March 15, 2018

Top 100 Warranty Providers of 2017:

While total claims and accruals fell last year, some companies saw their warranty costs soar. By comparing each company to itself over time, we can spot the most and least improved warranty providers. And we can also spot the accounting eccentricities of those few that act like nobody's watching.

As we begin our fifteenth year of measuring the warranty expense reports of the largest warranty providers in the U.S., we continue to resist the temptation to compare one company to another. Instead, we will compare each company to itself over time, and then we'll measure the changes.

In other words, rather than shine a spotlight on the tallest child, we're going to measure which child grew the most in the past year. But because warranty expenses can both rise and fall, we're also going to measure who shrunk the most. And because of the tremendous range in sizes between the companies, we're going to measure the changes proportionally, in percentages, rather than in dollars.

Comparing Companies to Themselves

As we have in years past, we began with a list of all U.S.-based warranty providers, both manufacturers and retailers, who report the amount of claims paid, accruals made, and reserves kept at least once a year in their financial statements (most report these metrics quarterly). We gathered these warranty metrics for each company, along with figures for product sales. The figures for claims paid and accruals made were divided by product sales to derive a pair of percentages representing the claims rate and the accrual rate for each company.

We then ranked all the companies by the amount of claims paid in calendar 2017, from largest to smallest. Then we shortened the list to just the top 100. However, we then determined that four members of the top 100 did not provide a complete set of warranty metrics last year. Bio-Rad Laboratories Inc. announced that it would be late to file its annual report because of the chaos unleashed by a recent software upgrade gone awry. AutoZone Inc., Mohawk Industries Inc., and Medtronic plc, for one reason or another, have decided not to follow accounting regulations any longer, and have discontinued providing investors with the required details about their warranty expenses.

Rather than shorten the list to 96 members, we added four replacements, which reported paying between $23.5 and $24.4 million in warranty claims during 2017. They were Fortune Brands Home & Security Inc., M/I Homes Inc., Regal-Beloit Corp., and Teradyne Inc., and they would rank as warranty providers number 101 to 104 had it not been for the four companies we scratched.

Fortune Brands and Regal-Beloit have made it onto the top 100 list in years past. M/I Homes and Teradyne are newcomers. Other companies making the top 100 list for the first time include Acuity Brands Inc., Cavco Industries Inc., Taylor Morrison Home Corp., Valmont Industries Inc., and Winnebago Industries Inc. Note that several of those are homebuilders or RV manufacturers, who have made a strong comeback since the last recession. And along with increased sales come increased warranty expenses.

With a list of the top 100 U.S.-based warranty providers in hand, we went about comparing their 2017 year-ending warranty metrics with their corresponding 2016 metrics, looking for the companies whose claims rate, accrual rate, or warranty reserve balance had changed the most over the past year. The reason we do it this way is because while it's dangerous to compare companies to one another without knowing all the subtle difference between them of how they calculate warranty expenses, it's much safer to compare companies to themselves over time.

Biggest Annual Changes

In other words, while it might be interesting to note that Standard Motor Products Inc. had the highest claims rate of the top 100 (at 8.7%), and Goodyear Tire & Rubber Co. had the lowest claims rate of the group (at 0.2%), we can't compare the two without knowing all the details of how they put together their warranty expense reports. It's far more relevant to be able to say that Standard Motor Products' claims rate is down a bit from a year ago while Goodyear's is about the same as it was at the end of 2016.

Implicit in this statement is the belief that they haven't changed the way they count their warranty expenses in the months between. In other words, if at first they choose to calculate parts cost at full retail, they don't suddenly switch to manufacturing cost or replacement prices. If they determine one year that 60% of their call center costs are warranty-related, they don't determine a year later that only 10% of them are. But that still leaves plenty of other ways to change warranty costs, such as lengthening or shortening warranty terms, or shutting down or selling off a problem-plagued product line.

The next step was to determine which companies were up or down the most. This we translate into statements about the biggest problems with warranty cost increases, or the biggest successes with warranty cost reductions. In other words, absent some mitigating factor such as an acquisition or a product line change, these are the companies that are either celebrating or regretting the past year's warranty expense record (although some may not know they're on the best or worst list).

