February 9, 2023

ISSN 1550-9214         

Largest Nine-Month Warranty Expense Rate Changes:

While we can't directly compare one company's expense rates to another's, we can compare each company against their year-ago levels. And then we can compare the size of the changes, to reveal which companies are seeing costs fall and which are seeing them soar.

For the past few editions of Warranty Week, we've been looking at the nine-month warranty data for United States-based manufacturers in key industries, while awaiting the release of the 2022 annual reports in the coming months. While those publicly trading in the U.S. are required to release financial statements each quarter, international companies usually only report their data once per year. This week, rather than honing in on a specific industry, we are taking a broader look at claims and accruals data for all of the U.S.-based companies we track.

First we gathered all of the 2021 and 2022 expense reports for the several hundred U.S.-based companies we track. We recorded four key figures: claims paid, accruals held, reserves held, and total product revenue. This week, we will focus on claims and accruals, and we will take a look at warranty reserves next week.

Then we narrowed down the list to just 110 companies that paid $10 million or more in claims during the first nine months of 2022, and who reported both claims and accruals amounts in their first, second, and third quarter expense reports. This excluded all companies that report their warranty expenses only once a year, all companies that missed filing one or more reports, and all companies that reported just the opening and closing balances in their warranty reserve funds without detailing the amount of claims paid or accruals made. In a handful of cases, certain companies reported making $0 accruals or paying $0 in claims, but at least they reported those amounts.

We calculated the expense rates using the relevant claims and accrual totals divided by product revenue totals (claims / product revenue and accruals / product revenue). These were calculated for the periods ending September 30 of 2021 and 2022 -- or, for those companies on different fiscal year schedules, for the quarters ending immediately before those dates, but not before June 30. While you can't compare companies, especially when they report their data differently, you can compare them to themselves a year prior.

Each company's 2022 expense rates were compared to those from 2021, to reveal the biggest increases and decreases. In the four tables that follow, we are listing the 10 biggest percentage gainers and decliners for the claims rate (Fig. 1 & 2) and accrual rate (Fig. 3 & 4).

Of the top 110 companies, a total of 24 made one appearance on any of the four tables below. Eight companies made the theoretical maximum of two appearances. And then 78 of the 110, almost three-fourths of the list, made no appearances at all, meaning that neither of their warranty expense rates changed by much since 2021.

The companies that made the maximum of two appearances on these lists are Boeing Co., Daktronics Inc., Herman Miller Inc., Hubbell Inc., MKS Instruments Inc., Nvidia Corp., Oshkosh Corp., and Taylor Morrison Home Corp..

Multiple appearances, as we will see, can be good or bad, depending on whether the metrics are rising or falling. To make it onto any list at all, one of a company's expense rates had to change significantly: by at least 28% for claims paid, and at least 38% for accruals made. Only 32 out of the top 110 did this.

The 24 companies that made into just one of the next four lists are A.O. Smith Corp., American Woodmark Corp., Aptiv PLC, CommScope Holding Co. Inc., Cummins Inc., Dana Inc., Enphase Energy Inc., First Solar Inc., Generac Holdings Inc., General Motors Co., IBM Corp., Infinera Corp., Insulet Corp., iRobot Corp., Juniper Networks Inc., Meritor Inc., Polaris Inc., Seagate Technology Holdings PLC, SunPower Corp., Tenneco Inc., Terex Corp., Toll Brothers Inc., Visteon Corp., and Western Digital Corp.

Basically, these are the companies showing the most warranty pain or gain. Figures 1 and 3 contain the most improved, while Figures 2 and 4 contain the top warranty cost increases. But keep in mind that those are not all caused by surges in defects. Some relate to mergers and acquisitions, which in and of themselves can raise warranty costs.

However, among the top 110 warranty providers, especially among the very largest, these warranty metrics tend not to change that much from one year to the next. For them, claims remain under control and accruals remain proportional to sales. In fact, General Motors, Cummins, and Boeing were the only three of the top 20 largest warranty providers to make appearances on this list, and the first two were for massive reductions in their accrual rates (good news).

