May 25, 2023

U.S. Semiconductor Warranty Report:

The semiconductor industry set new records in accruals and reserves, bolstered by Nvidia Corp.'s high warranty expenses due to a part malfunction. Key players in the industry have emerged in the past five years, though many companies could not weather the Great Recession, which had a profound and lingering effect on this industry.

As we saw in last week's U.S. Computer Industry Warranty Report, total semiconductor warranty claims, accruals, and reserves have grown considerably in the past few years. The pandemic disrupted this upward trajectory, but warranty accruals and reserves both hit record highs for this industry in 2022.

This year, we have changed our framing of the U.S.-based semiconductor and printed circuit board industry. In the past, we've included solar panel manufacturers such as SunPower, SolarEdge, and First Solar among this group of companies, but for our 20-year charts, we moved the renewable energy companies to the power generation category. Likewise, we moved Honeywell International Inc. to the aerospace industry, to better represent the company's primary activity. These changes brought the historic annual warranty expense totals down for the semiconductor industry, compared to the numbers we've reported in the past.

We also evaluated the dichotomy between semiconductor manufacturing equipment and semiconductors & PCBs. Previously, we've broken the industry into these two categories, showing that the warranty expense rates for the equipment makers were notably higher than the expense rates of those making the semiconductors themselves. This differs from the typical pattern, where the expense rates of the equipment suppliers are lower than those of the makers themselves.

But the categories don't really work anymore, for two main reasons. First, the solar companies comprised a significant portion of the manufacturing equipment category, and without them, the data doesn't show the same distinction between the two groups. And second, the semiconductor companies are becoming increasingly complex, and the categories don't capture these levels. For example, Lam Research, one of the biggest companies on our list, creates components of semiconductors and sells them to other companies. So it's a supplier to the semiconductor industry, which in turn supplies circuit boards, graphics cards, etc. to the computer and other industries.

The semiconductor industry can no longer be simplified to manufacturing equipment and semiconductors & PCBs. The leading companies on our list delve into chips and microprocessors, high-performance computing, graphics processing units (GPUs), flat panel displays (FPDs), wafer fabrication, lasers, artificial intelligence, software, robotics, autonomous vehicles, and more. They're innovative and they often have a wide breadth. In this report, we're looking at the semiconductor industry as a whole, with emphasis on the top companies and those with the biggest changes in their warranty expenses.

Every year since 2003, we've gathered data on the semiconductor industry's warranty metrics. Despite our recategorization of a few companies, this year, we began with a list of 155 U.S.-based manufacturers with a significant presence in the semiconductor and printed circuit board industry. These companies create parts that are foundational to computers and other electronic devices.

From each of these companies, we extracted three essential warranty metrics from their annual reports and quarterly financial statements: the amount of claims paid per year, the amount of accruals made per year, and the balance in their warranty reserve funds at the end of each calendar year. For companies whose fiscal years did not end on December 31, we used the figures from the quarter that ended closest to, but not after, December 31, combined with the three previous quarters.

For each of the three metrics, we ranked the 155 companies by total, to identify the top 10. These leading companies in terms of warranty expenses were: Lam Research Corp., Applied Materials Inc., Advanced Micro Devices Inc. (AMD), Nvidia Corp., Teradyne Inc., Kulicke and Soffa Industries Inc., Onto Innovation Inc., Cohu Inc., Veeco Instruments Inc., Axcelis Technologies Inc., Coherent Corp., and Monolithic Power Systems Inc. (MPS).

We also gathered product sales revenue data, which in each case was based upon the segmentation provided by each manufacturer. Most segmented their product and service revenue, and some also segmented their product revenue into capital equipment and consumables. The goal was to find the figures that approximated the revenue derived from the sale of the products that came with warranties, separate from something like software that usually does not. The next step was to take the claims and accrual data, and divide each by this sales data, so we could calculate the percentage of revenue spent on claims (the claims rate) and the percentage of revenue spent on accruals (the accrual rate).

As an aside, we'd also like to note that Intel is not included in this report, since the company does not report its warranty expenses in its annual or quarterly reports. We're not sure why, since the SEC requires all companies that publicly trade in the U.S. to do so. This report is populated by its main U.S.-based competitors, including AMD and Nvidia.

Warranty Claims Totals

Figure 1 shows warranty claims payments totals in the semiconductor & PCB industry over 20 years, from 2003 to 2022.

