Applied Materials reports its revenue geographically but provides no information on product mix. There is no mention of service or investment income, so we are forced to assume 100% of its sales are warranted. However, on June 9, Applied Materials reported even more recent warranty costs for the three months ended April 27 -- a update of the quarterly numbers initially used in the Warranty Week 500 computations. It reported spending $40.6 million on warranty in a period in which sales exceeded $1.1 billion, so that 3.7% rate represents a slight improvement on the 4.0% rate reported in the June 2 issue.

Novellus Systems reported $5.65 million in "other" income, so that amount was subtracted from total revenue. That increased their warranty cost percentage very slightly, from 5.5% to 5.6%.

American Standard Companies broke out their product sales into three segments, and noted the inclusion of service revenue in its air conditioning unit. But while it said the parts and service business was up 5%, the company quickly added that this growth rate was below plan. The company also noted that many budget-minded customers were either fixing things themselves or avoiding commitments to service contracts. Therefore, we estimate there was some service revenue but not a great deal of service revenue. We applied the 10% "tax" just to their $1.08 billion in air conditioning revenue, and removed that from the total, resulting in a slight increase in their warranty cost rate from 1.4% to 1.5%.

Ingersoll-Rand, by the way, is officially based in the Bahamas, meaning that as with Northern Telecom, its U.S. financial filings are purely voluntary. In Note 10 to its financial statement, Ingersoll-Rand breaks its revenue into five distinct product lines, but all products appear to be warranted. Further down in the management's discussion area, the company mentions both sales and service revenue for each of its business segments, although it does not provide any specific numbers. Therefore, we're applying a 10% service "tax" to its total revenue figures to arrive at a product warranty cost ratio of 1.1% -- only slightly higher than the 1.0% computed by using its total revenue number in the denominator.

AutoZone Provides Further Details

AutoZone Inc. and Pep Boys were the only pure retailers reporting any of their own product warranty activity, although Circuit City Stores Inc. and a few others reported significant extended warranty/service plan sales. AutoZone is a specialty retailer that in certain cases warrants the sale of automotive products not already covered by a manufacturer's warranty. In most cases, the manufacturer's product warranty applies, but even in some of these instances AutoZone functions as a cost-incurring middleman. Then there are the consumable parts and accessories which are warranted by nobody. So what AutoZone reports as warranty expense is really a giant mix-up of costs and overhead net of vendor recovery, where most things are warranted by somebody but not always by the retailer itself. Net sales, meanwhile, is a mix of both warranted products and consumables. Rather than trying to untangle this knot, we're going to leave the company's total revenue figures alone for now, and ask readers for advice on how to proceed.

There is news to report, however. AutoZone ended its fiscal quarters on Feb. 15 and May 10, and published its 10-Q reports on March 19 and June 11, respectively. Warranty Week used the figures filed in March for this round of chart-making, and will use the newer figures in the next round. However, it's worth noting that while the company initially reported warranty spending of $44.1 million for the six months between Aug. 31, 2000 and Feb. 15, 2003, in the latest report it provided more modular figures for the nine months between August and May, broken out into three distinct quarterly segments. Spending last fall was $23.9 million. Spending in the winter quarter was $20.2 million. And spending in the spring quarter was $22.3 million.

Absent better information, Warranty Week initially estimated that the $44.1 million spent on warranty during the six months occurred at a constant rate -- $22.05 million in the fall and $22.05 million in the winter. Now that we know it was actually a $23.9m/$20.2m split, we're modifying our figures accordingly. This drops their warranty cost from the 1.9% rate computed for the six months to 1.8% computed just for the latter three months of that same period. It also knocks them a few notches down the list of top warranty spenders, to a slot behind Brunswick and Ingersoll-Rand. By the way, in the latest period ending May 10, AutoZone's warranty cost continued to inch downward, to only 1.7% of total sales. More on that in next quarter's report.

Mohawk Industries reported a mix of product revenues coming from its own operations as well as from the acquisition of the Dal-Tile Corp. Mohawk, best known as a manufacturer of carpeting and other floor coverings, reported $276.6 million in sales by Dal-Tile, of a mix of ceramic, porcelain, and stone tiles. We're going to assume the carpets are warranted and the tiles are not, and reduce Mohawk's warranted product revenue accordingly. That changes its warranty cost ratio from 1.4% of total sales to 1.9% of just the warranted portion of sales.

Big Companies with Little Warranty Spending

Down below the top warranty spenders are a few very large companies which reported very low amounts of warranty spending. For instance, during the first quarter E.I. du Pont reported spending only $3 million on sales of nearly $7.2 billion -- an impossibly low 0.04% rate. Office furniture maker Steelcase Inc. reported spending only $2.7 million on nearly $2.6 billion in fiscal year sales -- an 0.1% rate. Eastman Kodak reported spending $12 million on quarterly sales of $2.74 billion - an 0.4% rate.

