15. COMMITMENTS AND CONTINGENT LIABILITIES

Product Liability Claims

On July 12, 2011, the Union Pacific Railroad (UPRR) notified (the "UPRR Notice") the Company and the Company's subsidiary, CXT Incorporated (CXT), of a warranty claim under CXT's 2005 supply contract relating to the sale of prestressed concrete railroad ties to the UPRR. The UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at CXT's Grand Island, NE facility fail to meet contract specifications, have workmanship defects and are cracking and failing prematurely. Approximately 1.6 million ties were sold from Grand Island to the UPRR during the period the UPRR has claimed nonconformance. The 2005 contract calls for each concrete tie which fails to conform to the specifications or has a material defect in workmanship to be replaced with 1.5 new concrete ties, provided, that UPRR within five years of the sale of aconcrete tie, notifies CXT of such failure to conform or such defect in workmanship. The UPRR Notice did not specify how many ties manufactured during this period are defective nor the exact nature of the alleged workmanship defect. Additionally, UPRR notified the Company that a customer of the UPRR asserted that a representative sample of ties manufactured by the Company's Grand Island facility have failed a test contained in the contract specification. UPRR has removed, at this customer's request, approximately 115,000 concrete ties , which are a subset of the ties subject to the UPRR Notice.

On January 11, 2012, CXT received a subpoena from the United States Department of Transportation Inspector General (IG) requesting records related to its manufacture of concrete railroad ties in Grand Island, Nebraska. The Company believes that this subpoena relates to the same set of circumstances giving rise to the UPRR product claim. CXT and the Company have been cooperating fully with the IG.

August 9, 2012 Update

Since late July 2011, the Company and CXT have been working with material scientists and prestressed concrete experts, who have been testing a representative sample of Grand Island concrete ties. During the second quarter of 2012 the Company completed sufficient testing and analysis to further understand this matter. In a combined effort with UPRR, the Company analyzed Grand Island concrete ties in track. The Company also conducted more significant forensic analysis during the 2012 second quarter. Based upon these findings, the Company believes that it has discovered conditions, which largely related to the 2006 to 2007 manufacturing period, that can shorten the life of the concrete ties produced during this period. The combined testing, analysis and recent findings, as well as the Company's ability to perform field testing during the 2012 second quarter, enabled it to uncover and define the scope of the problem.

The Company recorded a pre-tax warranty charge of approximately $19,000,000 in the second quarter of 2012 in "Cost of Goods Sold" within the Company's Rail Products segment for certain ties produced and sold to the Company's customers from Grand Island during the period the applicable manufacturing conditions were present. This charge is based upon the estimated number of Grand Island ties that will require replacement. No assurance can be given (i) that impacted customers will agree to the Company's estimates regarding the number of ties which will crack and prematurely fail, (ii) that the Company may have to provide more replacement ties in order to settle these claims, which would result in additional warranty charges or (iii) regarding the ultimate outcome and potential cost of litigation if these claims are not settled.

The Company is subject to product warranty claims that arise in the ordinary course of its business. For certain manufactured products, the Company maintains a product warranty accrual which is adjusted on a monthly basis as a percentage of cost of sales. This product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims. The following table sets forth the Company's continuing operations product warranty accrual:


		In thousands
Balance at December 31, 2011		$6,632
	Additions to warranty liability	20,494
	Warranty liability utilized	(1,817)
Balance at June 30, 2012		$25,309

While the Company believes this is a reasonable estimate of these potential warranty claims, these estimates could change due to new information and future events. There can be no assurance at this point that future potential costs pertaining to these claims or other potential future claims will not have a material impact on the Company's results of operations.

Environmental and Legal Proceedings

The Company is subject to national, state, foreign, provincial and/or local laws and regulations relating to the protection of the environment, and the Company is monitoring its potential environmental exposure related to current and former Portec facilities. The Company's efforts to comply with environmental regulations may have an adverse effect on its future earnings. In the opinion of management, compliance with the present environmental protection laws will not have a material adverse effect on the financial condition, results of operations, cash flows, competitive position or capital expenditures of the Company.

The Company is also subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition or liquidity of the Company. The resolution, in any reporting period, of one or more of these matters could have a material effect on the Company's results of operations for that period.

As of June 30, 2012 and December 31, 2011, the Company maintained environmental and litigation reserves approximating $2,132,000 and $2,184,000, respectively.