| COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
| Nov. 30, 2013 |
| COMMITMENTS AND CONTINGENCIES | ' |
| COMMITMENTS AND CONTINGENCIES | ' |
| 6. COMMITMENTS AND CONTINGENCIES |
|
| Litigation |
|
| We are subject to various legal claims arising in the normal course of business. We are self-insured up to specified limits for certain types of claims, including product liability, and are fully self-insured for certain other types of claims, including environmental, product recall, and patent infringement. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on our results of operations, financial position, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on our results of operations, financial position, or cash flows. |
|
| We establish accruals for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for such claims. However, we cannot make a meaningful estimate of actual costs or a range of reasonably possible losses that could possibly be higher or lower than the amounts accrued. In addition, from time to time we may incur expense associated with efforts to enforce our non-compete agreements. |
|
| California Sales Representative Litigation |
|
| BrittoAction: |
|
| Britto and Cowan were sales representatives based in California. They filed suit, styled Britto et al. v. Zep Inc. and Acuity Specialty Products, Inc. (“Britto Action”), in December 2010 on behalf of themselves and on behalf of all other sales representatives who were employed by Acuity Specialty Products, Inc. in the State of California at any time between December 30, 2006 and the present. Approximately 171 persons were members of the putative class proposed by the plaintiffs. Plaintiffs asserted two primary causes of action against Zep for (i) failure to reimburse work-related expenses (the “Expense Reimbursement Claim”) and (ii) failure to pay wages by reason of unlawful deductions from wages (the “Wage Deduction Claim”), as well as derivative claims under the California Labor Code Private Attorney General Act of 2004 (“PAGA”) for civil penalties and under the California Business and Professions Code for unfair business practices. The Company has settled with approximately half of the members of the putative class. |
|
| The Court denied the plaintiff’s motion for class certification in May 2012. Following the denial of class certification, plaintiffs sought leave to bring 55 additional plaintiffs into the case. Although the trial court initially granted leave, the Company successfully appealed this decision. The Company also successfully obtained summary adjudication in part on plaintiff Britto’s claims for his failure to disclose them in bankruptcy. |
|
| In June 2013, the Company made an offer of compromise to plaintiffs in the amount of $323,000; $26,000 to Britto, $22,000 to Cowan, and $275,000 for PAGA civil penalties; plus interest, costs and attorneys’ fees to the extent permitted by law and with the amount to be determined by the Court in accordance with law. In July 2013, plaintiffs filed a Notice of Acceptance of the Offer to Compromise. The PAGA civil penalties amount was subject to Court approval, which has now been obtained. In December 2013, the Company paid the amounts due to Britto, Cowan and the State of California under the PAGA claim. The amount of the offer of compromise did not include attorney fees and costs. The plaintiffs’ lawyers have already filed a memorandum of costs, which the Company has opposed, and will likely file their motion for fees shortly. The Company will vigorously oppose any request that it believes is excessive. |
|
| AguilarAction: |
|
| In December 2012, 55 of the current and former sales representatives who sought to intervene in the Britto Action filed a lawsuit against the Company in which they assert the Expense Reimbursement Claim and Wage Deduction Claim, as well as an additional claim for improper wages statements on behalf of themselves individually. This lawsuit is styled Aguilar et al. v. Zep Inc. and Acuity Specialty Products, Inc. (“Aguilar Action”). |
|
| After answering the complaint and successfully removing the case from state court to federal court, the Company asserted counter-claims against three plaintiffs, but the Company plans to dismiss its counterclaim against one plaintiff shortly. The Company also successfully compelled eight plaintiffs who signed arbitration agreements to arbitration. The Company has settled with 18 of the 55 individual plaintiffs and plans to continue negotiating settlements with plaintiffs on an individual basis. |
|
| In August 2013, a plaintiff in the Aguilar Action filed a motion for partial judgment as to the issue of liability on the business expense reimbursement claim. In October 2013, the Aguilar court granted the plaintiff’s motion for partial summary judgment as to part of his claims and denied it to the remainder of them. In terms of additional motion practice, the Company plans to bring summary judgments shortly to enforce the settlement agreements of two plaintiffs who previously settled, and discovery motion practice is also likely. |
|
| With respect to the arbitrations, the Company elected to proceed with eight separate arbitrations before Judicial Arbitration and Mediation Services (“JAMS”) under the JAMS streamlined process. Two of the plaintiffs who are subject to arbitration agreements previously settled their claims against the Company. The Company filed dispositive motions to enforce their settlement agreements, but the arbitrators denied the motions. The Company nevertheless intends to pursue the settlement agreement defense arguments again at the hearings for these two matters. The arbitration proceedings with respect to five of the plaintiffs who are subject to arbitration agreements have now occurred. The Company has received decisions with respect to three of the arbitrations. Two of the decisions included tentative awards to the plaintiffs. The total of the tentative awards is approximately 40% of the total amount claimed by the two plaintiffs. The Company has also settled with one of the arbitration plaintiffs and will be addressing fees and costs with respect to that plaintiff shortly. |
|
| During our fiscal year ended August 31, 2011, we established a $1.8 million accrual with respect to our potential liability to the plaintiffs in the Britto Action. During fiscal year 2013, we reevaluated the adequacy of this reserve based on the settlements we reached with plaintiffs during that period. We reduced the reserve by $0.3 million, reflecting the amounts paid in settlement during the period and then increased the reserve by $0.4 million, reflecting the accrual of additional pre-judgment interest on the liability that we think is probable. Based on the facts known as of the time of filing of this Quarterly Report on Form 10-Q, our current accrual of $1.7 million represents our best estimate of the probable settlement cost related to the Britto Action and the Aguilar Action. |
|
