Annual report pursuant to Section 13 and 15(d)

PRODUCT WARRANTY LIABILITY

v3.10.0.1
PRODUCT WARRANTY LIABILITY
 12 Months Ended
Dec. 31, 2018
Product Warranties Disclosures [Abstract]  
PRODUCT WARRANTY LIABILITY NOTE 9. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued product campaigns, was as follows:
 
 
December 31,
In millions
 
2018
 
2017
 
2016
Balance, beginning of year
 
$
1,687

 
$
1,414

 
$
1,404

Provision for warranties issued
 
918

 
557

 
334

Deferred revenue on extended warranty contracts sold
 
293

 
240

 
231

Payments made during period
 
(443
)
 
(398
)
 
(385
)
Amortization of deferred revenue on extended warranty contracts
 
(244
)
 
(219
)
 
(201
)
Changes in estimates for pre-existing warranties
 
3

 
85

 
44

Foreign currency translation and other
 
(6
)
 
8

 
(13
)
Balance, end of year
 
$
2,208

 
$
1,687

 
$
1,414


Warranty related deferred revenues and the long-term portion of the warranty liabilities on our Consolidated Balance Sheets were as follows:
 
 
December 31,
 
 
In millions
 
2018
 
2017
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 
 
 
 
 
Current portion
 
$
227

 
$
231

 
Current portion of deferred revenue
Long-term portion
 
587

 
536

 
Deferred revenue
Total
 
$
814

 
$
767

 
 
 
 
 
 
 
 
 
Base product warranty
 
 
 
 
 
 
Current portion
 
$
654

 
$
454

 
Current portion of accrued product warranty
Long-term portion
 
740

 
466

 
Accrued product warranty
Total
 
$
1,394

 
$
920

 
 
 
 
 
 
 
 
 
Total warranty accrual
 
$
2,208

 
$
1,687

 
 

Engine System Campaign Accrual
During 2017, the California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component. We recorded charges of $36 million to cost of sales in our Consolidated Statements of Income during 2017 for the then expected cost of field campaigns to repair some of these engine systems.
In the first quarter of 2018, we concluded based upon additional emission testing performed, and further discussions with the EPA and CARB that the field campaigns should be expanded to include a larger population of our engine systems that are subject to the aftertreatment component degradation, including our model years 2010 through 2015. As a result, we recorded an additional charge of $187 million, or $0.87 per share, to cost of sales in our Consolidated Statements of Income ($94 million recorded in the Components segment and $93 million in the Engine segment).
In the second quarter of 2018, we reached agreement with the CARB and EPA regarding our plans to address the affected populations. In finalizing our plans, we increased the number of systems to be addressed through hardware replacement compared to our assumptions resulting in an additional charge of $181 million, or $0.85 per share, to cost of sales in our Consolidated Statements of Income ($91 million recorded in the Engine segment and $90 million in the Components segment).
The campaigns launched in the third quarter of 2018 and will be completed in phases across the affected population with a projection to be substantially complete by December 31, 2020. The total remaining accrual related to this matter at December 31, 2018 was $372 million and is included in the base warranty total in the above table.
Loss Contingency
Engine systems sold in the U.S. must be certified to comply with the EPA and CARB emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer for which we did not also manufacture or sell the emission aftertreatment system. During 2015, a quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign to address the technical issue purportedly causing some vehicles to fail the in-use testing.
As the certificate holder, we recorded a charge of $60 million in 2015 for the expected cost of the proposed voluntary campaign. The campaign design was finalized with our original equipment manufacturer (OEM) customer, reviewed with the EPA and submitted for final approval in 2016. We concluded based upon additional in-use emission testing performed in 2016 that the campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. We recorded additional charges of $138 million in 2016 to reflect the estimated cost of our overall participation in the campaign.
In late 2016, litigation arose with our OEM customer regarding cost allocation for this campaign. In January 2018, a settlement was reached with our customer to fully resolve this matter, which resulted in an incremental charge of $5 million recorded in the fourth quarter of 2017.
These charges are reflected in a separate line item on our Consolidated Statements of Income.