The du Pont mystery was easily solved with the help of corporate spokespersons G. Irvin Lipp and Carol Gee. Both suspected and later confirmed that only the Stainmaster carpets, the Teflon fabric protectors, and the Corian surfaces were sold with product warranties. The rest of the product line consists primarily of chemicals and raw materials that are not normally covered by product warranties.

Stainmaster comes out of du Pont Nylon, which is part of the Textiles & Interiors Group. Teflon fabric protector is part of Chemical Solutions, within the Safety & Protection Group. Corian comes out of du Pont Surfaces, which also is part of the Safety & Protection Group. Textiles & Interiors reported sales of $1.7 billion; Safety & Protection reported sales of $985 million. Using just those revenue figures, du Pont's $3 million in warranty cost rises to a still-low 0.1% of sales. We suspect the figure would be much higher if du Pont released sales figures for just Stainmaster, Teflon, and Corian, but those figures are not available.

At Steelcase, there was no mystery at all. Spokeswoman Mary Underwood said the figures are accurate as is. "Everything we sell is covered by a Steelcase product warranty," she said. "The only exceptions are items that are considered consumables," such as light bulbs and ballasts. Added Mark Baker, the company's vice president of operations, "Our relatively low warranty costs are due to a combination of the high quality and durability of Steelcase products coupled with an intense focus on all elements of our costs to ensure that all warranty claims are valid." So there you have it: best practices in a single sentence. To understand how shockingly low the company's 0.1% figure is, consider that competitor Herman Miller Inc. spent almost as much money on warranty in a single quarter as Steelcase did in an entire year. Herman Miller's warranty cost percentage was more than eight times higher as a result.

Eastman Kodak, meanwhile, dismissed the whole idea of helping Warranty Week narrow down revenue figures to just those covered by product warranties. In an email message, Kodak spokesman Anthony Sanzio cited a note in Eastman Kodak's financial filings that states "The Company has warranty obligations in connection with the sale of its equipment," and went on to state that "providing a detailed list of the equipment would take some time to pull together." He did not take any time to respond to further inquiries.

So we had to work on our own estimate. On the Kodak Web site, we found warranted digital cameras, printers, imaging systems, and film cameras along with non-warranted consumables such as paper, film, developing services, photo CD production, and software. The Medical & Dental section listed the Kodak Image Station 2000R with a one-year warranty; various models of the Microscopy Documentation System with a one-year warranty; a Professional Digital Photo Printer with a one-year warranty, and the Gel Logic Imaging System with a one-year warranty. Everything seems to get a one-year warranty, even if it's sold to businesses normally looking for three-year coverage for their computer peripherals and office equipment.

Kodak's latest Form 10-Q contains a few warranty clues as well. The note Mr. Sanzio pointed to states in its entirety,

   "The Company has warranty obligations in connection with the sale
   of its equipment. The original warranty period for equipment products is
   generally one year. The costs incurred to provide for these warranty
   obligations are estimated and recorded as an accrued liability at the
   time of sale. The Company estimates its warranty cost at the point of
   sale for a given product based on historical failure rates and related
   costs to repair."

Then the company presents the table in which it lists $12 million in warranty cost for the first quarter, without narrowing down the products covered. Elsewhere in the 10-Q, however, Kodak provides some business segment information. Subtracting out Kodak's stated $1.8 billion in photography revenue and $21 million in other revenue leaves $921 million in medical and imaging systems revenue. However, a considerable amount of those segments' revenues also come from consumables, both X-ray and commercial film and paper. We will estimate two thirds of that medical and imaging revenue is equipment and one third is consumables. Therefore, on an estimated $614 million in equipment revenue, Kodak's true product warranty cost ratio is closer to 2.0% ($12m / $614m), a considerable jump upwards from the original warranty cost / total revenue percentage of 0.4% ($12m / $2.74b).

Pushing Extended Warranties

Notably, Kodak's extended warranty activity is more than six times larger than its basic warranty spending. According to the same section of its 10-Q, Kodak's extended warranty deferred revenue fund had a starting balance of $103 million on Dec. 31, minus subtractions (revenue recognition) of $74 million during the quarter, additions (new contracts) of $92 million, and an ending balance of $121 million on March 31, 2003. Therefore, during the first quarter, $12 million moved out of the basic warranty fund, while $74 million moved out of the extended warranty fund. That's a six-to-one ratio. Also, while Kodak put aside $12 million of its equipment sales to cover future warranty costs, it sold contracts worth $92 million for extended warranty service plans during the quarter. That's a 7.7-to-1 ratio. In other words, Kodak is driving customers to purchase extended warranties because the basic warranty coverage period is so brief.

