December 11, 2008
sponsored by Tavant
ISSN 1550-9214         

Sports Equipment Warranties:

Everything from StairMasters to snowmobiles carries product warranties, and cost their manufacturers a significant amount of money for warranty work. But compared to the billions spent by GM, HP and others, it's easy to overlook their corner of the warranty industry.

Sports equipment comes in many shapes and sizes, cutting across industries as diverse as electronics, automotive, and apparel. Sports equipment warranties, despite their being only a tiny fraction of the billions spent on claims within these industries, are a major expense for some of the individual companies.

Among the thousand or so companies tracked by Warranty Week, roughly 32 current and 13 former companies manufacture and warrant products that would fit under the "sports equipment" heading. The problem is that they seem to fit better under other headings, such as Microsoft's Xbox line (consumer electronics) or Jarden's Coleman gear (appliances).

So while we can report that "sports equipment" manufacturers have paid roughly $850 million in claims so far this year -- and that's up from $700 million in the first nine months of 2007 -- we're afraid that most of it has been already counted in other categories. For instance, take Microsoft, Jarden and Harley-Davidson off the list and claims for the remaining "sports equipment" companies are down to only $280 million this year.

Fortunately, many of the remaining companies have no other industry to which they could potentially belong. Where else to put weightlifting machines, golf clubs, or camping gear than under the "sports" heading? And while one could debate the merits of including guns and games under such a heading, where else could one put baseball or hockey gear?

What we propose to do in this week's newsletter is to take a first-time look at some of these sports equipment vendors, with the first three companies clearly in the industry, the fourth somewhat in the industry, and the fifth (Harley) only peripherally in the industry (although the company readily admits that most of its customers are buying luxury vehicles for fun and recreation more so than for mere transportation).

Golf Clubs

Let's start with a pair of snapshots for Callaway Golf Co., a prominent golf club maker which was the subject of a Warranty Week article way back on March 24, 2003. At that time, the company had just fired its auditors at KPMG LLP because they refused to go along with the accounting treatment the company preferred to use to report a downward change in its warranty cost estimates.

Back in 2002, Callaway had noticed that claims on a new line of titanium clubs were being paid at a lower rate than it had initially predicted, and so it wanted to take $17 million out of its warranty reserve, pay taxes on it, and report a one-time $10.5 million net boost to profits. KPMG insisted that the excess $17 million be treated as a cumulative error, and that its removal should be reported retroactively, spreading the earnings boost over multiple quarters.

To make a long story short, KPMG got the boot, Callaway got its boost, and Deloitte & Touche LLP got its foot in the door as the company's new auditors. The downward change in estimate resulted in a one-time gain that helped the company avoid back-to-back quarterly losses, but of course that was a secondary effect of the increased product quality that caused it.

None of that controversy is visible in either Figures 1 or 2, but perhaps that's the point? The company got its way, lowered its warranty costs, and business continued as usual. Callaway continued making golf clubs, and continued to pay claims. There was no long-lasting effect, and no shortfall that later needed to be corrected.

However, now that we have five more years of data, it becomes immediately apparent that Callaway could use a few lessons in how to manage warranty costs for such a seasonal product line as golf clubs. Claims always spike in the third quarter and plunge in the first quarter, which of course meshes well with the golf season in its major markets. But they average out over the course of the year to somewhere within the 1.5% to 1.8% range.

If that's the case, the company should be accruing funds at more or less the same rate in every season, flattening out the green line in Figure 1, as many of the farm equipment and homebuilding companies have learned to do. But instead, accruals rise and fall in much the same seasonal pattern as claims, rising as high as 2.4% of sales and plunging as low as 0.9%.

Figure 1
Callaway Golf Co.
Warranty Claims & Accrual Rates, 2003-2008
(in $ Mil & percentage of product sales)

Figure 1

Interestingly, the low mark for accruals was set just this past summer, meaning there is now almost a full percentage point of difference between the claims and accrual rates in the most recent quarter. Though the gap has been wider in the past, such a divergence has never before happened when claims jumped and accruals dove. Usually, they rise and fall together, especially in the peak season.

