Following up from last week's nine-month report on the warranty trends of consumer vehicle manufacturers, this week we will be looking at the other side of the United States' huge automotive industry: commercial vehicles and the parts that comprise them.

The warranties of the commercial vehicle industry work a bit differently than those of consumer vehicles, mainly because each component of a truck is often supplied separately and thus has a separate warranty attached to it. For example, one could purchase the shell of the tractor from one manufacturer, the engine from a different one, then the transmission, driveshaft, axles, digital equipment, etc. from someone else. And of course the trailer is separate and often changed out. This can lead to a headache for a fleet manager when trying to figure out which parts are under warranty, and from whom. While we historically have analyzed these elements of the commercial automotive together, this week we are breaking it down to the top six U.S.-based truck and heavy equipment makers and top five powertrain manufacturers.

Of the six truck and heavy equipment manufacturers from which we gathered data, Paccar Inc. and Oshkosh Corp. represent the vocational truck makers, and Deere & Co., Caterpillar Inc., AGCO Corp., and Terex Corp. represent other large vehicles, such as agricultural equipment and off-road construction. Additionally, we looked at five powertrain manufacturers, of which Cummins Inc. is by far the largest; the other four are BorgWarner Inc., Allison Transmission, Dana Inc., and Meritor Inc..

Truck & Heavy Equipment Claims

While we also track the European and Asian truck and heavy equipment manufacturers, they only report their data once per year, and many of them don't file their annual reports until February or March. So to fashion this midyear report, we had to select only companies based in the United States, who report their warranty data quarterly. We should note that some of the largest American truck manufacturers are no longer controlled by United States-based companies; Navistar was recently acquired by Traton SE, also known as Volkswagen, and Mack Trucks has been part of Volvo AB since 2000. We await their annual reports, along with those of other manufacturers such as Daimler Truck (now called Mercedes-Benz Group) and Isuzu, for our analysis of the global commercial vehicle industry later this year.

In Figure 1, we are looking at 43 quarters of claims data for the six companies that represent the largest U.S.-based makers of on-highway trucks, farm equipment, and construction equipment. Paccar Inc. is the parent company of truck brands such as Kenworth, Peterbilt, DAF, and Leyland Trucks. Oshkosh, formerly Oshkosh Truck, has also branched out to build military vehicles. Deere, Caterpillar, AGCO, and Terex make large vehicles not just for transportation, but also for construction, mining, agriculture, etc.

These data are interesting not just for what they show, but also what they do not. There is no visible decline in warranty claims from during the pandemic. Of course, trucking was a key essential sector during the height of quarantine, as were farming and construction. It makes sense that their equipment operators were able to obtain warranty work when they needed it, rather than the pause and time-shift we have seen from that time in many other industries. There's also no big trend for the nine months of 2022 for which we have data.

Deere and AGCO both saw an increase in their warranty claims in the first nine months of 2022 compared to the same period in 2021. Deere was up just 5% to $657 million, while AGCO was up 10% to $190 million. The other four all saw declines in their claims totals. Caterpillar was down -8% to $589 million, and Paccar was down -2% to $303 million. Terex saw a bigger drop in claims, down -21% to $28 million in claims in the first three quarters of 2022.

Oshkosh saw a huge decrease in claims compared to the year prior, down -68% to just $16 million in claims. In the third quarter alone, its claims were down -67% to $6 million, compared to the same quarter in 2021. Claims decreased by two-thirds between the third and fourth quarters of 2021, and have stayed low since then. We also saw a big decrease in Oshkosh's accruals, as seen in Figure 2.

Truck & Heavy Equipment Accruals

The accruals shown in Figure 2 are a little less steady than the claims shown in Figure 1. The pandemic is visible on this chart, in the valley in 2020, and there was another noticeable dip in totals at the beginning of 2022.

