Note 10 - Commitments and Contingencies

6 Months Ended

Feb. 28, 2015

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

10. Commitments and Contingencies

The Company and its operations are subject to various federal, state and local laws and regulations governing, among other things, air emissions, wastewater discharges, and the generation, handling, storage, transportation, treatment and disposal of hazardous waste and other substances. In particular, industrial laundries use and must dispose of detergent waste water and other residues, and, in the past used perchloroethylene and other dry cleaning solvents. The Company is attentive to the environmental concerns surrounding the disposal of these materials and has, through the years, taken measures to avoid their improper disposal. In the past, the Company has settled, or contributed to the settlement of, actions or claims brought against the Company relating to the disposal of hazardous materials and there can be no assurance that the Company will not have to expend material amounts to remediate the consequences of any such disposal in the future.

US GAAP requires that a liability for contingencies be recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. The Company regularly consults with attorneys and outside consultants in its consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, management’s estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of the Company’s attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for environmental and other contingent liabilities.

Under environmental laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for the presence of such hazardous or toxic substances. There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon the Company under such laws or expose the Company to third-party actions such as tort suits. The Company continues to address environmental conditions under terms of consent orders or otherwise negotiated with the applicable environmental authorities with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, three sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina, Wilmington, North Carolina and Landover, Maryland.

The Company has accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated. The Company has potential exposure related to a parcel of land (the "Central Area") related to the Woburn, Massachusetts site discussed above. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the "EPA") has provided the Company and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area. The Company, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved. The Company has accrued costs to perform certain work responsive to EPA's comments. The Company is also in discussions with EPA concerning its invoices for oversight costs with respect to the Woburn site and the Central Area. The Company has implemented mitigation measures and continues to monitor environmental conditions at the Somerville, Massachusetts site. The Company increased its environmental contingency reserves by approximately $3.6 million during the second fiscal quarter of 2015 due primarily to additional costs it expects to incur associated with the construction of a planned municipal transit station in the area of its Somerville site.

The Company routinely reviews and evaluates sites that may require remediation and monitoring and determines its estimated costs based on various estimates and assumptions. These estimates are developed using its internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on:

• Management’s judgment and experience in remediating and monitoring the Company’s sites;

• Information available from regulatory agencies as to costs of remediation and monitoring;

• The number, financial resources and relative degree of responsibility of other potentially responsible parties (“PRPs”) who may be liable for remediation and monitoring of a specific site; and

• The typical allocation of costs among PRPs.

There is usually a range of reasonable estimates of the costs associated with each site. In accordance with US GAAP, the Company’s accruals reflect the amount within the range that it believes is the best estimate or the low end of a range of estimates if no point within the range is a better estimate. Where it believes that both the amount of a particular liability and the timing of the payments are reliably determinable, the Company adjusts the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discounts the cost to present value using current risk-free interest rates. As of February 28, 2015, the risk-free interest rates utilized by the Company ranged from 2.0% to 2.6%.

For environmental liabilities that have been discounted, the Company includes interest accretion, based on the effective interest method, in selling and administrative expenses on the Consolidated Statements of Income. The changes to the Company’s environmental liabilities for the twenty-six weeks ended February 28, 2015 are as follows (in thousands):

	February 28, 2015
Beginning balance as of August 30, 2014	$	19,846
Payments made for which reserves had been provided		(1,683	)
Insurance proceeds received		65
Interest accretion		302
Revision in estimates		3,025
Change in discount rates		946
Balance as of February 28, 2015	$	22,501

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of February 28, 2015, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

(In thousands)	2015			2016			2017			2018			2019			Thereafter			Total
Estimated costs – current dollars	$	3,536		$	4,940		$	1,663		$	745		$	863		$	12,406		$	24,153
Estimated insurance proceeds		(107	)		(159	)		(173	)		(159	)		(173	)		(1,430	)		(2,201	)
Net anticipated costs	$	3,429		$	4,781		$	1,490		$	586		$	690		$	10,976		$	21,952
Effect of inflation																				7,377
Effect of discounting																				(6,828	)
Balance as of February 28, 2015																			$	22,501