Another Quality Boost?

The company said it recently cut back on accruals because of "the improved durability of newer products," which means it expects to pay out less claims in the future, and has reduced the amount it sets aside accordingly. That trend is yet to be reflected in the current claims data, but as was the case back in 2003, let's give the company the benefit of the doubt and see what the next few quarters look like.

The 2002 controversy was about fixing past estimates that turned out to be too high, by removing $17 million from the warranty reserve. And that doesn't really show up in Figure 2, because the data doesn't begin until 2003. And since then, the company has kept its warranty reserve within a relatively narrow range of $12 to $15 million. However, because claims are fluctuating so wildly from one season to the next, that volatility spills over into the capacity index, as illustrated by the dark blue line below.

Figure 2
Callaway Golf Co.
Warranty Reserves & Capacity, 2003-2008
(in $ Mil & number of months of claims payable)

Figure 2

The capacity index takes the amount paid per month in claims and divides it into the warranty reserve balance. If Callaway were paying out $1 million per month in claims and had a warranty reserve balance of $12 million, the fund's capacity would be equal to 12 months. But if claims dropped to $667,000 per month, the capacity would jump to 18 months. And indeed, that's what's happening in Figure 2, as summer turns to winter and back to summer again.

By the way, Callaway's golf club warranties last 24 months, and it makes a point to note that in the name of customer service it frequently honors claims even after that two-year period has expired. As can be seen in Figure 2, however, the company's capacity to pay claims has not once hit 24 months during the past six years.

Exercise Equipment

Next, let's look at a pair of exercise equipment manufacturers that are less seasonal but just as volatile in their warranty cost accounting. Nautilus Inc. is the manufacturer of fitness and exercise equipment sold to consumers under brand names such as Nautilus, Bowflex, Schwinn Fitness, and StairMaster. It also sold TreadClimber exercise equipment into the commercial market, but discontinued doing so earlier this year when warranty claims rose to unacceptable levels.

In Figure 3, it's clear when those levels became unacceptable. In the fourth quarter of 2007, accruals spiked to 5.4% of product revenue, and six months later claims jumped above 5% of revenue for the first time. The claims rate has now dropped back down to 4%, but it's still higher than it's been at any point during the previous five years.

Figure 3
Nautilus Inc.
Warranty Claims & Accrual Rates, 2003-2008
(in $ Mil & percentage of product sales)

Figure 3

The TreadClimber problem has also made itself visible in the company's warranty reserve balance, charted below in Figure 4. When that crisis hit at the end of 2007, Nautilus tripled its warranty reserve balance from $8.4 million as of September 2007 to $25.2 million at the end of that year. It's since fallen gradually back down to $19.8 million by September 2008, but that's still more than twice as much as was in the reserve a year before.

Figure 4
Nautilus Inc.
Warranty Reserves & Capacity, 2003-2008
(in $ Mil & number of months of claims payable)

Figure 4

The capacity to pay claims has also soared, from 8.1 months in September 2007 to 15.6 months in September 2008, but remember that claims paid per month as well as the reserve balance have also soared during the period. Still, for three years before the TreadClimber problem hit, the reserve's capacity was always kept between 8 and 14 months.

Commercial Customers

Nautilus competes with our next profiled company, Cybex International, though the latter is more focused on the commercial market for exercise and weightlifting equipment. The roster of Cybex brand names includes Stableflex, Arc Trainer, Cyclone, Home Arc, Legacy, Safety Sentry, Total Body Arc Trainer, and Trotter Elite, among others.

As can be seen in Figure 5, Cybex is well-accustomed to paying out 2% to 3% of product revenue to satisfy warranty claims, while as can be seen in Figure 3, Nautilus reached these levels only in the past year. And of course Nautilus blamed that rise on unacceptably high claims rates in its commercial product line.

So let's go out on a limb here and suggest that perhaps 2% to 3% is normal for the commercial market. Perhaps consumers are more likely to just give up and push the equipment under the bed or use it as a clothes hanger. This is unacceptable in the commercial market, where the customers of health clubs, hotel spas, and gyms expect every piece of equipment to be working every time they visit.