Figures 1 and 3 are the best lists to be on. Figures 2 and 4 are the worst lists. We'll reserve making any statement about the merits of being on either Figures 5 or 6, because increasing or decreasing warranty reserve balances may not be good or bad in the same way as increasing or decreasing claims or accrual rates.

However, we will say that making it onto three of the six lists (the maximum) is a clear sign of either massive pain or massive gain. Only four companies managed to do this: Beazer Homes and NetApp Inc. had the most pain, and Diebold Nixdorf Inc. had the most gain. And then Aptiv plc (the parts supplier formerly known as Delphi Automotive) had a bit of both, with its warranty metrics going in conflicting directions. In addition, there were 11 companies that made it onto two lists, and 26 that made it onto just one list. And then there were 59 out of the top 100 that made it onto zero lists, illustrating their stability in terms of keeping the changes to their warranty expenses relatively small.

Warranty Claims Reductions

As we mentioned, Figure 1 is a good list to be on. These are the top 10 warranty claims rate reductions, from the end of 2016 to the end of 2017. Beazer Homes, for instance, cut its claims rate by almost three-quarters, from 4.4% at the end of 2016 to 1.1% at the end of 2017. In Figure 4, however, we'll see that they raised their accrual rate by almost half, and in Figure 5 we'll see that they cut their warranty reserves by more than half, thereby taking the 2017 crown for most chaotic warranty expense report.

The other big change in 2017 is the increased presence of very large warranty providers on some of these lists. Last year, only three companies that paid out more than $1 billion in claims, and only 32 paid between $100 million and $1 billion in claims. Fifteen of them made it onto one of these six lists. Five of them made it onto the first list: Apple Inc., Boeing Co., Caterpillar Inc., Emerson Electric Co., and HP Inc. That's unusual.

Figure 1
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Reductions,
Calendar Year 2017 vs. 2016
(claims as a % of product sales)

   Claims   Latest  Rate
  Paid ($m) Claims Year
  Company  in 2017   Rate   Ago 
  Beazer Homes $29 1.1% 4.4%
  Emerson Electric $136 0.8% 1.3%
  Apple Inc. $3,967 1.2% 1.9%
  Diebold Nixdorf Inc. $65 3.8% 5.5%
  Allison Transmission $30 1.3% 1.9%
  NetApp Inc. $30 0.9% 1.1%
  Varian Medical Systems $42 2.4% 3.1%
  Caterpillar Inc. $860 2.0% 2.5%
  HP Inc. $999 2.6% 3.3%
  Boeing Co. $241 0.4% 0.5%

    Source: Warranty Week from SEC data

There's also a new name on the list: Diebold Nixdorf Inc., which was formed when ATM manufacturer Diebold Inc. acquired the German company Nixdorf Computer. The company reported $43.8 million in acquired warranty reserves during the third quarter of 2016, and began to report a declining claims rate almost immediately thereafter.

Warranty Claims Rate Increases

Figure 2 lists the top 10 claims rate increases. This time, there are only two very large warranty providers on the list. Aptiv saw its annual claims payments rise from $85 million to $143 million, and thereby raised its claims rate from 0.5% to 0.8%. While a 0.3% rate increase doesn't sound like much, it hurts more when you express it as a 68% increase in dollars spent. And then General Dynamics, makers of the Gulfstream business jets, saw its claims cost rise by more than a third from $91 million to $123 million, and its claims rate rise from 1.4% to 1.9%. That hurts.

