There used to be a thriving U.S.-based telecommunications equipment industry that included hundreds of companies manufacturing products covered by warranties. But fifteen years after the warranty expense reports began, almost three-quarters of them have been acquired or gone out of business.

We began this week's report with a list of 205 U.S.-based companies that have at one time or another reported warranty expenses incurred through the sale of various kinds of telecommunications equipment. We then broke the list into four smaller groups:

• Internet/Datacomm Equipment (65 companies)
• Landline/Mobile Phone Equipment (59 companies)
• Broadcast/Cable TV Equipment (48 companies)
• Satellite/Microwave Equipment (33 companies)

From each company's annual reports and quarterly financial statements, we collected four essential warranty metrics: the amount of claims paid, the amount of accruals made, the amount of reserves held, and the amount of warranted products sold. With the claims, accruals, and sales figures, we calculated an additional pair of metrics: claims as a percentage of sales, and accruals as a percentage of sales.

Warranty Claims

The most striking aspect of the list is how few companies have survived the tough and changing market of the last 15 years. Many well-known industry veterans, such as Lucent, Motorola, Nortel, and 3Com, have been acquired or sold off in pieces. In fact, of the 205 companies that we started with in 2003, only 50 were still reporting paying claims in 2017. So it's no wonder the warranty expense totals in the charts below are now far below their peaks.

For warranty claims, the peak came all the way back in 2006, when telecom equipment manufacturers paid out just under $2.2 billion in claims. Nearly two-thirds of that total came from sales of telephone network equipment, and only about a quarter of it came from sales of Internet and data communications gear.

Last year, telecom equipment manufacturers paid out $1.12 billion in claims, and well over three-quarters of it came from Internet and datacomm equipment. The landline and mobile phone share had dropped to only 6% of the total, the smallest of the four sub-groups.

Some of these market slices are so small that we can no longer fit labels into them. The satellite/microwave slide was $90 million in 2017; the TV slice was $91 million last year; and the phone slice was $63 million in 2017. The phone slice actually grew slightly last year, but the others contracted. Overall, the amount of claims paid by all telecom equipment companies fell by $81 million last year.

Two of the biggest proportional declines in claims paid were posted by Harris Corp. and Itron Inc. Each paid out more than 25% less in 2017 than they did in 2016. But the biggest absolute decline belonged to Cisco Systems Inc., which saw its claims cost fall by $76 million, or a little over 10% of its 2016 total.

In terms of increases, there were some spectacular upturns in claims totals. Juniper Networks Inc. saw claims rise by $21 million, or 68%. Broadband equipment provider Calix Inc. saw only a $5.4 million increase in claims, but that represented a 79% increase from 2016. And then Comtech Telecommunications Corp. saw a $4.5 million increase, but that represented an 85% jump in its annual claims cost.

Warranty Accruals

Warranty accruals showed the same pattern as claims, peaking more than a decade ago and then declining ever since. Back in 2006, the industry total for accruals was nearly $2.3 billion, and the telephone equipment sector's share was 65%. Last year, the industry total was $1.08 billion and the telephone sector's share was under 4%.

Once again, labels don't fit within some of these slices. The satellite/microwave companies accrued $82 million, down by $21 million from 2016 levels. The broadcast/cable equipment companies accrued $77 million, down by $32 million from their 2016 total. The landline/mobile phone equipment companies slipped under $40 million, down from $47 million in 2016. Overall, accruals were down by $134 million last year, a decline of more than 11%.

Once again, Harris was at the top of the list of declines, cutting its accruals by $7.0 million -- more than a third less than in 2016. Arris International plc, which is technically based in the UK but still maintains its operational headquarters near Atlanta, cut its accruals by $16 million, a 30% reduction. Optical multiplexer manufacturer Infinera Corp. cut its accruals by $6.9 million, a 27% reduction. And Juniper Networks reduced its accruals by $6.3 million, a 15% reduction.

There were, however, a handful of accrual increases last year. Netgear Inc. boosted its accruals by $22 million or 20%. Adtran Inc. increased its accruals by just $1.5 million, but that represented an 18% increase for the carrier equipment supplier.

Warranty Expense Rates

In the four charts below, we've taken the claims and accrual totals from the charts above and divided each of them by the corresponding product sales totals, in order to calculate the claims and accrual rates for each of the four sub-groups. And while the data above is in an annual format, the data below is in a quarterly format.

For the Internet/datacomm companies, markets have been expanding and sales have been growing, so the trend lines are the product of many companies' data. But for the other three sub-groups, the number of still-active companies has waned, and sales have declined, so the data is more volatile from one quarter to the next.