| We believe that we have substantial factual and legal defenses to the claims made in the lawsuits, which we are asserting aggressively. If we are not successful in our defense against the claims asserted in the lawsuits and if there is an adverse verdict on the merits from which there is no successful appeal, or in the event of a negotiated settlement of the litigation, the resulting liability could be material to our financial condition or results of operations. However, because of the uncertainty of the outcome of the lawsuits, including the amount of damages, if any, any plaintiff may be able to prove, and because our liability, if any, arising from the litigation, including the amount of any damages awarded if plaintiffs are successful in the litigation or any negotiated settlement, could vary widely, we cannot estimate the reasonably possible losses or range of loss that may arise from the litigation in excess of the amounts described above. |
|
| Environmental Matters |
|
| General |
|
| Our operations are subject to federal, state, local, and foreign laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous waste, and the remediation of contaminated sites. Permits and environmental controls are required for certain of our operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by the issuing authorities. We will incur capital and operating costs relating to environmental compliance on an ongoing basis. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. While management believes that we are currently in substantial compliance with all material environmental laws and regulations, and have taken reasonable steps to ensure such compliance, there can be no assurance that we will not incur significant costs to remediate violations of such laws and regulations, particularly in connection with acquisitions of existing operating facilities, or to comply with changes in, or stricter or different interpretations of, existing laws and regulations. Such costs could have a material adverse effect on our results of operations. |
|
| Superfund Sites |
|
| Certain of our subsidiaries are currently a party to federal and state administrative proceedings arising under federal and state laws enacted for the protection of the environment where a state or federal agency or a private party alleges that hazardous substances generated by our subsidiary have been discharged into the environment and a state or federal agency is requiring a cleanup of soil and/or groundwater pursuant to federal or state superfund laws. In each of these proceedings in which our subsidiary has been named as a party that allegedly generated hazardous substances that were transported to a waste site owned and operated by another party, either: (1) our subsidiary is one of many other identified generators who have reached an agreement regarding the allocation of costs for cleanup among the various generators and our potential liability is not material; (2) our subsidiary has been identified as a potential generator and the sites have been remediated by the Environmental Protection Agency or by a state for a cost that is not material; (3) other generators have cleaned up the site and have not pursued a claim against our subsidiary and our liability, if any, would not be material; or (4) our subsidiary has been identified as a potential generator but has been indemnified by its waste broker and transporter. |
|
| Environmental Remediation Orders |
|
| One of our subsidiaries has been named as a responsible party with respect to the facility located on Seaboard Industrial Boulevard in Atlanta, Georgia that it owns and currently uses in the manufacture of our products. Our subsidiary and the current and former owners of adjoining properties have agreed to share the expected costs and responsibilities of remediation. Further, our subsidiary has executed a Consent Order with the Georgia Environmental Protection Division (“EPD”) covering this remediation, and is operating under an EPD approved Corrective Action Plan, which may be amended from time to time based on the progression of our remediation. In May 2007, we accrued an undiscounted pre-tax liability of $5.0 million representing our best estimate of costs associated with subsurface remediation, primarily to remove, or secure, contaminants from soil underlying this property, and other related environmental issues. While it is reasonably possible that the total remediation cost could range up to $10.0 million, management’s best estimate of the probable total remediation costs continues to be $5.0 million. To date, we have expended $2.7 million of the $5.0 million accrual established in May 2007. Further sampling, engineering studies, and/or changes in regulatory requirements could cause us to revise the current estimate. We arrived at the current estimate based on studies prepared by independent third party environmental consulting firms. |
|
| One of our subsidiaries has been named as a responsible party with respect to its primary manufacturing location in Marietta, Georgia. With regard to this location, our subsidiary is responsible for the expected costs of implementing an Amended Corrective Action Plan that was conditionally approved by the EPD in June 2012 under the Georgia Hazardous Response Act. The State of Georgia has introduced a Voluntary Remediation Program (‘‘VRP’’) that provides for a risk-based approach toward environmental remediation. We believe the provisions of the VRP are applicable to the Marietta site. As of November 30, 2013, liabilities related to the remediation of the Marietta site presented within the condensed consolidated balance sheets reflect an undiscounted, pre-tax liability of $6.7 million, which represents our best estimate of remaining remediation costs for this site. We arrived at the current estimates based on studies prepared by independent third party environmental consulting firms. In the future, we plan to submit an application to enter the Marietta, Georgia site into the VRP. |
|
| Additionally, one of our subsidiaries previously conducted manufacturing operations at a facility in Cartersville, Georgia that has since been sold and where sub-surface contamination exists. Pursuant to the terms of the sale, the subsidiary retained environmental exposure that might arise from its previous use of this property. Management is preparing a plan to address sub-surface contamination at this location. Based on recent data, the contamination has migrated off site and is present at a greater depth than originally anticipated. In the future, we will submit an application to enter the Cartersville, Georgia site into the VRP. As of November 30, 2013, liabilities related to the remediation of the Cartersville site presented within the condensed consolidated balance sheets reflect an undiscounted, pre-tax liability of $0.4 million, which represents our best estimate of remaining remediation costs for this site. |
|
| The actual cost of remediation of the Marietta and Cartersville sites could vary depending upon the results of additional testing and geological studies, the rate at which site conditions may change, the success of initial remediation designed to address the most significant areas of contamination, and changes in regulatory requirements. While it is reasonably possible that the total costs incurred by us in connection with these matters could range up to an aggregate of $16.0 million, management’s best estimate of total remaining remediation costs for these two sites combined is $7.1 million. |
|
