Top Warranty Acquisitions:
Every once in a while, a manufacturer or retailer is acquired and ceases reporting its warranty expenses, while the acquiring company reports the amount of warranty reserves it gained through the purchase. What follows are some of the largest transactions of and by U.S.-based warranty providers in the past 18 months.
As we continue to collect the third quarter warranty expense reports of the top U.S.-based manufacturers, we're closing the books on the first half of 2015 with a look at some of the top adjustments these companies are making.
In the October 22 newsletter, we looked at some of the companies reporting warranty adjustments caused by foreign currency fluctuations. In the November 5 newsletter, we looked at companies that overestimated or underestimated their prior year warranty expenses, for which they made adjustments to correct the error.
This week, we're looking at some of the top acquisitions reported by manufacturers, of both the companies that made the acquisitions and the companies that were acquired. When one warranty provider buys another, they must account for the warranty reserves they acquire, and they must pay the remaining warranty claims on the acquired company's products.
Let's begin with a list of the top ten mergers and acquisitions of the past 18 months from the point of view of the amount of warranty reserves that changed hands. Figure 1 contains a list of the acquiring company, the acquired company, the date the transaction was completed, and the amount of warranty reserves transferred.
Top 10 Warranty Acquisitions
by U.S.-based Companies
Jan. 2014 to June 2015
Ranked by Reserves Acquired
(in $ millions)
|Textron Inc.||Beechcraft Corp.||3/14/14||$67.0|
|BorgWarner Inc.||Gustav Wahler GmbH||3/1/14||$64.9|
|Ply Gem Holdings Inc.||Simonton Windows & Doors||9/19/14||$48.2|
|Signet Jewelers Ltd.||Zale Corp.||5/29/14||$28.4|
|Medtronic Inc.||Covidien plc||1/26/15||$23.0|
|Zebra Technologies Corp.||Motorola Solutions Inc.||10/27/14||$20.5|
|Advanced Energy Industries Inc.||HiTek Power Group||4/12/14||$19.7|
|Westinghouse Air Brake||Fandstan Electric Group Ltd.||6/6/14||$14.4|
|Toll Brothers Inc.||Shapell Industries Inc.||2/5/14||$11.0|
|Avago Technologies Ltd.||LSI Corp.||5/6/14||$11.0|
Source: Warranty Week from SEC data
While many companies report when they make an acquisition that also includes acquired warranty reserves, they don't always say which acquisition was involved. For instance, Textron reported $67 million in acquired warranty reserves in its 2014 annual report, but didn't say which company was involved.
Most of that amount first appeared in its first quarter report, which is when it spent $1.5 billion to acquire Beech Holdings LLC, the parent company of Beechcraft Corp. But Textron also made seven smaller acquisitions during the year, so not all of the $67 million came from Beechcraft.
Textron owns the Cessna brand, with which it combined Beechcraft in a new aviation business segment. Cessna was sold to Textron in 1992 by General Dynamics Corp., which later acquired Gulfstream Aerospace. Beech Aircraft Co., which actually began its operations in an unused Cessna factory, was acquired by Raytheon, which spun it off into an entity called Hawker Beechcraft. That company went bankrupt, and then Textron stepped in to acquire it. In its time as an independent company, Beechcraft reported warranty reserves in the range of $40 to $68 million, which is in line with what Textron reported as an acquisition.
BorgWarner, on the other hand, explicitly named Gustav Wahler GmbH as the reason for its report of $64.9 million in acquired warranty reserves in March 2014. Wahler is a producer of exhaust gas recirculation valves, actuators, and thermostats, which are used to reduce engine emissions. BorgWarner continues to use the Wahler brand name in the aftermarket, but the bulk of the acquired assets were integrated into the BorgWarner Emissions Systems business.
In the second quarter of 2015, BorgWarner reported an adjustment of that $64.9 million addition. In order to settle a warranty claim that pre-dated its Wahler acquisition, BorgWarner paid out $17.1 million from its warranty reserve fund. But rather than report it as a change of estimate for prior years, it reported the amount paid as a negative acquisition.