Figure 5
Cybex International Inc.
Warranty Claims & Accrual Rates, 2003-2008
(in $ Mil & percentage of product sales)

Figure 5

Cybex saw a near-term peak in its claims rate of 3.4% in the first quarter of 2008. It has since fallen back to 3.1%. Meanwhile, as can be seen in Figure 6, its warranty reserve balance peaked at $4.4 million in the second quarter of this year, and has fallen back since.

Reserve capacity has fluctuated from 9.5 to 15 months over the years, but the average has always remained very close to 12 months. Although the structural frames of some of its exercise equipment models carry warranties of up to ten years, many of the moving parts are warranted for only one year and labor is covered for three years at most.

Figure 6
Cybex International Inc.
Warranty Reserves & Capacity, 2003-2008
(in $ Mil & number of months of claims payable)

Figure 6

Footwear Warranties

Now let's shift the focus away from equipment and into apparel. Clothing, for the most part, is not usually covered by an express product warranty, although of course it must adhere to certain implied warranties of merchantability and fitness for a particular purpose. Our next company snapshot is for a company that's an exception to that rule.

LaCrosse Footwear sells specialty footwear to customers such as firefighters, police forces, construction workers, loggers, soldiers, shipyard workers, and farmers. It gets its name from its former home town of LaCrosse, Wisconsin, where it was founded in 1897, producing leather and rubber boots favored by those who work in a cold or wet outdoor setting.

Simply put, these are not tennis shoes or casual slippers. These are high-performance products more akin to welding helmets or Kevlar vests, designed to shield their wearer from a harsh environment. They're in our sports equipment roundup simply because some of the company's products are sold by sporting goods retailers, and some of its customers are hunters, fishermen and others whose hobbies rather than their vocations make them stand outside for long periods of time.

As is evident in Figure 7, the protective footwear business is highly seasonal, with the bulk of sales (and warranty claims) coming in the cold half of the year. And we could level the same criticism at LaCrosse as we did at Callaway: sure, claims are seasonal, but why not flatten out accruals to a constant 1.6% or 1.8% of sales over the course of the whole year?

Figure 7
LaCrosse Footwear Inc.
Warranty Claims & Accrual Rates, 2003-2008
(in $ Mil & percentage of product sales)

Figure 7

It's much the same story with LaCrosse's warranty reserves. The balance has remained close to $1 million over the past six years, but because of the 180-day cycle in the claims rate, its capacity has oscillated from 4 to 11 months. If claims were to somehow flatten out, the capacity line in Figure 8 would also flatten out at around six months of coverage.

Figure 8
LaCrosse Footwear Inc.
Warranty Reserves & Capacity, 2003-2008
(in $ Mil & number of months of claims payable)

Figure 8

Sports Vehicles?

Finally, we concentrated so much on passenger cars and bailouts in our November 13 newsletter on automotive OEMs that we never once mentioned some of the sports vehicle manufacturers. Sure, we provided snapshots for one of the recreational vehicle companies, but there was no mention of specialized vehicle makers such as Arctic Cat Inc., Polaris Industries Inc., or our next profiled company, Harley-Davidson Inc.

For the record, claims at Polaris are up slightly while accruals are down significantly, while its warranty reserve is shrinking despite increasing sales. At Arctic Cat, claims, accruals, and warranty reserves are down slightly while sales are up slightly. But as we've detailed in newsletters such as the September 12, 2008 issue, the warranty data for these companies in particular is highly seasonal, so perhaps the end of summer isn't the best time to evaluate their warranty costs.

The one we haven't profiled since October 17, 2006 is Harley-Davidson -- frankly because the company so consistently and so predictably turned in warranty claims and accrual rates under one percent in an industry where 2% or even 3% was more the norm. But then in 2007 the claims rate twice hit 1.3%, and then in the most recent quarter, rose above 1.6%. As can be seen in Figure 9, it hasn't been higher since at least 2003.