Either way it's measured, extended warranty is much more important at Kodak than basic warranty. And it's not this way at other large companies. One could look at Ford's 1-to-2.8 ratio (the automaker recognized $299 million in extended warranty revenue to $834 million in basic warranty cost during the quarter) as an example of what would happen if Kodak were to cover its equipment with industry-norm three-year warranties. At American Standard, the ratio was 1-to-2.3 ($12 million in extended warranty recognized revenue). At Gateway, which is closer in product line to Kodak than perhaps Ford or American Standard, there was nevertheless a 1-to-2.35 ratio ($20m in extended warranty revenue recognized). In other words, while at Kodak the ratio was more than seven-to-one, at these companies it was between one-to-two and one-to-three. It's one thing to make two or three times as much on extended warranty as you spend on basic warranty. But six or seven times as much? That just seems greedy.

Then there are the companies that did not report their warranty activity. These companies can be broken into four groups:

1. Did not offer product warranties and/or do not file SEC financial statements,
2. Foreign companies not required to file financial statements with the SEC,
3. Offered warranties, but reported only warranty reserve fund balance, and
4. Offered warranties, but did not report their financials in a 10-Q or 10-K.

Companies in the first and second groups have not and will never file details of their product warranty activity with the SEC. The list of American companies that do not offer product warranties is something that would be so long that it would be best left unwritten. However, there are a fair number of foreign-based companies that through domestic subsidiaries sell warranted products on the American market. Most of the companies in group 2 are Japanese and European automotive and consumer electronics manufacturers. Many employ Warranty Week readers, who no doubt want to see their company's name in print. We have no idea how to begin estimating their quarterly U.S.-based warranty costs, so perhaps some of the readers within these companies will send us their secrets?

Foreign-based Warranty Providers

Here are the largest 50 foreign-based issuers of U.S. product warranties, in alphabetical order: ABB Ltd.; Airbus S.A.S.; Alcatel; Alstom; BMW AG; Bombardier Inc.; Bridgestone Corp.; Canon Inc.; CNH Global N.V.; DaimlerChrysler AG; Electrolux AB; Ericsson LM Telephone Co.; Fiat S.p.A.; Fujitsu Ltd.; Genmar Holdings Inc.; Hitachi Ltd.; Honda Motor Co. Ltd.; Hyundai Motor Co.; Kohler Co.; Komatsu Ltd.; LG Group; Matsushita Electric Industrial Co. Ltd.; Mitsubishi Corp.; NEC Corp.; Nintendo Co. Ltd.; Nissan Motor Co. Ltd.; Nokia Corp.; Nortel Networks; Peugeot Citroën S.A.; Philips Electronics N.V.; Pioneer Corp.; Renault S.A.; Ricoh Co. Ltd.; Robert Bosch GmbH; Rolls-Royce plc; Samsung Group; Scania AB; Schindler Holding Ltd.; Schneider Electric SA; Seiko Epson Corp.; Siemens AG; Sony Corp.; Sumitomo Corp.; Thomson Multimedia; ThyssenKrupp AG; Toshiba Corp.; Toyota Motor Corp.; Volkswagen AG; Volvo AB; and Yamaha Corp.

Thanks to the efforts of the Financial Accounting Standards Board and the reporting requirements of FASB Interpretation No. 45, all publicly-held American companies are now required to reveal never-before-seen details about their warranty activity. None of the foreign-based companies listed above are required to report, although some have filed papers with the SEC in order to sell shares in New York. For U.S.-based public companies, Warranty Week has now compiled a list of 750 companies that have filed their latest financial statements in compliance with FIN 45.

Companies in the third and fourth groups are the ones to watch. Warranty Week has a second list of some 150 non-complying companies, which we will check once again in August and November to see if they're making the required FIN 45 paragraph 14(b) disclosures. Of those 150 companies, some 63 filed either beginning or ending balances for their warranty reserve funds. By doing so, of course, they self-identified themselves as warranty-issuing companies. But if they did not disclose the inputs and outputs to the fund, they were added to the group 3 list. Another 87 were companies that never mentioned the existence of warranties even though they have a presence in a manufacturing industry in which product warranties are routinely issued, such as computers, tools & machines, electronics, automotive, or appliances. We have them listed in group 4 for now, but it is entirely possible that the reason they do not file warranty information is because they do not issue product warranties, in which they should be in group 1.

For the 150 companies which we have tentatively identified as non-complying product warranty issuers, however, the absence of information about their quarterly warranty costs limits the accuracy of an estimation of the U.S. warranty industry's size. So we threw caution to the wind, and invented estimates for each company based upon either 1) the size of their reported reserve fund, 2) the spending rate reported at a similarly-structured arch-rival, or as a last resort, 3) by applying their industry's average warranty cost as detailed in the June 2 issue to their total product revenue.

Warranty Week estimates that the 150 missing companies together spent around $652 million during the first quarter on warranty costs. Here are the top 15 estimated spenders, which together accounted for $541 million of that estimated total: