Sears Holdings Corp
Sears Sues Tool Manufacturer One World Seeking to Require Continued Performance Under Parties’ Supply Agreement
Mon 05/15/2017 18:49 PM
Relevant Document:
Complaint
Today, Sears Holdings Corp. and two affiliates filed a complaint in the Circuit Court of Cook County, Chancery Division against One World, a manufacturer of power tools and accessories and vendor under the Craftsman brand. The Illinois state court complaint seeks a declaratory judgment that Sears has not breached its supply agreement with the vendor and that One World does not have the right to suspend its performance under the parties’ supply agreement. The complaint also seeks a declaration that One World has no reasonable grounds for insecurity and is required to continue accepting payments for import products via Sears Roebuck Acceptance Corp., or SRAC, letters of credit.
Within the last week, the complaint says, One World has threatened to refuse to perform under the supply agreement unless Sears agrees to lower its forecasts for Craftsman products to less than a third of the amount on which the parties agreed in their most recent forecasting discussions. Although it appears that the credit support offered to One World is relatively small compared with Sears’ annual turnover, the lawsuit could be indicative of the extent of company’s willingness to fight vendors on tightening terms.
Sears contends that One World has “no basis for its purported concerns” given the companies’ nine-year relationship and Sears’ contention that it has consistently met its obligations, specifically within the last twelve months. Sears, it says in the complaint, has paid One World for Craftsman power tools delivered overseas “in arrears without delay” and has secured its performance with letters of credit by SRAC. “Sears has paid and continues to pay all of its debts as they come due and is fully capable of continuing to meet its obligations under the Supply Agreement,” says the complaint. “Separately, if Sears fails to meet its obligations, One World has an immediate right to draw on SRAC’s letters of credit,” the complaint asserts.
Per the complaint, One World has referenced “downgrades” in SRAC’s credit rating, which Sears calls “unwarranted criticism” because the supply agreement does not include a “rating trigger” and One World has accepted SRAC letters of credit as payment for nine years.
Moreover says the complaint, a Moody’s rating of “not prime” published in February was “an affirmation - not a new action - by Moody’s on a commercial paper instrument, not on the SRAC entity, and does not reflect a change in circumstances,” the filing notes. Any other “downgrades” of Sears’ credit are “irrelevant” to One World’s reasonable “security” under the supply agreement, Sears asserts.
The real reason One World is seeking to renegotiate the supply agreement, Sears alleges, is One World’s desire to reduce Sears’ business so that One World can do business with Sears’ competitors “by diverting resources committed to Sears rather than expand its manufacturing or outsourced procurement capacity.” Sears CEO Eddie Lampert stressed this point in a blog post today, adding that the tool company has “enjoyed significant benefits from its relationship with Sears,” having been paid more than $868 million by Sears since 2007. Sears has helped One World build a “formidable presence in the tool industry,” according to Lampert, who adds that Sears has paid and continues to make all payments to One World as they come due and are fully capable of continuing to meet obligations under the companies’ supply agreement. He says that Sears purchases more than $13 billion a year in goods and services.
Sears is represented in the action by Steptoe & Johnson LLP.
Prior Amendment
It has been “just over two years” since the parties amended their supply agreement, but One World seeks again to renegotiate the terms “under the guise of financial insecurity,” Sears says in its complaint. One World has “refused to provide any justification for its sudden position that Sears’ uninterrupted performance under the Supply Agreement, coupled with SRAC’s letters of credit providing a universally recognized secure method of payment separate from the credit of the purchaser, is not sufficient under the Supply Agreement,” Sears says. This is despite “numerous conversations and letters exchanged between the parties in which Sears has sought explanation for One World’s position,” according to the complaint.
In April 2015, Sears adds in its complaint, One World “suddenly claimed” that it did not have adequate assurance of Sears’ payment obligations and sought to impose a unilateral credit limit on Sears in addition to the terms of the supply agreement. The timing of One World’s demand “coincided with Sears’ own initiatives to ‘right size’ its stores and operations” and Sears reduced its forecasts and requirements for One World products and agreed to revise its credit target of $7 million in a May 2015 amendment. The complaint emphasizes that during and after the amendment, One World “continued to accept payment in the same manner [as] it had before: via letters of credit issued by SRAC.”
Vendor Concerns
The company has been working with its vendors to meet concerns related to “the recent wave of dire predictions about our company’s future have done harm to our business” and the efforts have resulted in a “meaningful reduction” in vendors’ counterparty risk with Sears Holdings, Lampert pens in his blog post. Nearly all of Sears’ vendors have a level of credit risk that is “both affordable and appropriate given the relationships we have and our history of always meeting our obligations,” the CEO asserts.
