14. 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 a concrete 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.

November 7, 2012 Update

The Company has been assessing warranty claims for certain concrete ties made in its Grand Island, NE facility. The claims are arising from ties found in track that are not performing up to the Company’s expectations, and do not meet the Company’s quality standards. These ties were manufactured between 1998 and 2011. The Company discontinued manufacturing operations in Grand Island in early 2011. The large majority of these claims come from the Union Pacific Railroad (UPRR). During the recent quarter, the Company has been working to resolve the claims in a satisfactory manner for our customers and the Company. The Company made substantial progress with the UPRR in the recent quarter regarding the approach to remedy field failures, the details of which are in the following paragraphs.

The Company has agreed on a process with the UPRR for identifying, prioritizing and replacing ties that meet the criteria for replacement. This process will be applied to the ties the Company shipped to the UPRR from its Grand Island, NE facility from 1998 to 2011. During most of this period the Company’s warranty policy for UPRR carried a 5 year warranty with a 1.5:1 replacement ratio for any defective ties. The agreed upon process will result in the Company and the UPRR working together to identify and replace defective ties. The process of planning and documenting will be done by both the Company and the UPRR to ensure this is done in a timely manner.

In order to accommodate customer concerns, the Company has reverted to a previously used warranty policy. This will result in all concrete ties with a 5 year warranty and a 1.5:1 replacement ratio, now having a 15 year warranty and a 1:1 replacement ratio. This change will provide an additional 10 years of warranty protection. The 1:1 replacement ratio will furnish one tie for each tie replaced under our claims process.

Following the changes noted above to the warranty policy and our assessment of the scope of the defective ties, the Company recorded an additional $3.0 million warranty charge in order to adequately reserve for the revised cost of resolving expected claims. This change brought the total warranty reserve for concrete ties to $27.2 million. It is now sized to reflect the expected claims from all customers who have notified the Company of problems, especially the UPRR where the majority of claims arose. It is supported by the extensive field sampling and forensic analysis we’ve conducted along with customer discussions.

Finally, the Company will produce the replacement ties in its Tucson, AZ manufacturing facility which has been operating under a 5 year supply contract with the UPRR expiring in December 2012. UPRR has verbally indicated their intent to award the Company with a new 5 year supply contract for its Tucson facility. The details of this supply contract have not been completed, although they are expected to closely resemble the terms in the existing contract with the exception of the new 15 year warranty policy and some product specification changes.

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		23,993
Warranty liability utilized		(2,512)
Balance at September 30, 2012	$	28,113

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 September 30, 2012 and December 31, 2011, the Company maintained environmental and litigation reserves approximating $2,112,000 and $2,184,000, respectively.