HP Inc. fined US$6M in penalty over APJ sales practices

The US Securities and Exchange Commission (SEC) has announced charges against HP Inc. for allegedly misleading investors in Asia-Pacific and Japan (APJ) by failing to disclose the impact of sales practices undertaken in an effort to meet quarterly sales and earnings targets.

According to the SEC, HP has agreed to pay US$6 million to settle the charges in a matter where HP failed to disclose material information regarding its print supplies channel inventory management and sales practices between November 2015 and June 2016.

During that period, the SEC outlined that “certain regional managers at HP undertook undisclosed sales practices to increase quarterly operating profit, leading to an erosion of profit margin and an increase in channel inventory, while failing to disclose known trends and uncertainties associated with the conduct”.

According to the SEC’s order, in an effort to meet quarterly sales targets, these HP regional managers used a variety of incentives to accelerate, or “pull-in” to the current quarter, sales of printing supplies that they otherwise expected to materialise in later quarters.

The order further finds that, in an effort to meet revenue and earnings targets, managers in one HP region sold printing supplies at “substantial discounts” to resellers known to sell HP products outside of the resellers’ designated territories, in violation of HP policy and distributor agreements.

“In a further attempt to meet revenue and earnings targets, in early 2015 through June 2016, certain HP sales managers in APJ sold to resellers or brokers known to sell HP supplies outside of their territory, described internally as “gray marketing” and known in APJ as “A-Business.” Despite increasing HP’s channel inventory and decreasing its margins worldwide, the A-Business sales and their impact on HP’s channel inventory and margins were not disclosed to the market,” the order read.

“To execute the A-Business, APJ sales teams sold supplies to resellers or brokers who they expected would later sell those supplies outside of their territory. 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, 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.

“Beginning in early 2015 and continuing through the second quarter of 2016, sales managers in APJ significantly increased the A-Business in order to fill gaps to sales targets. To entice distributors to take additional product, sales managers offered discounts, in some instances in excess of 40 per cent for A-Business sales, while discounts for local distributors were in the teens.

“In certain instances, to avoid the grey-marketed goods going from one APJ country to another and undercutting local prices, managers in certain APJ countries granted additional discounts to their local distributors, further undercutting margins within the region.”

As set forth in the order, HP changed its go-to-market model in part to address these undisclosed sales practices and undertook a channel inventory reduction that reduced its net revenue by approximately US$450 million during the third and fourth quarters of 2016.

“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,” the SEC’s division of enforcement associate director Melissa Hodgman said.

“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.”

The SEC’s order also found that HP violated the antifraud, reporting and disclosure controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, HP consented to a cease-and-desist order and to pay the $6 million penalty.

A HP spokesperson told Sprinter, “We are pleased to have resolved this matter, which involves historical disclosures from nearly five years ago.”

More information on the SEC order can be found here.

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