Figure 2
Top 100 U.S.-based Warranty Providers:
Top Ten Claims Rate Increases,
Calendar Year 2017 vs. 2016
(claims as a % of product sales)

   Claims   Latest  Rate
  Paid ($m) Claims Year
  Company  in 2017   Rate   Ago 
  Visteon Corp. $41 1.3% 0.7%
  Dover Corp. $73 0.9% 0.5%
  Juniper Networks Inc. $51 1.5% 0.9%
  Toll Brothers Inc. $82 1.4% 0.9%
  Aptiv plc $143 0.8% 0.5%
  Teradyne Inc. $24 1.4% 0.9%
  Tempur Sealy International $44 1.7% 1.1%
  General Dynamics $123 1.9% 1.4%
  Coherent Inc. $38 2.6% 1.8%
  Welbilt Inc. $34 2.4% 1.7%

    Source: Warranty Week from SEC data

Visteon, we should note, almost doubled its claims cost last year, though none of that pain made its way to appearances on any other top 10 lists. In recent years, it had kept its claims low, and actually fell off the top 100 list from 2010 to 2016. However, six other members of the Figure 2 list saw their claims rates soar by 50% or more in 2017, and five of them also made a second appearance on one of the lists below. The one that didn't make a second appearance, the homebuilder Toll Brothers, kept its accruals about the same, despite seeing its claims soar by almost two-thirds. That in turn led to a $42 million decline in warranty reserves, but that wasn't enough to make the top 10.

Warranty Accrual Rate Reductions

Before we get to any more pain, however, we want to point out that Figure 3 is the absolute best list to get onto. These are the top 10 accrual rate reductions, and since accrual rates are determined by future expectations of reliability and repair costs, they shouldn't be reduced by massive amounts unless a company expects vastly increased product quality, significantly reduced failure rates, or serious declines in repair costs.

Nonetheless, all of these companies reduced their accrual rates by 30% to 50%. Diebold Nixdorf, for instance, reduced its accrual rate from 3.8% to 2.1%. Apple cut its accrual rate from 3.3% to 1.8%. The savings for Diebold was only $15 million, but for Apple it represented a $600 million reduction in expenses.

For Honeywell, the accrual rate reduction from 1.0% to 0.7% represented a $111 million gain. For Polaris, it was a $49 million gain. We certainly hope these massive improvements were reflected in the size of the warranty managers' year-end bonuses. If not, please forward a clipping of this newsletter to the finance department.

Figure 3
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Reductions,
Calendar Year 2017 vs. 2016
(accruals as a % of product sales)

   Accruals   Latest  Rate
  Made ($m) Accrual Year
  Company  in 2017   Rate   Ago 
  Diebold Nixdorf Inc. $36 2.1% 3.8%
  Apple Inc. $3,592 1.8% 3.3%
  Wabco Holdings Inc. $33 1.0% 1.7%
  Polaris Industries Inc. $146 2.7% 4.3%
  Honeywell International $215 0.7% 1.0%
  RPM International Inc. $23 0.4% 0.6%
  PulteGroup Inc. $50 0.6% 0.9%
  Aptiv plc $76 0.4% 0.5%
  Sherwin Williams Co. $40 1.1% 1.6%
  Xylem Inc. $28 0.6% 0.8%

    Source: Warranty Week from SEC data

We should note that while claims are what happens to you, accruals are what you think is going to happen. Normally, when claims rise, so do accruals. But sometimes, they move in opposite directions, for unknown reasons. For instance, Aptiv made an appearance in Figure 2 because its claims rate rose by more than half. Yet here it is in Figure 3 for cutting its accrual rate by almost a third. Those movements would seem to be at odds with each other, and would suggest that the company believes that while costs are rising now, they will fall soon. We shall see in a year if that's true.

Warranty Accrual Rate Increases

Figure 4 is the list that nobody wants to be on. These are the ten companies that had to raise their accrual rates the most, suggesting that they expect warranty costs to soar. All of these rates were up by more than a third, and one -- NetApp -- was actually up by more than 500% (from 0.14% to 0.87%). In terms of serious amounts of money, the accrual increase at Cummins was $223 million, and was $46 million at Eaton. That has got to hurt.

