Impact of Incremental Tariffs on Profitability and Margins
The net impact of tariffs was around the top end of the estimated range for the quarter, approximately $250 million to $350 million.
Tariffs impacted all three primary segments, with about 55% of the impact in Construction Industries, 20% in Resource Industries, and 25% in Energy & Transportation.
The company expects the net impact from tariffs for 2025 to be around $1.3 billion to $1.5 billion, net of mitigating actions.
Management emphasized the fluidity of trade negotiations and the uncertainty surrounding future tariff impacts, with plans to implement long-term mitigation strategies once clarity is achieved.
The company is considering all options, including sourcing adjustments and pricing strategies, to mitigate tariff impacts over the medium to long term.
Tariff-Related Inventory Valuation Headwinds and Price/Cos Impact
The company highlighted tariff-related LIFO inventory valuation headwinds impacting gross margins, with an estimated 80 basis points of the 50 basis points gross margin decline for the year attributable to LIFO.
Management emphasized that these impacts are mostly transitory and expect gross margins to recover over time as they work back toward their price-cost neutrality target.
The September pricing cycle will include further increases on products directly imported by Grainger, expected to add 2% to 2.5% net annualized price inflation, contributing to a total of approximately 1% price increase for 2025.
Impact of Tariffs and Trade Negotiations on Supply Chain Strategy
Mohawk emphasizes the importance of local production, with about 85% of U.S. sales produced in North America, including Mexico under USMCA.
The company is actively monitoring and adjusting to tariffs, with a new deadline of August 1 for tariff negotiations.
Tariffs initially ranged from 10% to 50%, with ongoing negotiations causing uncertainty.
Mohawk is promoting domestically produced collections and optimizing supply chains to mitigate tariff impacts.
The company is adjusting prices and supply chain strategies in response to evolving tariffs, with no current inclusion of potential tariff impacts in guidance.
Strategic Focus on High-Margin Revenue Mix and Tariff Mitigation
Thermon's strategic shift toward higher-margin OpEx revenues across diverse end markets has contributed to a 30 basis point gross margin improvement despite volume declines.
Tariff mitigation measures, including prebuying materials, sourcing shifts, and price increases, began to take effect late in Q1, supporting margin expansion.
Management emphasized that operational discipline and proactive tariff strategies are key to maintaining profitability amid global trade uncertainties.
While revenue was impacted by delays, the company expects these to translate into future revenue recognition, indicating a focus on long-term margin stability.
Management highlighted the ongoing 25% automotive tariffs, which have significantly influenced import patterns and demand, especially in the tire industry.
The surge in tire imports into the U.S. following the early May tariff deadline has elevated channel inventories and weighed on local tire manufacturing, with expectations of normalization in June data.
Tariffs on India, including potential 15-25% rates, are expected to impact carbon black imports, making them less economically viable and influencing global supply dynamics.
Negotiations for tariffs in India are underway for 2026, with early customer actions driven by elevated tire imports and optimistic outlook for resolution.
European markets are under investigation for Chinese tire dumping, which could alter competitive dynamics and import pressures in the region.
Management anticipates that the new tariff paradigm could lead to a demand ramp-up in 2026, despite current uncertainties and cautious customer behavior.
Dafinchi