After the meeting Walt should discuss his suspicions with Norm and arrange to examine the equipment. Or is it the converse. This concern should be demonstrated by the returned goods area representative who should use engineering to examine any returned equipment and report on its condition. This episode should concern Walt because if the resolution of this problem is not handled as a cover-up, it comes very close. You can acknowledge the failure, and that the failure resulted from not testing the machine properly.
Engineers learn from failures.
Also in deciding to replace the equipment because XYZ has been a such a good customer all these years borders on hypocrisy. And, XYZ can go elsewhere with its business. They have placed the firm's reputation with XYZ at risk. Prepare a position description that includes the typical duties, responsibilities, and qualifications of the returned goods area representative. After examining returned equipment, meet with the customer to review the findings and present the proposed remedy based on the findings.