But then there is a subset for which the numbers increase by astronomical factors; tripling, quadrupling, quintupling, and, in some cases, as much as thirteenfold and seventeenfold. This reflects real pain, and big unanticipated expenses.

So these are the members of the following four top 10 lists: the biggest changes in expense rates since 2021. Everything can change in a few months when the fourth quarter and annual numbers come in, but these are the numbers as of right now.

Warranty Claims Rates

Let's begin with some good news. In Figure 1 we list the top 10 claims rate reductions for the first nine months of 2022.

Figure 1
Top 110 U.S.-based Warranty Providers:
Top Ten Claims Rate Reductions,
First 9 Mo. 2022 vs. First 9 Mo. 2021
(claims as a % of product sales)

Figure 1

At the top of the list is the new home construction company Taylor Morrison, which reduced its claims rate by about five-sixths, from 1.1% to just 0.2%. We will note that they acquired William Lyon Homes in February 2020, possibly helping to explain their higher claims rate the next year.

Next is Oshkosh Corp., which cut its claims rate by about two-thirds, from 0.84% to 0.26%. We visualized this change in Figure 3 of last week's report on truck and powertrain warranty trends. They are followed by Visteon, which cut its rate in half from 0.8% to 0.4%.

At the bottom of the list are Herman Miller, Aptiv, MKS Instruments, and Terex, all of which decreased their claims rates by just about one-third. Four of the 10 companies on this list also appear on the list of biggest accrual decreases in Figure 3: Taylor Morrison, Oshkosh, Herman Miller, and MKS Instruments, meaning 2022 was a great year for them. Appearing on this list is great news for these 10 companies, sure to be welcome by both management and investors.

Overall, it was a good year for our top U.S.-based warranty payers, with 61 of the 110 managing to cut their claims rates, while 49 saw their claims rise. In Figure 2, we will look at the top 10 companies that saw their claims rise the most.

Figure 2
Top 110 U.S.-based Warranty Providers:
Top Ten Claims Rate Increases,
First 9 Mo. 2022 vs. First 9 Mo. 2021
(claims as a % of product sales)

Figure 2

At the top of the list is the scoreboard and LED display maker Daktronics, which saw its claims rate almost sextuple between 2021 and 2022, from 1% to 5.9%. Next is Nvidia Corp., which saw its claims rate quadruple, though this increase was just from 0% to 0.1%.

The other two companies on this list that saw their claims rate more than double are First Solar, which increased from 0.2% to 0.5%, and Western Digital, which increased from 0.45% to 0.91%. Next is Generac Holdings, which increased by more than four-fifths, from 1.1% to 2.1%. Generac acquired Ecobee Inc. at the end of 2021, perhaps explaining their increase in claims payments in the subsequent year.

At the bottom of this list, increasing by a little less than half, are Boeing, A.O. Smith, and Hubbell. Note that Hubbell acquired two companies in 2022, PCX and Ripley Tools, helping to explain their big increase in claims paid last year.

Similar to the trend we noted for Figures 1 and 3, four of these 10 companies in Figure 2 also appear in Figure 4, the list of the biggest accrual rate increases. Before we look at those data, we will take a look at the best news of all: the ten biggest accrual rate decreases between 2021 and 2022.

Warranty Accrual Rates

In Figure 3, we celebrate the companies that cut their accrual rates the most. These numbers are particularly important because each company chooses how much money to accrue based on what they anticipate spending on warranty claims in the future. Lower accruals means more profits and savings for these companies.