Figure 1
Semiconductor Industry Warranties
Claims Paid by U.S.-based Companies
(in US$ millions, 2003-2022)

Figure 1

In 2022, the industry paid $799 million in claims, a 23%, or $147 million, rise from 2021. This is the second year in a row that total claims have risen by around $150 million; in 2020, the industry paid $500 million, and in 2021, $650 million.

We can see that the industry was paying just about the same amount of claims pre-recession, back in 2006 to 2008. In 2008, the claims total was $802 million, the highest we've seen for the industry. The effect of the recession lingered, and warranty claims remained low until 2016. In fact, the industry's lowest claims total of $453 million was recorded in 2016.

One company had an unfortunate spat of product failures in 2009, which actually boosted the industry totals between 2009 and 2011, explaining the second drop between 2011 and 2012, after the initial recession-induced crash from 2008 to 2009. It appears that a lot of smaller companies slowly went out of business or were acquired during the recession and its aftermath. We can see this better in Figure 2, which breaks down these totals by the top 10 claims payers in the industry in 2022.

Figure 2
Semiconductor Industry Warranties
Claims Paid by Top U.S.-based Companies
(in US$ millions, 2003-2022)

Figure 2

As we can see in Figure 2, Nvidia's warranty expenses ballooned from 2009 to 2011, despite the recession. Without the Nvidia bar, we can imagine that the claims totals immediately after the recession would have been around the same level as they were from 2013 to 2016.

In late 2008, it was discovered that Nvidia's GeForce 8600M GT GPU was manufactured with a faulty contact material inside its package, which can fail over time. These graphics processing units were used in Apple MacBook Pros produced between May 2007 and September 2008. Let's just say that September 2008 was a very unfortunate time for a manufacturer to have to initiate a recall.

Nvidia's warranty claims total jumped from $21 million in 2007, to $50 million in 2008, to $187 million in 2009, $205 million in 2010, and $114 million in 2011. Back down to $36 million in 2012, and expenses stayed low until 2022.

Figure 2 shows us that Nvidia once again had higher-than-usual warranty expenses in 2022, after keeping these numbers low for the last decade since the last product malfunction. According to Nvidia's 2022 annual report, "a defect was identified in a third-party component embedded in certain Data Center products." They stated,

"While we believe we have accurately recorded for warranty obligations, we may need to record additional amounts in the future if our estimate proves to be incorrect. In general, if a product liability claim regarding any of our products is brought against us, even if the alleged damage is due to the actions or inactions of a third party, such as within our supply chain, the cost of defending the claim could be significant and would divert the efforts of our technical and management personnel and harm our business.

The company paid $89 million in claims during calendar 2022, up 642%, or $77 million, from 2021. The company's most recent fiscal year ended on January 29, 2023. We took a look at the fourth quarter data in the annual report, which is not included in the charts based on the criteria specified in the introduction (we standardize to the calendar year). The company states:

"In the second quarter of fiscal year 2023, we recorded $122 million in product warranty liabilities primarily related to a defect identified in a third-party component embedded in certain Data Center products. In the third quarter of fiscal year 2023, we recognized a warranty-related benefit of approximately $70 million in cost of revenue due to favorable product recovery."
It's interesting to see that Nvidia presumably got reimbursed by the supplier that provided the defective part, found a relatively inexpensive fix, or by some other means recently cut these warranty costs by a considerable amount.

Three companies paid more in warranty claims than Nvidia during calendar 2022: Lam Research, Applied Materials, and Advanced Micro Devices. Lam's claims were up by 21%, or $48 million, to $271 million. Applied Materials was up 16%, or $30, to a total of $221 million in warranty claims. And Advanced Micro Devices was up 10%, or $9 million, to $101 million.

Teradyne's claims rose by 27% to $27 million; Kulicke and Soffa Industries' claims rose by 33% to $17 million; and Onto Innovation's claims rose by 53% to $14 million. At the bottom of the top, Veeco Instruments' claims increased by 30% to $8 million, and Axcelis Technologies' claims went up by 59% to $7 million.

Only one company in the top 10 saw its claims total fall in 2022. That company is Cohu Inc.; its claims total fell by -7%, just $1 million, to $10 million. Another big drop was at Coherent Corp., where claims fell by -83%, or $30 million, to $6 million. The company's claims payments peaked at $56 million in 2018, and have been falling annually since then.