In September 2014, building product maker Ply Gem Holdings acquired Fortune Brands Windows Inc. and its subsidiaries Simonton Building Products LLC, Simonton Industries Inc., Simonton Windows Inc., and SimEx Inc., all of which are collectively now known as Simonton Windows & Doors Inc. Of the $48.2 million in acquired warranty reserves the company reported in 2014, about $42.9 million came from this acquisition. The rest came from several smaller acquisitions, including those of Gienow WinDoor Ltd., Greendeck Products LLC, and Mitten Inc.
This year, Ply Gem made another small acquisition, of Canyon Stone Inc., through which it acquired $100,000 in warranty reserves. But its warranty accounting of the Simonton acquisition continues to require adjustments, as the true cost of past claims are reassessed. "More specifically," the company said, "the analysis of Simonton's warranty liability is open for further evaluation of historical claims data." And so, it reduced the amount of acquired reserves by $8.0 million in the second quarter of 2015, but then added back in $241,000 in the third quarter. The company says it has now finalized the acquisition accounting adjustments.
Signet Jewelers reported $28.4 million in acquired warranty reserves in the fiscal year ended January 31, 2015. The source of those funds wasn't specifically named in the company's annual report, but it acquired Zale Corp. for $1.46 billion in May 2014. That brought into the company retail brands such as Zales Jewelers, Peoples Jewellers, Gordon's Jewelers, Piercing Pagoda, and Mappins Jewellers, which joined Signet's existing brands: Kay Jewelers, Ultra Stores Inc., H.Samuel, Ernest Jones, and Leslie Davis.
As we explained in last week's newsletter, Medtronic Inc. acquired the Irish company Covidien plc, moved its headquarters to Dublin, and renamed itself Medtronic plc. In its annual report for the year ended April 24, 2015, alongside the $74 million "technology upgrade commitment" it made, it also listed $23 million in warranty reserves acquired from Covidien.
In October 2014, Zebra Technologies acquired the "enterprise business" of Motorola Solutions Inc. for $3.45 billion. That acquisition also brought with it $20.5 million in acquired warranty reserves, which helped to boost Zebra's warranty reserve balance from $4.1 to $24.7 million last year.
Advanced Energy Industries
Advanced Energy Industries made several acquisitions last year, the largest of them being its purchase of the UK-based HiTek Power Group in April. It also acquired a company based on Long Island called UltraVolt Inc., and it acquired a power control module product line from the AEG Power Solutions Group. The sum total of these acquisitions resulted in a $19.7 million increase in warranty reserves listed in the company's 2014 annual report.
Westinghouse Air Brake
Westinghouse Air Brake Technologies Corp., or Wabtec for short, made several railroad-related acquisitions in 2014 that contributed to a $14.375 million increase in its warranty reserves last year. In June, it acquired the British manufacturer Fandstan Electric Group Ltd. for $199 million. In August, it acquired the Brazilian company Dia-Frag Industria Comercio Motopecas Ltda. for $70.6 million. In January, it acquired the Texas-based company Railroad Controls LP from RCL Services Group LLC for $63.7 million. And in September, it acquired the Australian design company C2CE Pty Ltd. for $25.1 million.
Toll Brothers acquired homebuilder Shapell Industries Inc. for $1.49 billion in February 2014. In the fiscal year ended October 31, 2014, it reported an increase of $11.0 million in its warranty reserve fund for "liabilities acquired." However, as we reported in last week's newsletter, Toll Brothers made several additional quality-related adjustments last year that added $35.4 million more to its warranty reserve fund, which helped to double its size from $43 to $86 million.
Semiconductor manufacturer Avago Technologies acquired LSI Corp. for $6.5 billion in May 2014. Included in this transaction was the acquisition of $11.0 million in warranty reserves, which the company first reported in its financial statement for the quarter ended August 3, 2014.
However, later in fiscal 2014, Avago sold one part of LSI to Seagate Technology for $450 million and another part to Intel Corp. for $650 million. But there were no adjustments made to that $11 million balance in the company's annual report for the year ended November 2, 2014. And in the company's financial reports so far this year, the company simply reports that "changes in accrued warranty were not material."
Other noteworthy transactions include the acquisition of Stanadyne Holdings Inc. by engine filtration product maker Clarcor Inc.; the aforementioned acquisition of LSI's flash drive business from Avago Technologies by Seagate Technology as well as Seagate's acquisitions of Xyratex Ltd. and a majority stake in LaCie S.A.; the acquisition of Life Technologies Corp. by lab equipment maker Thermo Fisher Scientific Inc.; and the acquisition of Livin' Lite Corp., Bison Coach LLC, and KZ Inc. by recreational vehicle maker Thor Industries Inc.