Figure 9
Harley-Davidson Inc.
Warranty Claims & Accrual Rates, 2003-2008
(in $ Mil & percentage of product sales)

Figure 9

Notice that while claims rose, accruals remained below one percent of sales. It's as if the company is saying "What quality problem? We don't see any quality problem. We're not adjusting accruals upward." And as a direct result, the warranty reserve is beginning to shrink, and the coverage it provides has fallen below 12 months (on vehicles that are warranted for two years).

Figure 10
Harley-Davidson Inc.
Warranty Reserves & Capacity, 2003-2008
(in $ Mil & number of months of claims payable)

Figure 10

Harley's motorcycle sales revenue is also down about 1.6% for the year so far, which may explain some of the rise in claims, since the company is effectively fixing last year's bikes with this year's money. And yes, the company lengthened its warranties from one year to two beginning with the 2004 model year, and yes, that second year has cost it some extra money ever since. But while accruals in 2004 averaged 0.8% of motorcycle sales, they averaged only 0.95% in 2007 and 2008. That's not much of an upward trend. Meanwhile, claims haven't been below 1.0% of sales since 2006.

It's clear from Figure 9 that claims and accrual rates began to diverge in 2006. And it's clear from Figure 10 that the warranty reserve's capacity to pay claims has fallen in the most recent quarter and hasn't grown in the past four years despite the increased need for funds that lengthening warranty durations would seem to require. Neither trend is that ominous, and both are dwarfed by the twin impacts of tightened credit and lower sales, but some corrective action is needed in the warranty department.



This Week’s Warranty Week Headlines

Man pleads guilty to defrauding Cisco Systems of $7.9 million in warranty parts.
Associated Press, December 11, 2008
BorgWarner finds a major warranty issue in its dual-clutch transmissions sold in Europe.
Press Release, December 11, 2008 to sell extended warranties for mobile phones costing up to $400.
Press Release, December 11, 2008
A.M. Best affirms financial strength rating of A- (Excellent) for Virginia Surety Company Inc.
Press Release, December 10, 2008
HP Enviro laptop battery, made by Boston Power, to feature three-year warranties.
PC World, December 10, 2008

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Mize Warranty Connect


Warranty Headlines (cont’d)

Avon-ISI adds online warranty registration form to itw new Web site.
Press Release, December 10, 2008
Service contract discount is one option in settlement of Clayton Homes class action lawsuit.
Southeast Texas Record, December 9, 2008
Seagate offers pick-up and delivery warranty service via 43 SeaCare Centers in India.
Channel Times, December 8, 2008
NEW Customer Service Cos. to hire 480 people at call center in Altoona PA.
Associated Press, December 4, 2008
Federal Trade Commission's telemarketing call opt-out rule took effect Dec. 1.
Arizona Daily Star, December 4, 2008

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Warranty Chain Management Conference


Warranty Headlines (cont’d)

GM president says precarious situation may deteriorate more as doubts persist about federal aid.
Detroit Free Press, December 3, 2008
Economic Policy Institute says shutdown of U.S. automakers could cost up to 3.3 million jobs.
EPI Briefing Paper, December 3, 2008
MIT professor says Chapter 11 filing by an automaker would inevitably lead to liquidation.
Press Release, December 3, 2008
Gartner advises IT departments not to invest in extended warranties.
Incisive Media, December 3, 2008
Auto manufacturer uses business intelligence system to save $60 million on warranty costs.
Enterprise Systems Journal, December 3, 2008

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PCMI - Your technology partner


Warranty Headlines (cont’d)

Chrysler says it reduced warranty costs by 29% since going private in 2007.
Press Release, December 2, 2008
American Home Shield accelerates heating fix after local TV station makes inquiries.
WSPA-TV Greenville SC, December 2, 2008
Lee Laser doubles the warranty on all fiber array packages shipped after 12/1/08.
Press Release, November 2008
Reports continue that Tweeter sold extended warranties after its ex-administrator said to stop.
Hartford Courant, November 29, 2008
Circuit City struggles to explain to customers that bankruptcy isn't liquidation.
Washington Post, November 29, 2008

