Unfortunately, FASB's rules do not extend to companies based in Europe, Canada or Japan, so all the foreign-owned domestic manufacturers and all the importers -- everyone from Chrysler to Sony -- are not part of the list. Reader advice concerning how to account for all their warranty activity in the absence of formal reports would be appreciated.

General Electric Co., a huge manufacturer with $131.7 billion in revenue during 2002, is the company most obviously missing from the list above. GE did not report its warranty activity during the first quarter. However, it did make a disclosure in its 2002 annual statement, listing a beginning balance of $968 million for Jan. 1, 2002, and an ending balance of $918 million for Dec. 31, 2002. It also disclosed spending $694 million on warranty claims during the year, primarily for products coming out of the Power Systems sector.

If we were to carry forward that spending at the same rate into the first quarter, one could estimate that GE Power Systems spent $173.5 million on warranty claims during the first period. That would place them sixth on the list above, between IBM and Caterpillar. However, it also would make GE the only member of the top 25 with no actual information on its warranty experience during the first quarter. The company said that while the 2002 annual report contained details on the warranty fund balance, it does not plan to disclose this information going forward in its quarterly reports. Therefore, for the moment, we will defer adding them to the list, until better information can be located. However, we are adding a placeholder estimate of $173.5 million for GE to the industry totals used elsewhere in this report.

In addition, upon the advice of several readers, Warranty Week revisited the percent of sales calculations. The problem, readers said, was that a simple division of warranty cost by total revenue was of limited value in the case of companies that had an appreciable presence in the mortgage, finance, software, consulting, and other non-warranted industries. Therefore, we recalculated the percentages, using the most restrictive numbers available for revenue segments, so as to count only sales of warranted products.

In some cases, such as IBM, this radically reduced the size of the denominator, and raised the percentage proportionally. Using total revenue as the denominator, $190m / $20,065m equals only 0.9% -- below the industry average. But using just hardware revenue, $190m / $5,808 equals 3.3% -- closer to the experience of their competitors who don't have as much service or finance revenue in their financial statements. Readers are cautioned that these "warranty relevant" revenue numbers are under review, and as the denominators continue to shrink in response to new iniformation, further increases in the percentages are likely. The stated total revenue and warranty cost figures, however, will remain as they are now. At the end of this process, we will hopefully have estimates very close to the real percent-of-warranted-sales figures of the vendors in question.

Reader Contributions

Thanks to the suggestions, tips, and contributions of numerous readers, the number of companies found to be reporting warranty activity during the first quarter more than doubled from the initial list of 300. Some readers turned in their competitors for addition to the list, while others suggested whole additional industries that issue warranties -- new home builders, television broadcast equipment makers, and semiconductor equipment vendors.

Some of the most recently added companies turned out to be huge warranty spenders, including home builders Lennar Corp., Pulte Homes Inc., and Champion Enterprises Inc.; and semiconductor equipment makers Applied Materials Inc. and Novellus Systems Inc. They and the hundreds of other new additions arrived with enough first quarter warranty claims spending to bring the industry total above $5.5 billion.

Warranty Week can therefore now say with some confidence that the U.S.-based warranty claims processing industry is more than $23 billion in size per year. It may be even larger, but it is unlikely to be smaller. Either way, that's a good-sized industry. Put another way, a total of 750 U.S. manufacturers together spend more than $63 million per day (in payments and in kind) to satisfy all the warranty claims made against them. On average, this consumed around 1.3% of total sales and 1.9% of just their warranted product sales.

A handful of companies, including battery maker Exide Technologies and disk drive maker Quantum Corp., reported warranty activity for fiscal periods that ended before January-to-March 2003. For these companies only, placeholder first quarter estimates were used, derived from their 2002 quarterly spending patterns. These estimates will be replaced by the actual figures once reported, which could entail minor revisions to the industry totals.

Cummins Inc. and a few others were unable to file their financial statements on time for reasons that had nothing to do with warranty, so their inclusion in the list is based upon tentative estimates until some actual warranty data becomes available. In addition, more than 60 companies were found that reported only partial components of their warranty activity, primarily their warranty reserve fund balances. Most reported beginning and/or ending balances for their warranty reserve funds, but not the amounts actually spent during the quarter on current claims or the amounts added to their funds and set aside to finance future claims.

As they come into full FASB compliance in future quarters, we will be able to process the list as the Warranty Week 500 -- the 500 largest product warranty providers based in the U.S. This is version 1.0. Readers can expect the next edition in September 2003 and the third edition in December, by which time some of the expected TREAD Act disclosures may provide additional details on spending patterns within at least the automotive sector of the warranty industry.

