March 12, 2015

Top 100 Warranty Providers of 2014:

While we can't directly compare one company's warranty expenses to another's, we can compare each company to itself over time, and then compare the magnitude of the changes. What follows is a list of the manufacturers that have raised or lowered their warranty expense rates the most from 2013 to 2014.

The 2014 annual reports are out, and the latest product warranty data is in. And the list of manufacturers that have seen their warranty expense rates change the most for better or for worse has been compiled.

As we have for the past few years, we're comparing all of the top warranty providers to each other by comparing each to itself. That's because while no two companies have the same product mixes, and while no two make the same choices about what to include and exclude when it comes to product warranty costs, we have to believe that one company's choices are consistent over time.

So what we've done is to take the list of roughly 1,000 U.S.-based manufacturers, and to collect four essential warranty metrics for each: the amount of claims they paid, the amount of accruals they made, the amount of warranty reserves they kept, and the amount of product sales they reported. We did this for each company for all of calendar 2014 and 2013 if their fiscal years ended on or close to December 31, and for the fiscal quarter most closely corresponding to the months of October through December if they were on some other fiscal year schedule.

For the top 100 warranty providers, as defined by the amount of claims they paid in calendar 2014, we divided claims paid by product sales, and accruals made by product sales, to calculate a percentage for each. Then we looked for the biggest proportional changes in those percentage rates, both up and down, from the end of 2013 to the end of 2014. For warranty reserves, we simply took the year-ending balance from 2013 and 2014 and calculated the biggest proportional changes in that metric, both up and down.

Therefore, we ended up with six top 10 lists, comprised of the biggest warranty providers whose expense rates changed the most among their peers. Those who saw their claims or accrual rates decline the most have something to celebrate, in that either their expense rates are now returning to normal after an awful 2013, or they unlocked the key to higher product reliability and lower warranty expenses in 2014. Those who saw their expense rates rise the most have something to lament, in the sense that their warranties are a lot more expensive than before.

Top Warranty Newsmakers

The least shocking thing of all is how all of the warranty newsmakers of 2014 also feature prominently on these top 10 lists. We're looking for the companies that saw the biggest changes in their warranty expense rates, so it makes sense that they would also be among the biggest newsmakers.

For instance, General Motors Co, was among the top 10 gainers in its claims rate, its accrual rate, and its warranty reserve balance. This is the triple crown of bad news when it comes to warranty expense rate changes. It means that something went very wrong for the carmaker last year, and that warranty costs soared as a result. Conversely, Navistar International Corp. is on the list of top accrual rate decliners, which meshes well with the narrative that its manufacturing crisis is now largely behind it.

In Figure 1, we're celebrating the top 10 warranty claims rate decliners: the companies who saw the percentage of sales they pay in warranty claims fall the most in 2014. For instance, homebuilder D.R. Horton saw its claims rate fall from 0.5% at the end of 2013 to 0.3% at the end of 2014. And that represented a decline of a little more than a third of the 2013 rate, which was the largest decline among the top 100 warranty providers.

Figure 1
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Reductions,
Calendar Year 2014 vs. 2013
(claims as a % of product sales)

   Claims   Latest  Rate
  Paid ($m) Claims Year
  Company  in 2014   Rate   Ago 
  D.R. Horton Inc. $33 0.3% 0.5%
  Applied Materials $104 1.5% 2.2%
  RPM International $27 0.5% 0.7%
  Seagate Technology $209 1.2% 1.7%
  B/E Aerospace Inc. $34 1.3% 1.8%
  Varian Medical $51 2.7% 3.7%
  LKQ Corp. $28 0.4% 0.5%
  KB Home $39 1.7% 2.2%
  Medtronic Inc. $25 0.1% 0.2%
  Diebold Inc. $51 3.6% 4.7%

    Source: Warranty Week from SEC data

No companies reduced their claims rate by half or more. D.R. Horton came closest, reducing its claims rate by a little over a third, from 0.5% to 0.3%. Six more companies at the top of the list in Figure 1 reduced their claims rates by a quarter or more.