Warranty Accrual Totals

Next, we are going to take a look at 20 years of warranty accrual totals for the semiconductor industry. As we did with claims, we'll first look at just the totals, before breaking the numbers down by the top 10 companies. Figure 3 presents these industry-wide annual accrual totals.

Figure 3
Semiconductor Industry Warranties
Accruals Made by U.S.-based Companies
(in US$ millions, 2003-2022)

Figure 3

Unlike claims, 2022 was a record-setting year for accruals in the semiconductor industry. Accruals totaled $980 million for the industry in 2022, a 23%, or $183 million, increase from the year prior. Accruals also rose by about $200 million from 2020 to 2021.

Prior to 2022, the semiconductor industry had reported its highest total warranty accruals in 2006, with a total of $896 million. These totals fell at the onset of the recession, but then went back up due to Nvidia's higher accruals in response to the recall of its GPUs, as we described above. Total accruals plateaued around $500 million from 2012 to 2016, then started rising again towards pre-recession levels.

The same trend holds true for accruals as it did for claims: expenses were on the rise, the pandemic interrupted that trend for a few years, but totals are back on the upswing. Of course, higher warranty expenses on their own are not good news, but paired with rises in revenue, this indicates overall growth in the industry. Figure 4 also highlights the changing face of the industry in the past 20 years, especially the most recent five. Namely, the "Other" category has shrunken considerably, with the main players taking on bigger shares of the industry's warranty expenses. Many of the companies that were in the mix before and during the recession having since gone out of business, been acquired, or privatized.

Figure 4
Semiconductor Industry Warranties
Accruals Made by Top U.S.-based Companies
(in US$ millions, 2003-2022)

Figure 4

It's mostly good news for the semiconductor industry. First, we'll get the not-so-good news out of the way. Nividia's accruals were up by 544%, or $136 million, to an accrual total of $161 in calendar 2022. From the fourth quarter of calendar 2021 to the same quarter in 2022, sales revenue dropped by -69%. So warranty expenses were a significantly higher percentage of the company's product sales in 2022.

Lam Research Corp.'s accruals rose by 21%, or $57 million, to a total of $325 million. The company's revenue rose by a similar amount, so warranties continued to cost around the same amount per product. The same is true of Applied Materials Inc., where accruals rose by 14%, or $31 million, to a total of $254 million, and fourth quarter revenue rose by 12%.

Advanced Micro Devices' accruals rose by 8%, or $9 million, to $115 million, while product revenue in the fourth quarter rose by 44% from 2021 to 2022. The company was spending a little less per product on warranty expenses, meaning overall savings. The only other company where the rise in revenue outpaced the rise in total accruals was Axcelis Technologies Inc.; its accruals rose by 36%, or $3 million, while its fourth quarter revenue rose by 40%. Onto Innovation Inc. also saw its accruals rise, though more or less in pace with a rise in revenue. Onto's accruals rose by 35%, or $4 million, to a total of $16 million.

Three companies cut their total accruals, but also saw revenue fall, meaning that the proportion between the two costs remains consistent. The accruals of Teradyne Inc., ranked fifth, fell by -39%, or $14 million, to $22 million. Kulicke and Soffa, ranked eighth, cut accruals by -37% to $11 million, but saw its fourth quarter revenue fall more. And the accruals of Cohu Inc., ranked tenth, fell by -34%, or $4 million, to $9 million.

Rounding out the top 10 is Monolithic Power Systems Inc., which managed to cut its accruals while raising its revenue, meaning it actually saved money on warranties per product. The company didn't qualify for the top 10 in claims, so it's only featured in two charts in this article. MPS cut its accruals by -25%, or $4 million, to $12 million in 2022.

Looking a little further down the list, there are a few companies that saw their accruals change by relatively small dollar amounts, but very large percentages compared to their 2021 totals. Coherent Corp., another company only featured in one of the three top 10 lists (see Figure 7), cut its total accruals by -88%, or $29 million, to a total of $4 million. As we mentioned above, the company also cut its claims by a similar percentage. This is likely associated with the company's recent restructuring. Coherent Inc. was acquired by II-VI Inc. in July 2022, and the combined company renamed itself Coherent Corp.

Two other companies that managed to cut their total accruals while raising their fourth quarter revenue are Plexus Corp. and Azenta Inc. Plexus dropped its accruals by -45% to $2.3 million, and Azenta dropped its accruals by -57% to $2.1 million.