In Figure 3, the trend line is solidly declining from 2003 to 2008, and then seems to hit bottom until 2011. From 2012 to 2017, it seems to be rising, except for some sudden drops at the end of 2014 and 2015. In 2017, warranty expense rates for the Internet/datacomm equipment makers were back to 2005 levels.

Long term, the average expense rates for the Internet/datacomm equipment manufacturers has been around 1.7% for both claims and accruals. The standard deviation for the group is 0.2% for the claims rate and slightly higher for the accrual rate.

For the landline/mobile phone network equipment companies, the long term average warranty expense rate has been closer to 1.3%, with a much more volatile 0.5% standard deviation. Over the past 15 years, this group's expense rates have been as high as 2.1% and as low as 0.3%, though they've remained below one percept for all of the past five years.

Also, notice that in both 2016 and 2017 the phone equipment group's average accrual rate has declined significantly, to under 0.5%, while their claims rate has remained about the same, at around 0.8% to 0.9%. Part of the reason is the way companies such as Valmont Industries Inc. and Ciena Corp. maintain their warranty accounts. At the end of 2017, Valmont's claims rate was 1.0% while its accrual rate was 0.4%. Ciena's claims rate was 0.8% while its accrual rate was 0.4%.

Broadcast Equipment

In Figure 5, the broadcast and cable television equipment makers have seen their warranty expense rates climb for the past two years. In fact, they're just about right back to where they were in 2003. Long term, the average claims and accrual rates in this sector have been close to 0.6%, with a standard deviation of 0.2% for both. But as can be seen in the chart below, their recent expense rates have been a bit above that long term average.

Large companies in this sector such as Arris have kept their expense rates more or less the same in recent years. However, smaller companies such as Viavi Solutions Inc. and Avid Technology Inc. are helping to drive up the overall average. For instance, Viavi saw its claims rate rise from 0.5% at the end of 2016 to 1.5% at the end of 2017. Avid saw its claims rate jump from 0.9% to 1.2% during the same period.

Satellite/Microwave Equipment

With the satellite and microwave equipment manufacturers, there were a few bad years from 2008 to 2010, but the years before and after saw expense rates remain more or less the same, in a narrow range of 1.0% to 1.5%. The long term average claims rate has been 1.4% while the average accrual rate has been 1.5%. For both expense rates, the standard deviation has been 0.4%. But take away the 2008-2010 data and it was only half as large.

One big part of the reason for the high expense rates during those years was the elevated warranty costs of Garmin Ltd., makers of satellite-based navigation equipment. In early 2009 its claims rate rose as high as 9.7%, and later on that year its accrual rate was 6.4%. Now, both expense rates are back down below two percent.

Warranty Reserves

Our final metric is the year-ending balance in the warranty reserve funds of these telecom equipment companies. As can be seen in Figure 7, it has undergone a steady decline from 2003 to 2017, falling from just over $2 billion to just under $1 billion. As with the other metrics, the decline has been most prominent in the landline/mobile phone sector, where the departures of Lucent, Avaya, Nortel, and others have dramatically reduced the presence of U.S.-based companies in this market.

In 2003, landline/mobile phone equipment companies accounted for about 63% of the industry's total warranty reserves. By 2017, their share was down to 11%, and the Internet/datacomm equipment makers accounted for 62% of the total. All told, reserves contracted by about $97 million last year, a 9.4% decline.

All four sub-groups saw reserve balance declines last year. Cisco cut its balance by $19 million, a 5% decline. Juniper cut its balance by $14 million, a 34% decline. Valmont reduced its warranty reserves by $6.4 million. For doing so, both companies made it onto a top 10 chart in the March 15 newsletter. Elsewhere, Arris was down by $12 million, and Ciena was down by $10 million.

And then there were a few companies that increased their warranty reserve balances. Extreme Networks Inc. raised its reserve balance from $10.2 million to $13.0 million, a 27% increase. Both Adtran and Lumentum Holdings Inc. boosted their balances by $1.2 million, a 14% increase for each.

Both Comtech and Harris reduced their warranty reserves by $2.0 million last year. But for Comtech, it was a proportionally larger reduction, since its year-ending 2016 balance was $15 million, to Harris' $29 million. These and other reductions helped reduce the satellite/microwave category's total balance to $895 million, which is below the threshold that allows us to give it a label. Interestingly, that's almost exactly the same balance the group reported back in 2003.