Estimated insurance proceeds are primarily received from an annuity received as part of a legal settlement with an insurance company. Annual proceeds of approximately $0.3 million are deposited into an escrow account which funds remediation and monitoring costs for three sites related to former operations in Williamstown, Vermont. Annual proceeds received but not expended in the current year accumulate in this account and may be used in future years for costs related to this site through the year 2027. As of February 28, 2015, the balance in this escrow account, which is held in a trust and is not recorded in the Company’s accompanying Consolidated Balance Sheet, was approximately $2.9 million. Also included in estimated insurance proceeds are amounts the Company is entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

The Company’s nuclear garment decontamination facilities are licensed by the Nuclear Regulatory Commission (“NRC”), or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities. There can be no assurance that such regulation will not lead to material disruptions in the Company’s garment decontamination business.

From time to time, the Company is also subject to legal proceedings and claims arising from the conduct of its business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above. During the thirteen weeks ended February 28, 2015, the Company recorded higher legal expenses and reserves related to miscellaneous legal matters, including NECC, which were largely offset by the recording of the expected insurance recovery of defense costs associated with the NECC matter.

While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance have been properly accrued in accordance with US GAAP. It is possible, however, that the future financial position or results of operations for any particular period could be materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes out of the Company’s control.

As previously disclosed, the Company is a defendant in hundreds of lawsuits relating to New England Compounding Center’s (“NECC”) highly-publicized compounding and sale of tainted methylprednisolone acetate, which reportedly resulted in a widespread outbreak of fungal meningitis and other infections.  It has been reported that over 60 people died and another approximately 700 people were allegedly seriously injured as a result of this outbreak.  These suits against the Company relate to the limited, once-a-month cleaning services the Company provided to portions of NECC’s cleanroom facilities. 

In February 2013, suits against NECC were transferred to a multi-district litigation (“MDL”) proceeding in federal court in Boston, Massachusetts.  The MDL court appointed the Plaintiffs’ Steering Committee (“PSC”) for the NECC litigation.

NECC is in bankruptcy and on December 3, 2014 its Chapter 11 Trustee (the “Chapter 11 Trustee”) proposed a Chapter 11 Plan for NECC (the “Plan”).  On December 16, 2014, the United States indicted 14 former owners, managers, employees and affiliates of NECC, alleging a number of crimes, including second-degree murder and racketeering.

On February 23, 2015, the Company entered into a Settlement and Release Agreement with the Chapter 11 Trustee and the Company’s insurers, which is supported by the PSC and the creditors’ committee (the “Settlement Agreement”).  Pursuant to the Settlement Agreement, the Company’s insurers will pay the full settlement amount of $30.5 million to the Chapter 11 Trustee for the benefit of creditors and other parties under the Plan.  The Settlement Agreement provides that the Company will receive the benefit of the releases and injunction set forth in the Plan, which bar all persons from asserting any claims against the Company relating to the NECC matter.  The effectiveness of the Settlement Agreement is conditioned on the bankruptcy court’s issuance of a confirmation order confirming the Plan on terms that do not adversely change the terms or scope of the releases and injunction set forth in the Plan. In addition, $30 million of the settlement amount will be held in escrow pending the exhaustion of all appeals that may be taken with respect to such confirmation order.  Upon the exhaustion of all such appeals, if a court has not adversely changed the terms or scope of the releases and injunction set forth in the Plan, then this settlement amount will be released from escrow and the settlement will be final.

If either the bankruptcy court’s confirmation order or any resulting appeal adversely affects the releases or injunction as provided for in the Plan, then we or our insurers may terminate the Settlement Agreement, in which case the litigation would resume. If the litigation were to resume based on the information currently available, the Company believes that a loss with respect to this matter would be neither probable nor remote and the Company is unable to reasonably assess an estimate or range of estimates of any potential losses. However, if the Company is found to be liable with respect to litigation relating to NECC that is not covered by the Company’s insurance or exceeds such insurance coverage, the Company may incur liabilities that are material to its financial condition and operating results.