Accruals decreased for all but Paccar in the first nine months of 2022 compared to the same period the year before. Deere was down just -4% to $762 million, and AGCO was down -5% to $231 million. Terex was down -7% to $30 million. Caterpillar saw a much bigger decrease in accruals, down -22% from $716 million in the first three quarters of 2021 to $562 million in that span of 2022. And once again leading the group in decreases, Oshkosh's accruals were down -40% to $22 million.

Paccar, on the other hand, saw an increase in accruals by 23% to $269 million, despite having no big changes in claims during that period. It looks like Paccar decreased its accruals for just the third quarter of 2021, depositing just $61.8 million, and made a bigger-than-usual deposit of $109.6 million in the third quarter of 2022 to make up for it. Accruals in the third quarter of 2022 were up 77% compared to the third quarter of 2021, but the accruals in the five other quarters from those two years hovered around $70-80 million.

Truck & Heavy Equipment Expense Rates

Deere & Co's line oscillates wildly, especially pre-pandemic. After hovering around 3% during 2020, sales have increased in the past few years, driving down the claims rate since claims totals have remained rather steady. This rate seems to have steadied out recently. Deere's claims rate was 1.86% in the second quarter of 2022, and 1.85% in the third quarter.

AGCO also has an oscillating pattern, though it does not seem like its trend has smoothed out since the pandemic. Its claims rate was 2.62% in the third quarter, 1.7% in the second, and 2.15% in the first, a bit all over the place. In other words, AGCO's claims do not correlate with its sales.

Paccar saw a huge increase in its claims rate in 2020, mainly because sales decreased due to the pandemic while claims remained steady since trucking never ceased activity even at the height of the pandemic. Sales have gone up and its line has steadied since then, and its claims rate in the third quarter of 2022 was 1.43%. Caterpillar and Terex saw similar trends, though the increases in 2020 were not as dramatic, and both of their lines also smoothed out in 2022. Oshkosh's dip in the fourth quarter of 2021 corresponds to the two-thirds decrease in claims noted earlier.

As seen in Figure 4 below, the accruals rates of these six companies follow similar patterns to the claims rates. Deere and AGCO look like ocean or sonic waves with lots of peaks and troughs, while Paccar, Caterpillar, Terex, and Oshkosh saw increases in rates due to decreases in sales in 2020 but have smoothed out since then.

Deere saw a huge spike in its accruals rate at the beginning of 2017, probably due to some unexpected sales data since accruals remained steady. It has continued to oscillate since then, though trending downward. Deere and AGCO ended the third quarter of 2022 right in the same spot, and in fact see a lot of the same peaks and troughs at the same times. Deere's accrual rate was 2.75% in the third quarter and AGCO's was 2.76%.

The other four companies had much lower accruals rates in the third quarter of 2022. To varying degrees, they all saw an increase of their accruals rate due to a decrease in sales during the pandemic, but they are all right back around their pre-pandemic rates. Caterpillar had an accruals rate of 1.38% in the third quarter, and Paccar had a rate of 1.43%. Even lower, Oshkosh accrued only 0.36% of sales for warranty expenses, and Terex's rate was 0.92%.

Powertrain Claims

In previous reports, we have grouped Cummins Inc., the United States' largest powertrain manufacturer, with Deere, Caterpillar, Paccar, and AGCO to look at large vehicle manufacturing as a whole. This time, we've broken the industry down to the vehicles, shown in Figures 1-4, and the powertrain shown in Figures 5-8 below. A powertrain, of course, includes not just the engine, but also the transmission, driveshaft, axles; basically, every moving component in a vehicle. Cummins, which primarily makes diesel engines, is by far the United States' largest powertrain manufacturer. In this section, we also look at four other powertrain makers: BorgWarner, Allison Transmission, Dana, and Meritor.

Warranty claims for these powertrain manufacturers had a notable upward trend in 2022. All but BorgWarner saw increases in claims totals in the first nine months of 2022 compared to that period in 2021. Cummins was up 16% to $476 million in claims during the first three quarters of 2022. It saw a 48% increase in claims to $187 million in the third quarter of 2022 compared to that quarter in 2021. That number is actually the highest claims total we have recorded for Cummins since we started tracking these data back in 2003.