Figure 3
Top 110 U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
First 9 Mo. 2022 vs. First 9 Mo. 2021
(accruals as a % of product sales)

Figure 3

Leading the pack is Tenneco, which decreased its accruals rate from 0.18% to just 0.02% from 2021 to 2022. Next on the list is Taylor Morrison, one of the four companies also found on the list of biggest claims decreases (Figure 1). They made a big jump, from 1.1% to just 0.13%. As we saw in Figure 5 of our Nine-Month New Home Warranty Report a few weeks ago, Taylor Morrison has had huge fluctuations in its warranty accruals, especially in the past few years. They might be exhibiting a pattern of making huge accruals one quarter, and then reducing their accruals the next, rather than staying consistent. Nevertheless, congratulations are in order.

Next on the list is General Motors, which had a three-fourths reduction in its accrual rate from 6.8% to 1.8%. This shows a great recovery after its big spike in accruals last year, in response to a huge recall of 2021 SUVs, which we also noted two weeks ago in our report on car and RV warranty trends.

CommScope's accrual rate dropped by about half, from 0.46% to 0.24%. Perhaps these lower costs are associated with the separation of its Home Networks business, a decision they announced in 2021 with the goal of "reduc[ing] operating costs throughout the company." Undoubtedly, establishing what may have been one of the costlier elements of the business as an independent company is an effective strategy to cut expenses.

Oshkosh, Herman Miller, and MKS Instruments are the three other companies that find themselves both on this list and in Figure 1. They all saw their accruals rates decrease by about two-fifths, as did iRobot, Juniper Networks, and Cummins. Cummins finds itself on this list after several quarters with significant accruals in the past five years due to issues with some older diesel engines failing U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) standards. However, we note that Cummins acquired Meritor, another powertrain company, in August 2022, right at the end of the window of our data. Meritor makes an appearance in Figure 4, with some bad news about increased accruals. It will be interesting to see if anything changes next year as a result of this.

The Pain Chart

Now for the bad news. Figure 4 is the chart that no company wants to be a part of. While claims are something that happen to a company, accruals are something a company decides to do. And accrual increases have a direct impact on net income. So when a company decides to raise its accrual rate, it does so because the accountants believe it will be necessary in order to pay claims.

Figure 4
Top 110 U.S.-based Warranty Providers:
Top Ten Accrual Rate Increases,
First 9 Mo. 2022 vs. First 9 Mo. 2021
(accruals as a % of product sales)

Figure 4

Some of these increases are on a scale that we rarely see. Nvidia, at the top of the list, increased its accruals a whopping seventeenfold, from 0.1% to 1.8%. We also saw them make an appearance in Figure 2, with the second-highest increase in claims rate. While some of this change can be explained by decreased revenue in 2022, it is unclear what the future has in store for this computer graphics processing unit (GPU) company.

Next on the list is the medical device company Insulet, increasing thirteenfold from 1.1% to 14.3% in the span of just a year. This is the result of an extra $36.8 million accrual they made in the third quarter of 2022 in response to a battery issue with one of their insulin pumps. Meanwhile the company released a new product and reported record revenue growth in 2022. They might be anticipating many of the users of this new product, or perhaps some older models, to file more warranty claims in the upcoming year. In any case, 14.3% is a really, really high accrual rate.

Next on the list is Daktronics, which saw its accrual rate quintuple from 1.5% to 7.6%. While this increase is a little smaller than the increase in its claims rate that earned it the top spot in Figure 2, it again calls the near future of the company into question.

The next companies on the list still saw big increases in the accruals rate, but at least they didn't double. Polaris is next on the list, almost doubled but not quite, from 1.4% to 2.6%. Boeing and Hubbell find themselves both here and in Figure 2, again not the best position to be in. Meritor's problems seem to be over, though, due to the merger with Cummins we mentioned above.

Rounding out the list are Enphase Energy, American Woodmark, and Toll Brothers. What's especially interesting is that when conducting research for this report, we found several of the companies on this list put out press releases reporting record earnings during 2022. On the one hand, record growth could simply mean that they anticipate that many of those new customers will come to them with warranty claims in the next few years. However, it's possible that this time next year, there will be a news story or maybe even a recall that explains these big changes. While we cannot predict the future, we can notice the patterns and big changes, point them out, and wait and see what comes next.


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