Advanced Energy Industries Inc. almost doubled its accruals, from $3.2 million in 2021 to $5.6 million in 2022. Kopin Corp. almost tripled its accruals, from $0.8 million in 2021 to $2.3 million in 2022. inTEST Corp. almost doubled its accruals, from $250,000 to $470,000. Vicor Corp. rose its accruals by a little more than double, from $158,000 to $376,000. And Trio-Tech International almost quadrupled its accruals, from $8,000 to $30,000.

Warranty Expense Rates

Next, we're going to take a look at the average warranty claims and accrual rates of the industry over the past 20 years. Figure 5 presents 80 quarters of data, with each quarter's average rate derived from the total claims or accruals normalized by that quarter's segmented product sales revenue total.

Figure 5
U.S.-based Semiconductor Industry
Average Warranty Claims & Accrual Rates
(as a % of product sales, 2003-2022)

Figure 5

This EKG-like chart is certainly more volatile than we typically see, especially from an industry that usually sells to other manufacturers rather than directly to the end-user consumer. Usually, we see a higher level of volatility from those consumer-facing industries, such as consumer vehicles, rather than from suppliers, such as the powertrain makers that sell engines and other parts to the car manufacturers. That's simply because consumers file their warranty claims with the company from which they bought the product; it's then that manufacturer's job to fulfill the claim, and if they choose, to pursue reimbursement from the supplier that provided them the faulty part.

The semiconductor industry is kind of in the middle of that dichotomy. Nvidia, for example, sells GPUs to computer manufacturers such as Apple, but also sells GPUs directly to video game enthusiasts. It's actually becoming increasingly popular with that demographic to self-build a personal computer, buying components such as the graphics card, CPU, motherboard, etc. individually from marketplaces such as Micro Center. As an aside, Nvidia and AMD also make GPUs that power AI applications such as ChatGPT, another new and quickly growing market that's recently bolstered both companies' stock prices.

In the fourth quarter of 2022, the average claims and accrual rates for the industry were both 0.8%. Over 20 years, the average claims rate was 0.73%, with a standard deviation of 0.24%, and the average accrual rate was 0.77%, with a standard deviation of 0.24% as well. Amazingly, the current expense rates for semiconductors are just around the average level over the past two decades. In an industry that is really defined by new and innovative technology, it is rather impressive that things average out to current levels. At the same time, the level of variation we see even from quarter to quarter within a year is a little more in line with what we might expect.

Warranty Reserve Totals

Our final metric is the balance in the warranty reserve funds of all these semiconductor manufacturers at the end of each calendar year. Warranty reserves for the industry exceeded $800 million for the first time in 2022. Total reserves rose by 29%, or $209 million, to $923 million.

Figure 6 shows this total broken down by the top companies in the industry.

Figure 6
Semiconductor Industry Warranties
Reserves Held by Top U.S.-based Companies
(in US$ millions, 2003-2022)

Figure 6

In 2019, the semiconductor industry recorded its lowest-ever year-end reserve balance of $483 million. Reserves almost doubled over the following three years, leading to the record high in 2022.

Our top five companies all grew their warranty reserve balances. Lam Research increased its reserves by 40% to a total of $319 million. Applied Materials increased its balance by 18% to $286 million. Nvidia, of course, more than tripled its reserves, in line with the other huge increases we've observed in the company's total warranty expenses. Nvidia's reserves grew by 225%, or $72 million, to $104 million. AMD's reserves grew by 27% to $65 million. And Monolithic Power Systems increased its reserve balance by 15% to $24 million.

Coherent Corp., which didn't make the top 10 for claims or accrual totals, ranked sixth for the size of its warranty reserve fund. Despite this, the company actually decreased the size of the fund by -40%, or $12 million, to $18 million. Teradyne, ranked seventh, also shrunk its reserve by about -40% to $14 million.

This rise in reserves reflects anticipated growth in the industry. Perhaps some of these companies are less concerned with their warranty expenses, and more concerned with keeping pace with the rapidly changing global tech landscape. As we've seen from Nvidia, mastery of warranty expenses can really affect the well-being of a company. The company's stock price is soaring, but earnings are down and warranty expenses have all increased manyfold in just a year.

Even without Nvidia's recent deposit into its reserve fund, 2022 still would have been a record-setting year for this industry, especially in terms of total warranty reserves. And now that these huge AI platforms are being powered by GPUs, the semiconductor industry will undoubtedly continue to grow, including its associated warranty costs.

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