HVACR & Appliance Warranties

Editor's Note: The following article ran in the October 2010 issue of WarrantyWeek.com. It is reprinted with permission.

The systems that heat, cool, refrigerate, cut, groom and clean for us also throw off a considerable amount of warranty expense. Besides passenger cars and computers, major appliances are probably the most warranty-intensive products on the market.

So far in 2010, the 33 or so U.S.-based HVACR and appliance companies have spent a collective $1.08 billion on warranty claims, and have set aside $1.18 billion in warranty accruals. Claims have consumed roughly 1.1% of their combined product revenue, while accruals were equal to 1.2% of product revenue.

The good news is that sales are beginning to pick up again. Eight out of the top 10 warranty providers in this sector saw sales rise since the middle of 2009, led by Johnson Controls Inc., owners of the York International brand, which reported a 28% rise in product and system sales for the period ended June 30, 2010.

The net effect is that as sales rise, warranty accruals rise in proportion. Meanwhile, the latest claim totals reflect repair costs for products sold in the slow years, so that metric should be falling. And indeed they are: The claims total for the first half of 2009 was $1.2 billion (11% higher than this year) while the accrual total was $1.1 billion (9% lower).

Mergers and Acquisitions

The bad news is that more sales this year means more claims next year [ed. note: 2011]. However, we hope that during the recession, companies learned not only how to cut costs but also how to raise product quality, how to detect problems sooner, and how to design systems that are cheaper and easier to fix.

In Figure 1, we're tracking the claims total reported by all HVACR and appliance makers since 2003. We should note that the names have changed quite significantly over the years through mergers and acquisitions. So what we've done is add together the totals for all the companies that are now (or ever have been) in the industry, going back 30 quarters.

The net effect is that we're counting companies such as Johnson Controls both before and after they acquired York, Ingersoll-Rand plc, both before and after they acquired Trane, and Whirlpool Corp. both before and after they acquired Maytag. In other words, it's as if the 33 companies now in the industry were always in the industry, even when they weren't.

Admittedly, this approach may inflate the totals somewhat, but there's already plenty of that from other sources. For instance, one of the biggest warranty providers in the HVACR and appliance industries is United Technologies Corp., thanks to its Carrier product line. But the company also makes elevators, helicopters and jet engines. And the warranty expenses from those product lines also are included in Figures 1 through 4. However, there's really no alternative. Companies report only their totals, and not figures for each product line. So it's the same problem with Ingersoll-Rand and Johnson Controls, both before and after their acquisitions.

The Other Side of Claims

A quick glance at Figure 1 reveals that warranty claims peaked in the second quarter of 2007, at a level of $735 million. The lowest level they've ever reached came in 2003, when the total was barely over $400 million. But one should also note the recent falloff in claims, from a level of $650 million in 2009's third quarter to $621 million in the fourth quarter, to $571 million in 2010's first quarter, and finally to $513 million in the second quarter. As mentioned, this is a lagging effect of the recession. Claims are likely to begin heading up again later this year and on into 2011.

Claims are what's spent fixing products that were sold a year or two ago. Accruals are what's set aside from current revenue, in order to finance future repairs. So if one assumes that neither repair costs nor product quality is changing, this metric should rise and fall in exact proportion with product sales.