Diebold Inc. turned in the tenth best claims rate decline, having seen its claims rate fall by about a quarter, from 4.7% to 3.6%. Paradoxically, it also raised its warranty accrual rate by about a fifth, from 4.8% to 5.8%, over the same period. But that was only the twelfth largest increase of 2014, so it didn't make it onto the Figure 4 list. But those twin movements in warranty metrics (cutting payouts, raising set-asides) did exactly what you'd expect: Diebold saw its warranty reserve balance rise by $79 billion, which was enough to land it a spot on the Figure 6 list.

However, most of the top 10 warranty cost cutters reduced their claims and accrual rates in tandem. In other words, when claims payments declined, they cut the amount they set aside too. For instance, Seagate Technology, B/E Aerospace Inc., Varian Medical Systems Inc., and LKQ Corp. each reduced their claims rates by at least one-quarter. And each also reduced their accrual rate significantly, though only Varian did so by enough to make it onto the top 10 list in Figure 3.

Top Claims Rate Increases

In Figure 2, we're listing the top 10 claims rate increases among the top 100 warranty providers. These are the companies where something went wrong in 2014, even if it was just bad luck or unfortunate timing.

Helen of Troy was the only one to see its claims rate more than double, but four of these top 10 saw their claims rates rise by half or more: Goodyear, Bio-Rad Laboratories, Paccar, and Advanced Micro Devices. This is not a good list to be on. However, under the accrual system, these expenses should have been provided for previously. So the money should have been in the warranty reserve already. In terms of pain, Figure 4 is the more damaging list to be on, in that it represents the top impacts upon net income.

Figure 2
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Increases,
Calendar Year 2014 vs. 2013
(claims as a % of product sales)

   Claims   Latest  Rate
  Paid ($m) Claims Year
  Company  in 2014   Rate   Ago 
  Helen of Troy Ltd. $48 3.2% 1.5%
  Goodyear Tire $39 0.2% 0.1%
  Bio-Rad Laboratories $26 1.2% 0.8%
  Paccar Inc. $457 2.6% 1.6%
  Advanced Micro Devices $39 0.7% 0.5%
  General Motors Co. $4,326 2.9% 2.0%
  AGCO Corp. $206 2.1% 1.5%
  Johnson Controls $234 0.8% 0.6%
  Tesla Motors Inc. $40 1.2% 1.0%
  Fortune Brands $24 0.6% 0.5%

    Source: Warranty Week from SEC data

Of the top 100 warranty providers, 47 saw their claims rate rise from the end of 2013 to the end of 2014, while 53 saw their claims rate fall during the same period. However, keep in mind that some of these claims rates rose and fell because of changes in product sales volumes. In other words, a problem-plagued manufacturer may have cut its claims rate by selling more units that simply haven't broke yet. So sales rose but claims didn't, and the claims rate fell.

That doesn't happen with warranty accruals. A company is supposed to pick a number for its warranty cost per unit sold, and is supposed to set aside exactly that amount every time it sells a unit. So if sales rise, accruals rise in exact proportion. If sales fall, so do accruals. And the percentage rate relationship between them remains exactly the same.

Therefore, when an accrual rate changes, it's not merely a matter of bad luck or unfortunate timing. It is a conscious change by the company's financial directors, to reduce accruals because reliability is up or repair cost is down, or to increase accruals because reliability is down or repair costs are up. It's what they company believes is going to happen soon (accruals), as opposed to what happened recently (claims).

Of the top 100 warranty providers, 46 let their accrual rates rise from the end of 2013 to the end of 2014, while 53 let their accrual rates fall during the same period. One company kept its accrual rate unchanged. Therefore, on balance, more of the top 100 companies were on the good side (declines) with both warranty metrics.

The Best List of All

Figure 3 is a list of the companies with the most to celebrate. For whatever reason, they decided they could reduce the amount they set aside when they sold a new product. Medtronic tops the list, having cut its accrual rate almost in half, from 0.2% to 0.1%. But trailing right behind is the network equipment giant Cisco Systems Inc., datacomm equipment rival NetApp Inc., and the homebuilder NVR Inc.