Warranty Reserve Fund

Here now is the tabular reconciliation of total warranty activity by all FASB FIN 45-compliant American manufacturers during the first quarter of 2003 (in US$ millions):

Numerous companies changed their estimates upwards or downwards, depending upon management's revised expectations of defect rates that turned out higher or lower than originally anticipated. The $200 million figure represents an aggregation of 164 different upward and downward adjustments.

The $104 million net upwards currency conversion figure is illuminating in that it immediately spotlights all the warranty providers that deal in non-dollar currencies. Because of the recent rapid fall in the value of the dollar, almost any company that has made warranty promises internationally must now recalculate the amount of dollars they expected to spend to satisfy those guarantees. However, the only major warranty providers to make currency adjustments during the quarter were GM, Ford, and Paccar Inc. -- all from the automotive segment of the warranty market.

Market Segmentation

One of the problems encountered when trying to break the list of warranty providers into industry segments is what to do with companies that have operations in two or more completely different lines of business. For instance, Honeywell International makes both turboprop jet engines and thermostats, so it would be equally at home in either aerospace or air conditioning. Gateway Inc. sells PCs, but it also sells consumer electronics items such as plasma TVs. Brunswick Corp. is into boats, billiards, and bowling pins.

We distributed the 750 companies into 12 separate categories, based on the primary product line of the company. So Honeywell went into the aerospace category rather than heating and ventilation or automotive. Gateway went into the category for computers instead of the one for home appliances. Brunswick was included with other boat and marine engine makers in the aerospace category rather than with the sports equipment vendors.

The categories themselves are somewhat arbitrary, and do not follow any of the groupings set up by Fortune, Hoover's, Dun & Bradstreet, Thomas Register, or other business ranking services. However, they work for warranty, if only because so many major sectors of the general economy are not traditionally issuers of product warranties.

Functional Groupings

Planes and ships are grouped together under aerospace, along with navigation gear. Terrestrial vehicles are split between on-road automotive and off-road construction/farm vehicles. Homes are split between those on wheels and those that are stationary. By the way, thanks go out to the reader who suggested taking a look at the warranties on new homes -- an activity worth $111 per quarter.

Tools and machines are split up by the industry or location where they're typically used: in the home, in the office, in the factory, in the hospital, in the clean room, or in the network operations center. Therefore, a microwave oven is thrown in with home appliances. A microwave transmitter is counted in with telecom and broadcasting gear. A laser used for welding is counted in with heavy industry. A laser used for tattoo removal or vision correction is counted in with medical instruments. A laser used for fiber-optics is counted as telecommunications equipment.

For this first iteration of the Warranty Week 500, we're lumping watches, cameras, and sports gear in with home appliances and office equipment into one super-category that also includes furniture, chairs, cabinets, rugs, and building materials. These each deserve their own separate categories, eventually, but right now not enough warranty providers in those markets are reporting their reserve fund activities.

In the watch market, for instance, neither Fossil Inc. nor the Movado Group Inc. reported the amount of warranty claims paid. Timex Corp. is privately-held and many of the other major players are European or Japanese. An accurate accounting of their aggregate warranty costs may not be possible, even in the future.

In the sports category, a half dozen golf gear makers reported, but few of the major exercise equipment makers bothered. Of all the bicycle manufacturers, only Huffy Corp. reported properly on its warranty reserve cash flows. Few of the camping gear makers besides Johnson Outdoors reported on their warranty balances at all. Brunswick Corp. reported, but because of their Mercury and Mariner brands of boat engines, the company was grouped with the air/sea manufacturers, despite their major presence in the sports and leisure equipment industry.

Consumer electronics -- chiefly home audio, TVs and cameras -- deserve their own category. But because so much of these industries is ultimately based in Japan or Europe, a separate listing may not be feasible, even after all U.S.-based manufacturers have reported.

In the future, all of the publicly-traded U.S.-based warranty providers will have to comply with FASB rules. But for now, with such a high rate of non-compliance in these markets, it doesn't make sense to list a separate category for watches/jewelry, consumer electronics, or sports equipment.

We're tempted to combine electrical power-generating infrastructure with telephone, cable, cellular, and broadcasting gear into one big telecom networks category. But for the moment we will hold it separate in its own category. Likewise, we're tempted to add all the heating, ventilation, and air conditioning vendors into the home and office equipment category, though for now they too will be counted separately. And it might be possible to combine all the security vendors with either the aerospace/defense or the telecom and network equipment vendors, depending on the application.

