Impact of Trade Uncertainty on 2025 Outlook and Margin Management
Timken has reduced the high end of its 2025 earnings guidance due to cautious outlook on the second half, primarily driven by trade uncertainty.
The volatile tariff environment has led to incremental costs, but the company is actively passing these costs into the market through repricing, with some lag.
Timken estimates a full-year net negative impact from tariffs of approximately $10 million, an improvement from previous estimates of $25 million, with full mitigation expected by 2026.
Impact of Tariffs on Cost Structure and Pricing Strategy
The company's global direct tariff impact in 2025 is estimated at approximately $40 million, down from an earlier estimate of $60 million, reflecting changes in tariffs, especially on China and copper.
Management highlighted ongoing analysis of cost inputs and active adjustments in pricing strategies to mitigate tariff effects, with full realization of recent tariff-related price increases expected in the second half of the year.
Tariffs on Europe are now set at 15%, and copper tariffs are also impacting costs, leading to multiple rounds of staggered price increases between March and June, with full effects anticipated in the latter half of 2025.
The company has a track record of successfully navigating inflationary periods and remains confident in maintaining favorable price/cost outcomes despite the fluid tariff environment.
Strategic Supply Chain Diversification and Tariff Mitigation Efforts
The company successfully mitigated the impact of tariffs, reducing China exposure from 24% in 2024 to 10% by the end of 2025.
Diversification strategies included sourcing from more favorable regions, renegotiating supplier agreements, and bringing some manufacturing back to the U.S.
Tariff impact increased from 180 basis points last quarter to 290 basis points due to settled tariffs at 30%, but management remains confident in mitigation plans to offset future impacts.
Adjusted EBITDA margin in Q4 was 14.8%, down from 17.7% in the prior year quarter, mainly due to lower volumes and tariff impacts.
Adjusted EPS for fiscal 2025 was $1.34, supported by one-time items and restructuring savings despite lower sales and production volumes.
Adjusted EPS in Q4 declined to $0.34 from $0.49 in the prior year quarter.
Capital expenditures were $87 million in fiscal 2025, compared to $102 million the prior year.
Free operating cash flow for fiscal 2025 was $121 million, down from $175 million the prior year, impacted by lower net income and higher inventory costs.
Kennametal reported a 4% organic sales decline for fiscal 2025, with Metal Cutting down 5% and Infrastructure down 2%.
Kennametal returned $122 million to shareholders in fiscal 2025 through $60 million in share repurchases and $62 million in dividends.
Q4 sales declined 5% organically year-over-year, with Metal Cutting down 4% and Infrastructure down 5%.
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.
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.
Dafinchi