Figure 4
Top 100 U.S.-based Warranty Providers:
Top Ten Accrual Rate Increases,
Calendar Year 2017 vs. 2016
(accruals as a % of product sales)

   Accruals   Latest  Rate
  Made ($m) Accrual Year
  Company  in 2017   Rate   Ago 
  NetApp Inc. $20 0.9% 0.1%
  Tempur Sealy International $50 2.0% 1.2%
  Manitowoc Co. Inc. $35 2.2% 1.3%
  Varian Medical Systems $50 3.9% 2.3%
  Welbilt Inc. $33 2.3% 1.5%
  Beazer Homes $16 1.1% 0.8%
  Cummins Inc. $557 2.7% 1.9%
  Winnebago Industries $38 2.2% 1.6%
  Flowserve Corp. $35 1.0% 0.7%
  Eaton Corp. $163 0.8% 0.6%

    Source: Warranty Week from SEC data

Manitowoc may want to qualify its appearance on this list by pointing out that it spun off its food service equipment operations into a company now called Welbilt Inc. The problem is, Welbilt also made the list.

NetApp might try to explain away the massive increase in accruals by pointing out that it artificially reduced its accruals in 2016, so 0.87% is really just a return to normal, not a massive spike. However, investors might then want to know if that artificial reduction was made a year ago to avoid reducing earnings below 39 cents per share. In other words, let's drop the subject.

Warranty Reserve Reductions

As was mentioned, an appearance on the lists in Figures 5 or 6 isn't necessarily good or bad, in the sense that there are plenty of good reasons why the balance might double or triple, or fall by half or more. So perhaps what we should do is simply point out which companies are making an appearance for the second or third time, which serves to confirm that they really are changing the most among their peers.

In that respect, Diebold is making its third appearance in the list below, after reducing both its claims and accrual rates by massive proportions. So that's something of a triple crown: leading all three lists in terms of warranty cost reductions. In contrast, Aptiv, Beazer Homes, and NetApp made conflicting appearances on previous lists -- one up and the other down. So they get the batting title for most conflicted.

Also, in terms of curious behavior, both Juniper Networks and Dover Corp. reduced their warranty reserves after seeing their claims rates rise, which suggests that they declined to raise accruals (and cut earnings) in response to whatever caused the problem with claims. Good luck with that.

Figure 5
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Reductions,
Calendar Year 2017 vs. 2016
(reserves in US dollars)

   Warranty   Warranty  vs.
  Reserve Reserve Year
  Company  12/31/16   12/31/17   Ago 
  Aptiv plc $161 $58 -64%
  Beazer Homes $32 $16 -51%
  Juniper Networks $41 $27 -34%
  Dover Corp. $85 $62 -27%
  Valmont Industries $27 $20 -24%
  Navistar International $818 $629 -23%
  Diebold Nixdorf Inc. $99 $77 -23%
  Regal-Beloit Corp. $20 $16 -21%
  NetApp Inc. $54 $44 -19%
  Xylem Inc. $99 $82 -17%

    Source: Warranty Week from SEC data

Navistar cut its warranty reserves by a massive $189 million, which earned it a sixth place finish. And then there are a bunch of companies that made equally massive reserve reductions, but didn't make the top 10 cut. For instance, Honeywell reduced reserves by $79 million but was in 11th place (-16%). Boeing cut $203 million, but was in 12th place (-14%). HP cut $82 million and was in 25th place (-8%).

Apple cut reserves by $375 million, but that put it into 14th place (-8%). In fact, out of the nine U.S.-based companies that ended 2017 with a billion dollars or more in their warranty reserve funds, only Apple, Boeing, Caterpillar, and Cummins made any top 10 lists. And none of them featured in either Figures 5 or 6.

Warranty Reserve Increases

In Figure 6, we're listing the top 10 warranty reserve balance increases of 2017, which again may be neither good nor bad. In fact, some of these can be explained away by the fact that the companies made massive acquisitions, and added the acquired reserves to its own. For instance, Sherwin Williams acquired Valspar Corp. and added $110 million in acquired reserves to its previous balance. Rockwell Collins acquired B/E Aerospace Inc. and added $117 million to its reserves. Stanley Black & Decker bought the Craftsman brand from Sears, and added $68 million to its warranty reserve balance.