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After Warranty Analytics


Warranty Headlines (cont’d)

Extended warranties from third parties are usually not affected by a retailer's liquidation.
Washington Post, November 28, 2008
NJ Assemblyman Paul D. Moriarty discusses his "Consumer Electronics Warranty Lemon Law."
YouTube Video, November 26, 2008
GE Money and GMAC Finance pull out of Australian auto market, causing dealerships to shutter.
My Small Business, November 26, 2008
Farm equipment groups working on Web-based warranty claim system for Jan. 2009 launch.
Wisconsin Ag Connection, November 26, 2008
Corsair Memory launches Professional Series of power supply units with 7-year warranties.
Press Release, November 26, 2008

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Warranty Headlines (cont’d)

McCusker & Co. and Subtotal to sell extended warranties to Quick Service Restaurants.
Press Release, November 26, 2008
AB Insurance Cyprus Agency Ltd. and AutoProtect introduce used car warranties to Cyprus.
Financial Mirror, November 26, 2008
New Michelangelo book has €100,000 pricetag and a 500-year warranty.
Associated Press, November 25, 2008
Penske Truck Leasing, National Truck Protection & netLoan Funding offer extended warranties.
Press Release, November 25, 2008 (PDF file)
Business customers complain about IT vendors overpromising warranty services in India.
CyberMedia India Online, November 25, 2008

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Entigo, Founding Sponsor


Warranty Headlines (cont’d)