Top Acquired Companies
The flip side of the acquiring companies is the list of acquired companies. There's not always a one-to-one correspondence, because some of the acquiring companies are based outside the United States, while others are privately-held U.S. companies, and therefore they don't have to report their warranty expenses publicly. Also, some of the acquiring companies disregard the relevant accounting regulations and forget to reveal their warranty expenses publicly because enforcement is so lax.
The ten examples below are companies that used to report their warranty expenses but have stopped doing so during the 18 months between the beginning of 2014 and the middle of 2015. In Figure 2 we've listed their names, the names of the companies that acquired them, the date of that transaction, and the last reported amount of warranty reserves involved.
Top 10 Warranty Acquisitions
of U.S.-based Companies
Jan. 2014 to June 2015
Ranked by Reserves Acquired
(in $ millions)
|TRW Automotive Holdings||ZF Friedrichshafen AG||5/15/15||$157|
|Foster Wheeler AG||AMEC plc||11/13/14||$68.8|
|Dresser-Rand Group Inc.||Siemens AG||6/30/15||$17.8|
|CareFusion Corp.||Becton, Dickinson and Co.||3/17/15||$16.0|
|DriveTime Automotive Group||management buyout||7/29/14||$11.9|
|LSI Corp.||Avago Technologies Ltd.||5/6/14||$8.19|
|Aruba Networks Inc.||Hewlett-Packard Enterprise||5/19/15||$1.36|
|Overland Storage Inc.||Sphere 3D Corp.||12/2/14||$1.33|
|Cobra Electronics Corp.||Monomoy Capital Partners||10/8/14||$0.853|
|Zygo Corp.||Ametek Inc.||6/18/14||$0.727|
Source: Warranty Week from SEC data
TRW Automotive Holdings
TRW Automotive Holdings Corp. was acquired in May 2015 by the German company ZF Friedrichshafen AG, also known as the ZF Group. At last report, it had $157 million in warranty reserves on hand, and was spending roughly $3 to $4 million per month on warranty claims.
The ZF Group, founded in 1915, originally made parts for airships and dirigibles but later moved on to automobiles. It currently supplies powertrain components to BMW, Ford, and Chrysler, among others.
TRW is an acronym created from the last names of Charles Thompson, Simon Ramo, and Dean Wooldridge, who founded some of the predecessor companies rolled up into TRW Inc. When Northrop Grumman acquired TRW in 2002, it spun off the automotive operations into the company ZF eventually acquired. Other spin-offs and associated companies include Experian, Bunker-Ramo, and Pacific Semiconductors.
Count Ferdinand von Zeppelin, the founder of ZF, eventually lent his name to both a type of airship and a famous British rock group. He opened his first airship factory in Friedrichshafen, on the shores of Lake Constance in southern Germany. One of its most infamous airships was the Hindenburg, which crashed like a lead balloon in New Jersey in 1937. The company eventually formed a joint venture with the Goodyear Tire and Rubber Co., makers of the Goodyear Blimp that patrols the skies during numerous major sporting events, parades, and outdoor concerts.
Foster Wheeler, a mining engineering and construction company, merged last November with the British company AMEC plc. The companies are today known as Amec Foster Wheeler plc, with their headquarters in London.
Foster Wheeler was an American company until it moved its headquarters to Bermuda and eventually to Zug, Switzerland. Along the way it changed its name from Foster Wheeler Inc. to Foster Wheeler AG. At the time of its acquisition, Foster Wheeler reported having $68.8 million in warranty reserves on hand. However, Amec Foster Wheeler does not include any warranty expense data in its financial reports, so we don't know the current status of those funds.
Dresser-Rand Group Inc., makers of oil and gas drilling equipment, was acquired by Siemens AG in June 2015. In its final financial statement it reported $17.9 million in warranty reserves.
Dresser-Rand was initially a joint venture between Dresser Industries and Ingersoll-Rand. In 1998, Dresser merged with Halliburton, and in 2000 Ingersoll-Rand bought the other half of the joint venture. Ingersoll-Rand sold it to a private equity company a few years later, which took it public in 2005.
