HP Inc. (NYSE:HPQ)

The common-size income statement reveals a significant shift in the company's cost structure and profitability drivers between 2013 and 2018. A primary trend is the compression of gross margins beginning in 2016, which was offset by a substantial reduction in operating expenses to maintain stable operating earnings.

Gross Margin Analysis

Gross profit margins remained relatively stable between 2013 and 2015, averaging approximately 23.6%. However, a sharp decline occurred in 2016, with the margin dropping to 18.65% and continuing a slight downward trend to 18.25% by 2018. This contraction is directly attributed to an increase in the cost of revenue, which rose from an average of 76.3% in the first three years to over 81% in the final three years.

Operational Expense Management

A notable improvement in operational efficiency is observed in the selling, general, and administrative (SG&A) expenses. From 2013 to 2015, SG&A costs consistently represented nearly 12% of net revenue. Starting in 2016, these expenses dropped significantly to approximately 8%, remaining at that level through 2018. This reduction in overhead helped mitigate the impact of the shrinking gross margins on the bottom line.

Operating Income Stability

Despite the volatility in gross margins and SG&A, earnings from operations remained remarkably resilient. Operating margins fluctuated within a narrow band of 5.29% to 7.36%. The peak operating margin of 7.36% in 2016 coincides with the sharpest reduction in SG&A, suggesting that cost-cutting measures were successfully implemented to preserve operating profitability during a period of rising cost of goods sold.

Net Profitability and Tax Impact

Net earnings showed stability between 4.41% and 5.53% from 2013 to 2017. A significant anomaly occurred in 2018, where net earnings spiked to 9.11%. This increase was not driven by operational growth, as earnings from continuing operations before taxes actually decreased to 5.15%. Instead, the surge in net profitability was the result of a substantial tax benefit, which contributed 3.96% to net revenue in 2018, contrasting sharply with the tax provisions observed in previous years.

Overall, the data indicates a strategic pivot where the company absorbed higher production costs by aggressively reducing administrative and selling overhead. While operating efficiency improved, the final net income peak in 2018 was primarily influenced by non-operational tax benefits rather than core margin expansion.