Zale Corp. reports a net loss and declining extended warranty sales.
Press Release, November 25, 2008
GM CEO cites finding that 80% of customers would not buy a vehicle from a bankrupt automaker.
Detroit News, November 25, 2008
For Detroit, Chapter 11 would be the final chapter, with liquidations to follow bankruptcy.
New York Times, November 24, 2008
Consumer Reports says consumer interest in extended warranties fell 20% following its campaign.
Press Release, November 24, 2008
Greenpeace Guide to Greener Electronics ranks Nokia, Sony Ericsson, Toshiba & Samsung highest.
Press Release, November 24, 2008
Harmonix calls Rock Band drum pedal lawsuit "opportunistic and baseless."
Game Daily, November 24, 2008
Internet Security Suite Plus 2009 identity theft protection plans administered by WaCA.
Press Release, November 24, 2008
Headlines about bankruptcy effects may already be scaring away auto buyers.
Associated Press, November 23, 2008
Could the U.S. government underwrite automakers' warranties to reduce uncertainty?
Times of London, November 23, 2008
Chevrolet-Cadillac dealer says GMAC will now pay for warranty services on a monthly basis.
Sturgis (MI) Journal, November 21, 2008
Attorneys General urge the Federal Trade Commission to strengthen its "Used Car Rule."
Press Release, November 21, 2008
Rock Band drum pedals draw lawsuit alleging design defect and criticism of warranty expansion.
Game Daily, November 21, 2008
Satellite Protection Services Ltd. put into compulsory liquidation by UK's Insolvency Service.
Norwich Evening News, November 21, 2008
Dell names Ganesh Lakshminarayanan new Vice President of Global Consumer Services and Support.
Channel Times, November 20, 2008
Consumer Reports survey finds 35% may buy an extended warranty, down from last two years.
Press Release, November 20, 2008
Survey finds fear of breakdowns and meager product warranties drive extended warranty sales.
Choice Online, November 2008
Research in Motion president criticizes SquareTrade's research methodology.
Computer Business Review, November 20, 2008
GM spokesman says Chevrolet Volt battery production is on schedule and going smoothly.
Dow Jones Newswires, November 20, 2008
Nissan executive says 2010 GT-R won't have launch control due to "warranty nightmare" it caused.
Edmunds Inside Line, November 19, 2008 web site reveals "secret" service bulletins and warranty extensions.
WTVR-TV Richmond (VA), November 19, 2008
Tweeter allegedly sold extended warranties after former administrator told them to stop.
Hartford Courant, November 19, 2008
ServicePower signs P&F USA, Philips, Hitachi, Yamaha, Bankers Warranty Group, and Bristol West.
Crain's Manchester Business, November 19, 2008
McCusker & Company to supply extended warranty programs to Coastal Video Security.
Press Release, November 19, 2008
Honeywell's Storm-A-Rest hurricane-resistant curtains get Popular Science award.
Press Release, November 18, 2008
Daimler AG joins the Automotive Industry Action Group.
Press Release, November 18, 2008 (PDF file)
How MPC declined into bankruptcy after acquiring GatewayÂ’s professional computing business.
Idaho Business Review, November 17, 2008
Schools report repair problems and late shipments of laptops after MPC files for bankruptcy.
Sioux City Journal, November 16, 2008
Prepare for cold comfort if you reject boiler insurance.
The Scotsman, November 16, 2008
Columnist helps buyers whose breakdowns came too late for their warranties.
Toronto Star, November 15, 2008
Alanco Technologies says it was hit by unusually high warranty expense in the first quarter.
Press Release, November 14, 2008
Impact Systems to provide warranty work for bankrupt Optima Technology Solutions.
CRN Australia, November 14, 2008
Lenovo launches extended warranty packages in the Middle East.
PC Magazine Middle & Near East, November 13, 2008
WGBH-TV alleges Broadway National and Mark IV Industries failed to honor TV screen warranties.
Boston Globe, November 13, 2008
Warranty on new sidewalks would be voided if business owners use salt to melt ice.
Baldwin City (KS) Signal, November 13, 2008
Lint buildup makes editor's iPhone inoperable, as he discovers after taking it apart.
Popular Mechanics, November 13, 2008
AIAG OESA Guideline contains suggested best practices for managing warranty.
Press Release, November 12, 2008 (PDF file)
Circuit City Advantage Protection Plan to continue despite retailer's bankruptcy.
Sacramento Bee, November 12, 2008
The Warranty Group wins awards from the Association of Marketing and Communication Professionals.
Press Release, November 12, 2008
NEW Customer Service Cos. to employ 160 in work-at-home Carbondale IL call center for DirecTV.
Southern Illinoisan, November 11, 2008
Circuit City Stores declares bankruptcy, to reorganize under Chapter 11.
Press Release, November 10, 2008
Buying from bankrupt stores: warranty and gift card holders are unsecured creditors.
CNBC, November 10, 2008
SquareTrade study finds iPhone more dependable than BlackBerry or Treo.
Press Release, November 10, 2008
Staples to pilot test the HP retail recycling program for used printer cartridges.
Press Release, November 10, 2008
Horizon to offer "next day fix" warranties on all Sun systems in South Africa.
IT News Africa, November 10, 2008
National Association of Realtors survey finds home warranties used as buying inducement.
Press Release, November 8, 2008
MPC Corp. declares bankruptcy, creating laptop parts and warranty repair problems for schools.
Mitchell (SD) Daily Republic, November 7, 2008
Spokesman says Hyundai Motor Co. has no interest in acquiring Chrysler.
Reuters, November 7, 2008
GM ends merger talks with Chrysler, Hyundai rumored to be interested.
Reuters, November 7, 2008
Faulty optical scanners could have significantly miscounted votes in Minnesota.
Minnesota Independent, November 6, 2008
California Cars Initiative says modifying Prius for plug-in won't void the whole car's warranty.
Popular Science, November 6, 2008
BMW to use DealerTrack Arkona Dealer Management System in its training centers.
Press Release, November 6, 2008
Arizona homebuilders help defeat "homeowners rights" ballot proposition.
Reuters, November 5, 2008
Directed Electronics exits satellite radio business, Sirius XM Radio to take over warranty work.
Press Release, November 5, 2008
Westinghouse Digital Electronics to sell extended warranties for all LCD products.
This Week in Consumer Electronics, November 5, 2008
Warrantech signs three-year marketing partnership with Rymax Marketing Services.
Press Release, November 4, 2008
State officials worry about maintenance costs when electronic voting machine warranties run out.
Charleston Gazette, November 3, 2008

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