Medical equipment company CareFusion, which was spun off by Cardinal Health Inc. in 2009, was acquired by Becton, Dickinson and Co. in March 2015. At last report, CareFusion had $16 million in warranty reserves. However, BD does not report any warranty activity in its financial statements, despite having a medical device manufacturing operation that reported $4.57 billion in revenue in its most recent fiscal year.
DriveTime Automotive Group Inc. is a used car dealer network based in Phoenix. It operates 134 dealerships across the U.S., focusing on customers with poor credit histories. It equips the vehicles it sells with a 30-day limited warranty, for which it accrues funds in a warranty reserve. The company also sells DriveCare vehicle service contracts, which cover the vehicles for an additional 36 months or 36,000 miles (5 years/50,000 mile in some states).
DriveTime filed its last quarterly financial statement with the U.S. Securities and Exchange Commission in May 2014, and notified the SEC in July 2014 that it was delisting its shares and those of its sister company, DT Acceptance Corp. At that time, it had $11.88 million in its warranty reserve fund. Its major shareholders included chairman Ernest C. Garcia II and CEO Raymond C. Fidel.
In late 2014, the Consumer Financial Protection Bureau fined DriveTime $8 million for making harassing debt collection calls and providing inaccurate credit information to credit reporting agencies. The CFPB also required DriveTime to end the unfair calling practices, correct inaccurate credit reporting information, and take other remedial actions.
We already covered the acquisition of semiconductor maker LSI by Avago Technologies in the section above. However, here we'll note that while Avago reported the acquisition from LSI of $11.0 million in warranty reserves, LSI reported having only $8.19 million in warranty reserves as of March 30, 2014. So the reports of the acquirer and the acquired don't precisely line up with each other, although there is a four-month gap between them, during which additional accruals and other adjustments could have been made.
Wireless network infrastructure company Aruba Networks was acquired in May 2015 by what was then called Hewlett-Packard Co., but which is now called Hewlett Packard Enterprise Company, following HP's own split into two operating companies. HPE, the operating company focused on business customers, also acquired Aruba's $1.36 million in warranty reserves. The other half of the company, now called HP Inc., sells printers and PCs.
Overland Storage lost money for multiple years on its storage network product line before being acquired by the Canadian company Sphere 3D Corp. in December 2014. Along with that acquisition came $1.33 million in warranty reserves.
Cobra Electronics, makers of Citizens Band (CB) radios, GPS navigation systems, radar detectors, dash cams, and marine radio systems, was acquired by the private equity firm Monomoy Capital Partners in October 2014. At least $853,000 in warranty reserves were included in that transaction. In June 2015, Monomoy merged Cobra with Escort Inc. and renamed the combined companies Cedar Electronics Holdings Corp.
Zygo Corp., a manufacturer of optical and laser measurement equipment, was acquired in June 2014 by Ametek Inc. In its final quarterly financial statement, Zygo listed $727,000 in warranty reserves.
Ametek, meanwhile, reported $2.9 million in warranty reserves acquired during 2014. Besides Zygo, it reported the acquisitions of four other companies: Teseq Group; VTI Instruments; Luphos GmbH; and Amptek Inc. The combined cost for all five was $574 million, but Ametek didn't break them out individually.
Also worth noting are the acquisitions of Oplink Communications Inc. by a subsidiary of Koch Industries Inc.; the acquisition of BTU International Inc. by Amtech Systems Inc.; the acquisition of ChyronHego Corp. by the private equity firm Vector Capital; and the acquisition of Measurement Specialties Inc. by TE Connectivity Ltd.
And finally, in June 2015, the Babcock & Wilcox Co. spun off its power generation equipment operations into a new entity called Babcock & Wilcox Enterprises Inc. It then renamed itself BWX Technologies Inc., with that part of the company retaining the focus on nuclear power plants and nuclear propulsion systems used in submarines and aircraft carriers.
At the end of 2014, the parent company reported a total of $53.6 million in warranty reserves, including $4.7 million it acquired along with the air pollution control system manufacturer formerly known as Megtec Systems Inc.. Of that total, the piece now known as BWX Technologies ended up keeping $15.9 million in warranty reserves while its spin-off departed with the remaining $37.7 million.