Top 50 Warranty Providers:

Footnotes:

(1) Delphi, Navistar, and Nortel Networks have not yet filed their year-end 2005 financial reports, so full-year estimates were extrapolated based on third quarter data. Also, annual comparisons were made using Sep. 30, 2004 and Sep. 30, 2005 data.

(2) Jarden Corp. last year acquired both the Holmes Group and American Household, along with their respective warranty reserves. On its own, Jarden was not a significant warranty provider at the end of 2004, so rather than annual comparisons, percentages were calculated using March 31, 2005 and Dec. 31, 2005 data.

Statistics were gathered for each of 736 warranty providing companies from their three quarterly statements and one annual report filed with the SEC. All were for periods ending in calendar 2005. In cases where a company's fiscal year ended on a date different from Dec. 31, the four fiscal quarters which ended during 2005 were used. For instance, any fiscal quarter ending during the months of October, November, or December was considered for the purposes of this study to be the fourth quarter of calendar 2005.

The 736 companies were then ranked based on the dollar amount of warranty claims paid during calendar 2005. These top 50 warranty providers reported totals ranging from General Motors' $4.7 billion to Remy International's $55.3 million. All public companies which ended their fiscal years on Dec. 31 were required to file their Form 10-K annual reports with the SEC by the end of March. GM was among the last of the large companies to file this year, thanks to some last-minute revisions in its net loss computations. Delphi, Navistar, and Nortel Networks were among the dozen or so companies that completely missed the deadline. For them, we have fashioned placeholder estimates for the time being.

As soon as the missing data becomes available, we'll revise these totals and percentages. Manufacturers traditionally report more warranty costs in their fourth fiscal quarters than in any other, so it's unlikely that Nortel Networks will remain third on the list once it files its year-end report. Then again, Nortel is coming off some fairly steep year-ago numbers, so some improvement (and therefore a negative percentage change) is highly likely.

Computer Service Revisions

There are a few other changes in methodologies and the use of estimates to report. Most notably, we revised the estimate for the percentage of Dell's sales revenue that comes from services, finance, and other non-warranted sources up to 22%. We had previously estimated that the non-warranted segment was roughly the same size as Apple Computer's, at 14%. For HP, non-warranted revenue represent 20% of total revenue. At Cisco it's 16%. At GM it's 18%. So we're estimating that Dell is a little ahead of its peers, primarily because of its success selling extended warranties.

What this change of estimate does, however, is raise Dell's claims rate above those reported by HP and IBM. It used to be lower, because we were underestimating the contribution of services to Dell's top line. We also revised Dell's estimates retroactively, however, so the 24% rise in claims rates over the past year is accurate. So is the 33% rise for IBM. Despite Lenovo's acquisition of the PC business, which one would expect to have been more warranty-weighted than the remaining lines of business, IBM is paying out more as a percentage of sales now than it did a year ago (3.4% vs. 2.6%). And no doubt because of the iPod's battery problems, Apple Computer is up 38% from a year ago. At HP, meanwhile, warranty costs slid from 3.7% to 3.4%. For a ship as big as HP, that's an astonishing turn.

An increase in sales can be just as beneficial as a decrease in warranty costs when it comes time to compute a claims rate, of course. In effect, we're comparing the repair costs for old products against the sales revenue for new products. And in fact, all but one of the companies that showed a declining claims rate also saw sales rise (the sole exception being Tyco International). Among the 38 who saw their claims rates rise, ten can partly attribute it to declining sales totals. However, the rest have no excuse. For instance, Pulte Homes saw sales rise 29% while warranty costs rose 43%, which together produced an 11% rise in its claims rate. Caterpillar saw a 20% increase in sales and a 33% rise in claims, and together those measures also produced an 11% rise in the claims rate.

Medical Surprises

At the extreme bottom of the chart, Guidant Corp. continues to be impacted by the cost of its pacemaker recall. The company went from $9 million in warranty claims in 2003 to $15 million in 2004 and $66 million in 2005. So of course the percentages were up by an insane amount. It was the same story for Medtronic Inc., which saw claims soar from $10 to $14 to $58 million in the past three calendar years. It sounds less serious when seen as a 0.1% to 0.2% to 0.5% of sales rise, however.

Not all the manufacturers who saw triple-digit rises in claims rates were making medical devices, however. At Lucent Technologies, the 169% increase has a little to do with rising warranty claims and a little to do with falling sales. This is a situation where a picture really is worth a thousand words.

As the chart shows, it just so happens that Lucent's claims rate hit its three-year low of 0.7% at the end of 2004, and its nine-quarter high of 1.9% at the end of 2005. That's a 169% rise, and it puts Lucent above the all-manufacturer median for the first time since 2003. So perhaps it's better the decline went unpublicized. There will be less questions to answer now on the inevitable rebound, and after the merger is completed Lucent's warranty costs will blend into Alcatel's.

It will be much like what happened when Chrysler merged with Daimler Benz. Detroit used to have a big three, but at least in warranty terms, it's now a big two. DaimlerChrysler AG is not based in Detroit, any more than Toyota is a Kentucky company or Honda is from Ohio. They're all huge manufacturers, but financially they're based abroad. And therefore, along with Sony, Siemens, Nokia, and many other huge international manufacturers, they're not part of this U.S.-only list.

So don't look too surprised when you read somewhere that DaimlerChrysler last year reported almost as much in warranty claims as GM and HP combined: $6.9 billion, give or take, depending on the exchange rate you use for the U.S. dollar. That was around 4.2% of their auto sales revenue, and was significantly above 2003 and 2004 levels. Yet they seem to be doing fine -- certainly having none of the drama of GM and Delphi, not to mention the medical device companies.

In next week's newsletter we'll take a much closer look at the automotive industry's warranty experience over the past three years. But with seven major automotive OEMs and eight major parts suppliers on the list above, the highlights are essentially already here. It's the same story for computers, telecom equipment, disk drives, printers, and other peripherals: the major players are all on this chart. So maybe in future weeks we should do something besides dwell on changes in warranty claims rates? Suggestions are welcome.