Despite this, “One World has informed us of their intention to take the very aggressive step of filing a lawsuit against us,” Lampert underlines in his blog post, adding that the vendor seeks to “embarrass [Sears] in the media to force us to let them out of their contract.” While Sears is “generally not a litigious company,” Lampert says the company will “fight back to protect [its] legal rights, hold One World to its contractual agreements, and ensure that our customers are not affected by this business dispute.”
Sears has worked to reduce its net inventory balance in an effort to help the company transform into an asset-light business model, an effort that has been affected by the company’s store closures and ongoing divestiture program. As shown below, in a presentation covering results for the third quarter of 2016, Sears highlighted the the company’s reduction in both inventory and payables as a means to decrease the level of vendor support required to run the business.
As long as Sears receives the support of its vendors and stakeholders, according to Lampert, Sears can “continue to operate as a very significant member-centric integrated retailer with a large number of stores.”
Sears has used blog posts in the past to respond to vendor issues, including a response to The Wall Street Journal, which had reported on changing payment terms between Sears and its vendors and insurance policies that some vendors had taken out to cover potential nonpayment from Sears. Sears again responded to an article by The Wall Street Journal that reported on Jakks Pacific halting shipments to Kmart.
In addition, the company’s quarterly and annual financial reports include disclosures on trade creditor matters, with the company’s most recent 10-K stating,
In its 10-K filed March 21, Sears disclosed that historical operating results indicate that “substantial doubt exists related to the Company’s ability to continue as a going concern” referencing potential difficulties with both the company’s ability to obtain additional debt financing and limitations to sell assets under the company’s pension plan protection and forbearance agreement , or PPPFA, with the Pension Benefit Guaranty Corp. The company also laid out a series of actions that it said it believes are “probable of mitigating the substantial doubt” and are capable of satisfying the company’s liquidity needs for the 12 months following the issuance of financial statements.
The company has a $500 million secured loan facility maturing in July, and the company’s restructuring program seeks to repay amounts outstanding under both that facility and the company’s $500 million senior secured real estate loan facility raised in January, with proceeds from the targeted $1 billion in real estate assets. In an April 21 update, the company said that it received more than $700 million in non-overlapping bids for over 60 properties. The update also noted that Sears has upped its targeted annual cost savings to $1.25 billion from $1 billion previously.
An image of the company’s capital structure is shown below.
Complaint
Today, Sears Holdings Corp. and two affiliates filed a complaint in the Circuit Court of Cook County, Chancery Division against One World, a manufacturer of power tools and accessories and vendor under the Craftsman brand. The Illinois state court complaint seeks a declaratory judgment that Sears has not breached its supply agreement with the vendor and that One World does not have the right to suspend its performance under the parties’ supply agreement. The complaint also seeks a declaration that One World has no reasonable grounds for insecurity and is required to continue accepting payments for import products via Sears Roebuck Acceptance Corp., or SRAC, letters of credit.
Within the last week, the complaint says, One World has threatened to refuse to perform under the supply agreement unless Sears agrees to lower its forecasts for Craftsman products to less than a third of the amount on which the parties agreed in their most recent forecasting discussions. Although it appears that the credit support offered to One World is relatively small compared with Sears’ annual turnover, the lawsuit could be indicative of the extent of company’s willingness to fight vendors on tightening terms.
Sears contends that One World has “no basis for its purported concerns” given the companies’ nine-year relationship and Sears’ contention that it has consistently met its obligations, specifically within the last twelve months. Sears, it says in the complaint, has paid One World for Craftsman power tools delivered overseas “in arrears without delay” and has secured its performance with letters of credit by SRAC. “Sears has paid and continues to pay all of its debts as they come due and is fully capable of continuing to meet its obligations under the Supply Agreement,” says the complaint. “Separately, if Sears fails to meet its obligations, One World has an immediate right to draw on SRAC’s letters of credit,” the complaint asserts.
Per the complaint, One World has referenced “downgrades” in SRAC’s credit rating, which Sears calls “unwarranted criticism” because the supply agreement does not include a “rating trigger” and One World has accepted SRAC letters of credit as payment for nine years.
Moreover says the complaint, a Moody’s rating of “not prime” published in February was “an affirmation - not a new action - by Moody’s on a commercial paper instrument, not on the SRAC entity, and does not reflect a change in circumstances,” the filing notes. Any other “downgrades” of Sears’ credit are “irrelevant” to One World’s reasonable “security” under the supply agreement, Sears asserts.