Figure 3
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
Calendar Year 2014 vs. 2013
(accruals as a % of product sales)

   Accruals   Latest  Rate
  Made ($m) Accrual Year
  Company  in 2014   Rate   Ago 
  Medtronic Inc. $18 0.1% 0.2%
  NVR Inc. $52 1.2% 2.0%
  Cisco Systems Inc. $607 1.5% 2.6%
  NetApp Inc. $51 0.9% 1.5%
  Varian Medical $46 2.0% 3.2%
  Navistar International $302 2.8% 4.4%
  KLA-Tencor Corp. $37 2.0% 2.9%
  Oshkosh Corp. $42 0.5% 0.7%
  EMC Corp. $150 1.1% 1.4%
  General Electric Co. $593 0.5% 0.7%

    Source: Warranty Week from SEC data

And there's Navistar in sixth place, having reduced its accrual rate from 4.4% to 2.8%. That was enough to get it onto this top 10 list, though its claims rate reduction from 6% to 4.7% fell short of the top 10 listed in Figure 1. And its $152 million reduction in warranty reserves wasn't enough to get it onto the list in Figure 5.

In terms of accrual rate reductions, no companies cut their accrual rates in half, but all ten of the companies listed in Figure 3 reduced their accrual rates by a quarter or more. And those were the biggest reductions among the biggest warranty providers, making them the most successful warranty cost-cutters of 2014.

The Most Painful List

Meanwhile, Figure 4 is a list that nobody wants to be on. This is the list of maximum warranty pain. These are the companies that had to explain to management why they had to begin setting more money aside to cover future warranty costs, because either the products were breaking more often, were costing more to fix, or both.

Both Helen of Troy and Goodyear Tire allowed their accrual rates to more than double, while Bio-Rad Laboratories, General Motors, and Paccar allowed their accrual rates to go up by half or more. Four more companies on the list in Figure 4 allowed their accrual rates to climb by a quarter or more.

Figure 4
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Increases,
Calendar Year 2014 vs. 2013
(accruals as a % of product sales)

   Accruals   Latest  Rate
  Made ($m) Accrual Year
  Company  in 2014   Rate   Ago 
  Helen of Troy Ltd. $54 3.8% 1.7%
  Goodyear Tire $36 0.2% 0.1%
  Bio-Rad Laboratories $29 1.3% 0.7%
  General Motors Co. $5,450 3.6% 2.1%
  Paccar Inc. $642 3.6% 2.2%
  Caterpillar Inc. $1,130 2.2% 1.6%
  Hyster-Yale Materials $37 1.3% 1.0%
  Fortune Brands $25 0.6% 0.5%
  Pentair plc $75 1.1% 0.8%
  Tempur Sealy Int'l $34 1.3% 1.0%

    Source: Warranty Week from SEC data

Out of the top 100 warranty providers, 32 of them made at least one appearance on one of the four charts above, and eight of those 32 made two appearances. In other words, when one of these warranty metrics changes by a lot, so does the other.

Two companies made appearances on both of the "good" charts: Medtronic and Varian Medical Systems. Six made appearances on both of the "bad" charts: Bio-Rad Laboratories Inc.; Fortune Brands Home & Security Inc.; General Motors; Goodyear Tire & Rubber Co.; Helen of Troy; and Paccar Inc. In other words, these six saw both their claims and accrual rates rise by large amounts: the worst of all possible worlds.

Top Warranty Reserve Declines

Next, let's take a look at the biggest changes in warranty reserve fund balances. We can't really say whether a rise in the balance is "good" or "bad," because it won't become clear whether that extra money was needed until some time passes.

Conversely, we can't qualify the goodness or badness of the balance reductions in Figure 5, unless we know why the balance declined. Was it because the funds proved to be unneeded, because the once-feared rise in claims never materialized? Or was it because claims actually did rise, and the funds were spent?

The balance in and of itself doesn't tell us much. But here are the ten biggest proportional reductions in the warranty reserve balance, from the end of 2013 to the end of 2014.