Figure 6
Top 100 U.S.-based Warranty Providers:
Top Ten Warranty Reserve Increases,
Calendar Year 2017 vs. 2016
(reserves in US dollars)

   Warranty   Warranty  vs.
  Reserve Reserve Year
  Company  12/31/16   12/31/17   Ago 
  Sherwin Williams Co. $34 $151 +340%
  Teradyne Inc. $7.2 $24 +239%
  Rockwell Collins Inc. $84 $186 +121%
  Stanley Black & Decker $103 $176 +70%
  Tesla Inc. $267 $402 +51%
  Lam Research Corp. $119 $180 +51%
  D.R. Horton Inc. $108 $149 +39%
  Acuity Brands Inc. $18 $24 +37%
  Emerson Electric Co. $96 $128 +33%
  Winnebago Industries $25 $33 +32%

    Source: Warranty Week from SEC data

And then there are a few companies that are growing so quickly that it's inevitable that their warranty reserves are doing likewise. For instance, Tesla saw a 53% increase in product sales. Winnebago saw an 83% increase in sales. Product sales at Lam Research rose 37%. Teradyne sales rose 23%. Emerson sales rose 19%. While their warranty reserve balance increases weren't precisely proportional, at least they were in the same direction.

By comparing companies against themselves over time, the relative size of the company doesn't matter as much. Instead, it's the size of the change that matters, with a warranty metric that doubles or halves in a year causing a company to make one of these lists. Usually, the largest warranty providers are stable enough to avoid big changes in their percentage rates, though as was mentioned, some of the largest warranty providers, such as HP, Apple, Navistar, Caterpillar, and Cummins did in fact make the lists this year.

In raw dollar terms, however, some of the biggest changes didn't move the percentage rates enough to make a top 10 list. For instance, GM cut its claims cost by $581 million, but its claims rate barely budged. Ford paid out $171 million more in 2017 than it did in 2016, but again, its claims rate barely budged.

Thor Industries Inc. saw claims rise by $56 million, but sales rose so fast that its claims rate actually fell. The same thing happened at Lennar Corp., Applied Materials Inc., and Westinghouse Air Brake Technologies Corp.

It was the same story with accruals. GM cut its accruals by $733 million, but the percentage rate that produced was only 38th out of 100 -- far out of the top 10 listed in Figure 3. Cisco Systems Inc. cut its claims, accruals, and reserves, but failed to make a single top 10 list for all its efforts. At the other extreme, both GE and Deere raised their accruals by about $200 million, but it wasn't enough to make a single list.

In what has to be the most unheralded reduction of all, GM cut its reserves by a whopping $1.37 billion, but in percentage terms that was good enough only for 14th place. GE boosted its balance by $444 million, but that was only the 16th largest increase of the year. Other massive dollar increases in reserve balances were reported by John Deere, Ford, United Technologies, and AGCO Corp., but in terms of percentages, they all missed out on the top 10.

In other words, it's all relative, and in this case, the metrics in 2017 relate to the same metrics in 2016. So what we're really measuring is who changed the most, compared to themselves a year ago. And on that scale, GM, GE, Cisco, Ford, and Deere simply didn't change enough.

More To Come

In the weeks and months ahead, we will take a deeper dive into some of these companies and the industries to which they belong. For now, we'll leave you with some top-level numbers. In 2017, U.S.-based companies reported paying about $24.7 billion in claims, making about $23.6 billion in accruals, and holding about $42.8 billion in warranty reserves. As such, these top 100 companies represented about 92% of the total.

All the warranty metrics declined in 2017, as did sales. Claims fell by 6.4%, and accruals fell by 3.6%. Warranty reserves were down by 1.5%. And because of a parallel decline in sales, the U.S. average claims and accrual rates both fell slightly, from 1.4% to 1.3%, which is in the range of where they've been for most of the past six or seven years.

Way back in 2003, however, the average claims and accrual rates for all companies were over 1.8%, while the amount of claims paid and accruals made in dollars were about the same. In other words, over the past 15 years, sales rose but expenses didn't, so expense rates fell by half a percentage point. That suggests a tremendous reduction in warranty costs. And when you're talking about roughly $2 trillion in manufactured and warranted products sold, that half a point represents a tremendous amount of money saved and never spent.

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