The real reason One World is seeking to renegotiate the supply agreement, Sears alleges, is One World’s desire to reduce Sears’ business so that One World can do business with Sears’ competitors “by diverting resources committed to Sears rather than expand its manufacturing or outsourced procurement capacity.” Sears CEO Eddie Lampert stressed this point in a blog post today, adding that the tool company has “enjoyed significant benefits from its relationship with Sears,” having been paid more than $868 million by Sears since 2007. Sears has helped One World build a “formidable presence in the tool industry,” according to Lampert, who adds that Sears has paid and continues to make all payments to One World as they come due and are fully capable of continuing to meet obligations under the companies’ supply agreement. He says that Sears purchases more than $13 billion a year in goods and services.
Sears is represented in the action by Steptoe & Johnson LLP.
Prior Amendment
It has been “just over two years” since the parties amended their supply agreement, but One World seeks again to renegotiate the terms “under the guise of financial insecurity,” Sears says in its complaint. One World has “refused to provide any justification for its sudden position that Sears’ uninterrupted performance under the Supply Agreement, coupled with SRAC’s letters of credit providing a universally recognized secure method of payment separate from the credit of the purchaser, is not sufficient under the Supply Agreement,” Sears says. This is despite “numerous conversations and letters exchanged between the parties in which Sears has sought explanation for One World’s position,” according to the complaint.
In April 2015, Sears adds in its complaint, One World “suddenly claimed” that it did not have adequate assurance of Sears’ payment obligations and sought to impose a unilateral credit limit on Sears in addition to the terms of the supply agreement. The timing of One World’s demand “coincided with Sears’ own initiatives to ‘right size’ its stores and operations” and Sears reduced its forecasts and requirements for One World products and agreed to revise its credit target of $7 million in a May 2015 amendment. The complaint emphasizes that during and after the amendment, One World “continued to accept payment in the same manner [as] it had before: via letters of credit issued by SRAC.”
Vendor Concerns
The company has been working with its vendors to meet concerns related to “the recent wave of dire predictions about our company’s future have done harm to our business” and the efforts have resulted in a “meaningful reduction” in vendors’ counterparty risk with Sears Holdings, Lampert pens in his blog post. Nearly all of Sears’ vendors have a level of credit risk that is “both affordable and appropriate given the relationships we have and our history of always meeting our obligations,” the CEO asserts.
Despite this, “One World has informed us of their intention to take the very aggressive step of filing a lawsuit against us,” Lampert underlines in his blog post, adding that the vendor seeks to “embarrass [Sears] in the media to force us to let them out of their contract.” While Sears is “generally not a litigious company,” Lampert says the company will “fight back to protect [its] legal rights, hold One World to its contractual agreements, and ensure that our customers are not affected by this business dispute.”
Sears has worked to reduce its net inventory balance in an effort to help the company transform into an asset-light business model, an effort that has been affected by the company’s store closures and ongoing divestiture program. As shown below, in a presentation covering results for the third quarter of 2016, Sears highlighted the the company’s reduction in both inventory and payables as a means to decrease the level of vendor support required to run the business.
As long as Sears receives the support of its vendors and stakeholders, according to Lampert, Sears can “continue to operate as a very significant member-centric integrated retailer with a large number of stores.”
Sears has used blog posts in the past to respond to vendor issues, including a response to The Wall Street Journal, which had reported on changing payment terms between Sears and its vendors and insurance policies that some vendors had taken out to cover potential nonpayment from Sears. Sears again responded to an article by The Wall Street Journal that reported on Jakks Pacific halting shipments to Kmart.
In addition, the company’s quarterly and annual financial reports include disclosures on trade creditor matters, with the company’s most recent 10-K stating,
“We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations.”
In its 10-K filed March 21, Sears disclosed that historical operating results indicate that “substantial doubt exists related to the Company’s ability to continue as a going concern” referencing potential difficulties with both the company’s ability to obtain additional debt financing and limitations to sell assets under the company’s pension plan protection and forbearance agreement , or PPPFA, with the Pension Benefit Guaranty Corp. The company also laid out a series of actions that it said it believes are “probable of mitigating the substantial doubt” and are capable of satisfying the company’s liquidity needs for the 12 months following the issuance of financial statements.
The company has a $500 million secured loan facility maturing in July, and the company’s restructuring program seeks to repay amounts outstanding under both that facility and the company’s $500 million senior secured real estate loan facility raised in January, with proceeds from the targeted $1 billion in real estate assets. In an April 21 update, the company said that it received more than $700 million in non-overlapping bids for over 60 properties. The update also noted that Sears has upped its targeted annual cost savings to $1.25 billion from $1 billion previously.
An image of the company’s capital structure is shown below.
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