HP Inc. has agreed to pay US$6 million (€5.11 million) to settle charges levied by the U.S Securities and Exchange Commission that the company misled investors by failing to disclose the impact of sales practices.
The U.S Securities and Exchange Commission (SEC) imposes a $6 million (€5.11 million) penalty as well instigating cease and desist proceedings against HP Inc. without admitting or denying the SEC‘s findings.
Between early 2015 and June 2016, HP regional managers used a variety of incentives to accelerate, or “pull-in,” to the current quarter sales of printer consumables that they would otherwise expect to materialise in later quarters.
The SEC also found that managers in the HP Asia Pacific and Japan (APJ) region sold printing supplies to distributors who HP known to be involved in selling HP printing supplies into grey market channels causing significant margin erosion and cannibalisation of HP sales in HP’s European and African markets.
The SEC said “The practice had occurred on a small scale in APJ for years and came to be included in APJ’s budgeting process. To engage in the A Business [grey market], sales managers in APJ provided HP product to resellers and brokers within their region at higher than normal discounts, knowing they would sell the goods through a network of firms into the Middle East.” In some instances, the discounts were in excess of forty percent.
Despite the risk that these sales practices could negatively impact HP’s operating profit in future quarters, HP did not disclose to the market during the relevant time period that its use of the pull-ins and grey sales were causing decreased margins and increased channel inventory.
During this period, one regional general manager in the Printing segment described “unhealthy levels of stock” in Tier 1 and Tier 2, saying that “we needed the Supplies Revenue & we used significant amounts of contra to push in Supplies at T1 to > 2 weeks above their optimal levels.”
In June 2016, HP changed its go-to-market model, in part to address the undisclosed sales practices and undertook a channel inventory reduction that would reduce HP’s net revenue by approximately $450 million (€383 million) during the third and fourth quarters of 2016 the SEC said. The $450 million (€383 million) reduction represented 5% of HP’s reported printing segment net revenue for the second half of 2016.
Following the announcement, HP’s stock price dropped nearly 6%, eliminating more than $1 billion (€0.85 billion) of market capitalisation.
“Investors are entitled to accurate disclosures of business trends that are likely to have a material impact on a company’s future revenues or operating profits,” said Melissa Hodgman, an Associate Director in the SEC’s Division of Enforcement. “HP’s failure to disclose the foreseeable negative impact of its use of pull-ins and other sales practices created a misleading and incomplete picture of the company’s financial condition.”