Figure 5
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Decreases,
Calendar Year 2014 vs. 2013
(reserves in US dollars)

   Warranty   Warranty  vs.
  Reserve Reserve Year
  Company  12/31/13   12/31/14   Ago 
  IBM Corp. $376 $197 -48%
  EMC Corp. $289 $210 -27%
  Lexmark International $31 $22 -27%
  Joy Global Inc. $86 $67 -22%
  Xerox Corp. $14 $11 -21%
  Goodyear Tire $21 $17 -19%
  Terex Corp. $106 $87 -18%
  Medtronic Inc. $38 $31 -18%
  Mohawk Industries $36 $29 -18%
  Flowserve Corp. $38 $31 -18%

    Source: Warranty Week from SEC data

IBM leads the list, having cut its warranty reserve fund balance almost in half, from $376 million to $197 million. But that happened largely because the company decided to take $126 million out of its warranty reserve that it deemed to be unnecessary. That money goes straight to net income, after taxes are paid upon it. But IBM's claims rate fell only slightly, from 2.7% to 2.5%, while it actually increased its accrual rate by 0.5%. So the justification for the large removal of funds is far from conclusive.

Compare and contrast that to Boeing Co., which took $200 million out of its warranty reserve in 2014, or United Technologies Corp., which took out $40 million. Neither made any of our top 10 lists, because their claims and accrual rates didn't change by much, and their reserves were so large that those millions weren't missed.

In Figure 6 we're listing the top 10 biggest warranty reserve fund balance increases. And again, we can't say whether it's good or bad to be on this list. Let's just say it's interesting to note that this is the third appearance on top 10 lists for GM, and the second for both Diebold and Tesla Motors Inc. So those companies are each among the most active of the top 100.

Figure 6
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Increases,
Calendar Year 2014 vs. 2013
(reserves in US dollars)

   Warranty   Warranty  vs.
  Reserve Reserve Year
  Company  12/31/13   12/31/14   Ago 
  Tesla Motors Inc. $53 $129 +143%
  BorgWarner Inc. $73 $132 +82%
  Diebold Inc. $83 $113 +36%
  General Motors Co. $7,214 $9,646 +34%
  Apple Inc. $3,980 $5,195 +31%
  FMC Technologies $18 $23 +28%
  Textron Inc. $223 $281 +26%
  Middleby Corp. $23 $29 +24%
  Fiat Chrysler US $3,800 $4,685 +23%
  Whirlpool Corp. $191 $235 +23%

    Source: Warranty Week from SEC data

Actually, among the 20 companies listed in either Figure 5 or Figure 6, six also made at least one appearance in Figures 1 through 4. They are: Diebold, EMC, GM, Goodyear, Medtronic, and Tesla Motors. In other words, their expense rates changed by enough to also move their warranty reserve fund balance by large amounts.

However, at the other extreme, BorgWarner increased its warranty reserve by $59 million, but its claims and accrual rates hardly changed during the year. That's because it made a big acquisition during the year, of the German engine valve maker Gustav Wahler GmbH, and therefore added the company's warranty reserves to its own.

Sales Gains & Other Data

Finally, out of the top 100 warranty providers of 2014, 70 saw their product sales totals rise from the end of 2013 to the end of 2014, while 30 saw their product sales fall. Incredibly, Apple was in only eighth place on this list, with a 26% rise. Tesla was at the top of the list, with a nearly 60% sales gain.

Three companies saw their product sales fall significantly. Joy Global Inc. was down 25% for the year, while Dover Corp. was down 11%, and AGCO Corp. was down 10% for the year. Meanwhile, product sales at Oshkosh Corp. were down 12% in the fourth quarter (sales were down 11% in the fiscal year ended Sept. 30).

AGCO made it onto the list in Figure 2. The reason we mention this is because both the claims rate and the accrual rate are calculated by dividing the relevant warranty expense by sales. So a modest rise in the expense coupled with a modest decline in sales can produce a top 10 rise in the expense rate. And in AGCO's case, claims payments rose from $166 million to $206 million, while sales fell from $10.8 billion to $9.7 billion, so the claims rate rose from 1.5% to 2.1%.

Overall, the complete list of U.S.-based warranty providers saw sales rise about 4.5% in 2014 to about $2.054 trillion. Claims rose to $29 billion, accruals rose to $31 billion, and reserves rose to $49 billion. But the average claims rate (1.4%) and the average accrual rate (1.5%) also rose, a concerning development which we will explore in more detail in next week's newsletter.





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