The bottom line is that these groupings can be changed in time for the September edition. Reader advice and feedback is welcome at this address. For this inaugural edition of the Warranty Week 500, we're using just 12 rather broad categories:

Aerospace

This is the category into which were lumped all the airplane manufacturers, the defense contractors, the ship and boat makers, space and satellite systems manufacturers, and anyone who makes anything that flies or floats. Initially, security firms were lumped in with the defense contractors, but upon reconsideration it was decided that there's a big difference between a submarine and a card swipe machine.

The current grouping sweeps together the big guns of warranty providers: United Technologies, Boeing, Honeywell International, Goodrich Corp., General Dynamics, and Raytheon. It also would include General Electric, Lockheed Martin, Northrop Grumman, and Textron, but those companies made no warranty disclosures in their most-current financial statements (GE, however, did reveal its warranty activity for calendar year 2002, which was included in the electrical power equipment category).

A total of 34 aerospace and defense companies spent $298 million on warranty during the first quarter, and ended March with just over $3 billion in their warranty reserves. United Technologies was the largest warranty provider in this category, with $113 million spent. However, that represented only 2.3% of its total product sales, a percentage that is relatively close to the 1.9% total manufacturing industry average, which is appropriate given its mixed product line of air conditioners, elevators, helicopters, turbines, and jet engines.

Several of the other big players such as Boeing were able to keep their warranty costs down below 1%, in part, we suspect, because they successfully delegate most warranty matters back to their parts suppliers. Among the larger aerospace companies, Goodrich spent $10 million on warranty, equal to 1% of total sales. Boeing spent only $69 million out of its $12.26 billion revenue on warranty -- a paltry 0.59%. Honeywell spent only 0.76% on warranty.

Because of the drag-down effect of these big companies with small warranty budgets, the industry average warranty budget was 1.0%. Also, we suspect that if vendors detailed the percentage of their product sales actually covered by warranty, the industry average would rise as the denominator used in these calculations shrank.

In terms of curiosities, General Dynamics spent only $9 million (0.3%) on warranty claims during the quarter, but added $81 million to its reserves. Rockwell Collins stood out with 3.0% of product sales consumed by warranty claims.

Among smaller companies, Lowrance Electronics Inc. topped the percent-of-sales list with 2.7%. Numerous smaller companies' warranty spending were well below 0.5% of sales. Woodward Governor Co. and Curtiss-Wright Corp. were among those reporting international warranty activity.

Automotive

The automotive category is much more than just cars and trucks. In this instance it includes trains, motor homes, engines, batteries, and parts manufacturers, as well as a few auto parts retailers that provide warranties to their customers. Extended warranty revenue, which is not as much a warranty as it is a hybrid between an insurance policy and a prepaid service plan, was not included, except in the handful of cases where manufacturers reported both together.

General Motors, with $1.1 million spent on warranty in the first quarter and an $8.9 billion warranty reserve fund at the end of March, was by far the biggest warranty provider by almost all measures. But at 2.8% of product sales, it was hardly among the biggest in terms of the percentage of sales consumed by warranty claims.

Ford, Navistar, Paccar, AutoZone, and Brunswick were the other big names placed in this category. They were each within a range of 2-3% of sales spent on warranty. Cummins Inc. was a bit towards the high end, with $49 million in claims accounting for 3.5% of product sales.

Numerous internationally-based automakers are not required to file financial statements with the SEC, and therefore they do not report upon their warranty activity. DaimlerChrysler AG is the company most missed, but also missing are major automotive importers such as BMW AG; Fiat S.p.A.; Honda Motor Co. Ltd.; Hyundai Motor Co.; Mitsubishi Corp.; Nissan Motor Co. Ltd.; Peugeot Citro�n S.A.; Renault S.A.; Robert Bosch GmbH; Scania AB; Toyota Motor Corp.; Volkswagen AG; and Volvo AB. Readers are free to make assumptions about what their U.S.-based warranty experience might total.

Overall, 1.9% of sales was the average amount spent on warranty by all automotive companies. But there were also numerous big U.S.-based players that didn't report on warranty during the first quarter, including Delphi and Eaton. So a true industry average might be somewhat different than suggested by this first attempt.

Notes:

(2) Company reported six month figures for warranty cost, here ÷ 2
(3) Company reported nine month figures for warranty cost, here ÷ 3
(4) Company reported annual figures for warranty cost, here ÷ 4