Allison's claims were up 9% in the first nine months of 2022 to $24 million. Meritor was up 15% to $15 million. Dana saw a huge 65% increase in claims to $33 million, though these numbers are still below some of the claims totals we saw from them in the early to mid-2000s.

BorgWarner's overall claims total for the first three quarters of the year was down -22% to $70 million. It looks like this was a shift back to normal after the abnormally high claims totals it reported in the second quarter of 2021. Additionally, it recorded an amazingly high, unprecedented $150 million in claims in the fourth quarter of 2021 alone, which is the big blue spike seen in Figure 5. Their 2021 annual report notes that they settled and paid a warranty claim of $130 million for "certain combustion-related products" in December 2021, and that they hope to get a partial reimbursement from their insurance firm, but that this is not guaranteed.

Powertrain Accruals

If you thought Figure 5 had a huge spike in it, Figure 6 blows it out of the water. This is due to Cummins' struggle to comply with EPA diesel engine emissions regulations back in 2018, which led to a huge accrual of $571 million in the third quarter of that year. It looks like Cummins has had some trouble accurately predicting its warranty claims spending since then.

Accruals were down -33% to $395 million for Cummins in the first three quarters of 2022 compared to that period in 2021. However, Cummins' accruals have been all over the place for the past few years. Its accruals in the third quarter of 2022, our most recent data, were down -78% to just $63 million compared to $291 million in the same quarter in 2021. And it looks like it accrued too much money into its warranty reserves in the first part of 2021, because it deposited $0 in the fourth quarter of that year after the high figure in the third quarter. We will note that Cummins' warranty reserves total has actually steadily increased during this timeframe. Perhaps they are erring on the side of caution. Perhaps they were hoping that nobody would notice.

Aside from Cummins, accruals for the four other powertrain manufacturers were up in the first nine months of 2022. BorgWarner's accruals were up only slightly, by 3%, to $71 million. This total remains steady despite the huge claims payment we noted in the fourth quarter of 2021. Allison's accruals were up 8% to $13 million, and Dana was up by 11% to $31 million.

Meritor more than doubled its accruals last year, up by 130% to $23 million. It looks like this is from a big-for-them deposit of $12 million in the third quarter of 2022. They might be making up for the lower-than-average accruals they recorded in the second and third quarters of 2021. A look back shows that they did this in 2019 and 2020 as well, a series of small deposits followed by one quarter with huge accruals before going back to average. This is the beauty of taking a look at some companies we don't normally use to summarize warranty trends in the American trucking industry.

Powertrain Expense Rates

Next we are taking a look at two key metrics: claims and accruals as a percentage of revenue.

We see in Figure 7 that Cummins and Allison had big increases in their claims rates during 2020, as a result of falling sales while claims remained consistent. We also notice BorgWarner's giant claims payment in December 2021 shows up on the chart even relative to its revenue, though it looks like things have gotten back to normal since then.

For the third quarter of 2022, Cummins recorded a claims rate of 2.34%. Allison had a claims rate of 1.27%. BorgWarner had a claims rate of 0.6%, back on trend. Dana had a claims rate of 0.51%, and Meritor had a rate of 0.45%, showing warranty claims are a small expense compared to their revenue.

As seen in Figure 8 below, the accruals rates for these companies are even more consistent. Cummins stands out as the largest of these five companies.

As we noted earlier, Cummins' accruals have been rather inconsistent recently, explaining the waviness of its line. Their accruals rate for the third quarter of 2022 was 1.95%. It seems like 2% of revenue as accruals is their sweet-spot, though we've seen lots of variation in recent years.

The accruals rates for the other four companies are all right around 0.5%. Meritor had the next highest accruals rate of 0.69% in the third quarter. BorgWarner was at 0.61%, Allison was at 0.56%, and Dana was at 0.43%. Of these four lines, Meritor's has the most hills and valleys, but overall, accruals are rather consistent when taking into account sales in this industry.