty reserve balance to fall significantly (Figure 6), making it the only company to be on the wrong side of all three pairs of Top 10 lists.

Figure 4
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Increases,
Calendar Year 2012 vs. 2011
(claims in $ millions and % of sales)

   Accrual   Accrual   Accrual   Accrual  Rate Now
  Made Rate Made Rate vs.
  Company  2011   Dec '11   2012   Dec '12   Year Ago 
  Garmin Ltd. $52 0.62% $38 1.4% +128%
  Steris Corp. $14 0.85% $27 1.9% +126%
  Boeing Co. $232 0.64% $678 1.4% +115%
  Power-One Inc. $19 1.8% $35 3.4% +86%
  Ciena Corp. $18 1.3% $33 2.3% +76%
  NetApp Inc. $46 1.5% $91 2.7% +76%
  Navistar International $407 3.0% $571 4.5% +51%
  First Solar Inc. $22 0.81% $41 1.2% +50%
  Masco Corp. $28 0.44% $42 0.64% +47%
  Diebold Inc. $50 3.9% $74 5.4% +40%

    Source: Warranty Week from SEC data

Reserves Rise and Fall

Finally, let's turn to warranty reserves. This is simply the balance left in the account at the end of the year, after accruals are added and claims are paid. So it probably doesn't mean as much as the rate changes listed above, in either a positive in a negative sense.

In fact, we're not sure whether it's better to be among the Top 10 increases in Figure 5 or the Top 10 decreases in Figure 6. As with the other metrics, the Top 100 were fairly evenly split: 53 increased their reserves and 47 reduced their year-ending balances.

Again, though, what's striking about the lists below is the amount of money involved. Navistar added $520 million to its reserves, because of those dirty diesel engines. Boeing added $526 million, because of its new plane teething problems. And Apple added a whopping $634 million to its warranty reserves, but that's because its iPhones are selling so well that it really needs to do so.

Figure 5
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Increases,
Calendar Year 2012 vs. 2011
(balance change in $ millions and percent)

   Warranty   Warranty   $ Change   % Change 
  Reserve Reserve vs. Year vs. Year
  Company  Dec '11   Dec '12   Before   Before 
  Lam Research Corp. $33 $63 +$30 +92%
  Navistar International $598 $1118 +$520 +87%
  Pentair Ltd. $29 $54 +$24 +83%
  NetApp Inc. $65 $112 +$47 +72%
  Power-One Inc. $31 $49 +$18 +57%
  Boeing Co. $1046 $1572 +$526 +50%
  LKQ Corp. $7.3 $11 +$3.2 +44%
  Apple Inc. $1676 $2310 +$634 +38%
  Western Digital $156 $211 +$55 +35%
  Diebold Inc. $63 $82 +$18 +29%

       Source: Warranty Week from SEC data

In Figure 6, some of the reserve balance reductions are enormous, given that they can't be cut by more than 100% (that would be a $0 balance). However, NACCO did so because of how it accounted for the spin-off of its forklift operations into a separate company. Left behind are the household appliance operations, which simply don't need as much warranty money.

Nvidia, of course, we already mentioned is returning to normal after several years of warranty chaos. So it reduced its accruals by more than its claims fell, which gradually reduced the remaining balance. At the end of calendar 2008, the company had $200 million in its warranty reserve. Now it has only $15 million remaining. That, we have to assume, is great news for them.

Going in the Wrong Direction

The only time we'd be worried is if a company saw its claims rate rise, still saw fit to cut its accrual rate, and watched as its warranty reserves balance fell. This is exactly what happened to NACCO, but their spinoff of Hyster-Yale explains why. But what excuse can be offered for Applied Materials, Eastman Kodak, FMC, and Rockwell Automation Inc. They're all on the list in Figure 6, after seeing claims rates rise and accrual rates fall.

Figure 6
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Decreases,
Calendar Year 2012 vs. 2011
(balance change in $ millions and percent)

   Warranty   Warranty   $ Change   % Change 
  Reserve Reserve vs. Year vs. Year
  Company  Dec '11   Dec '12   Before   Before 
  NACCO Industries $48 $4.2 -$44 -91%
  Nvidia Corp. $44 $15 -$29 -66%
  Ingersoll-Rand plc $636 $263 -$373 -59%
  FMC Technologies $26 $15 -$10 -40%
  Itron Inc. $80 $54 -$26 -33%
  Applied Materials $168 $119 -$49 -29%
  Eastman Kodak Co. $46 $34 -$12 -26%
  Garmin Ltd. $47 $37 -$9.5 -20%
  AMD $20 $16 -$4.0 -20%
  Rockwell Automation $44 $36 -$7.9 -18%

       Source: Warranty Week from SEC data

Actually, most of the Top 100 warranty providers saw relatively little change in their year-to-year warranty metric comparisons. Only 39 of the Top 100 warranty providers made any of the six lists above. Or to put it another way, 39 companies accounted for all 60 slots on the six lists above. So obviously, some companies made more than one appearance.

A single company could not make more than three appearances. And three companies did so: Garmin, Nvidia, and Power-One Inc. Nvidia was there for its pair of industry-topping rate decreases, while the other two were there for their pairs of industry-topping rate increases.

And then there were 15 companies that each made two appearances, and 21 that made a single appearance. And of course 61 of the Top 100 companies made no appearances at all.

Big Warranty Providers

Normally, the biggest warranty providers of all usually don't make appearances on these lists. Because their revenue totals are so large, and because their warranty and quality operations are so well-run and so closely monitored, they're unlikely to see their percentages change by so much that they make it into a Top 10.

This year, however, things are different. GE, United Technologies and Apple made it into the lists because of good news, and Navistar and Boeing made it because of bad news.

Next week, we'll begin to take apart these statistics industry by industry, expanding the view from the past two years to the past 10 years. We'll start with automotive and will move through high tech and the building trades in the weeks that follow.

Tenth Annual Product Warranty Reports

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

Assurant Solutions Shed The Light
Fulcrum Analytics
Warranty Chain Management Conference
Pegasystems Inc. - PegaWorld
GWSCA First Annual Conference on Service Contracts
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