RRX Q2 Deep Dive: Data Center Orders Offset Industrial Headwinds, Eyes on Margin Recovery

Industrials products and automation company Regal Rexnord (NYSE:RRX). met Wall Street’s revenue expectations in Q2 CY2025, but sales fell by 3.3% year on year to $1.50 billion. Its non-GAAP profit of $2.48 per share was 1.5% above analysts’ consensus estimates.

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StockStory’s Take

Regal Rexnord’s second quarter saw results that met Wall Street revenue expectations, with adjusted earnings per share slightly ahead of consensus. Management attributed this performance to resilience in the company’s industrial and automation segments, despite lingering headwinds in metals, mining, and rare earth magnet availability. CEO Louis Pinkham highlighted that temporary delays in higher-margin shipments, particularly in medical and defense, were offset by strong demand in residential and commercial HVAC and aerospace. The team emphasized ongoing efforts to neutralize tariff impacts and maintain stable operating margins, while acknowledging that project timing and supply constraints weighed on some segments.

Looking ahead, Regal Rexnord’s guidance reflects optimism for gradual recovery and growth, driven by backlog expansion in key segments and recent large data center wins in the Automation and Motion Control (AMC) division. Management expects order momentum to translate into higher shippable backlog, especially in late 2025 and into 2026. CFO Rob Rehard pointed to progress on cost synergies and cross-sell initiatives, stating that, “We are confident we can create value for our shareholders in 2025 and many years to come,” but cautioned that rare earth magnet sourcing and tariff mitigation remain key execution risks.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to strong execution in HVAC and aerospace, offsetting supply chain and project timing issues in other segments, and highlighted cross-sell synergy progress and backlog growth as positives for future quarters.

• Rare earth magnet disruption: Temporary shortages of rare earth magnets impacted AMC’s higher-margin medical and defense shipments, forcing a brief facility shutdown and delaying revenue. Management expects to recover lost sales in the back half of the year as sourcing improves.
• Data center order momentum: The company secured a major hyperscale data center switchgear order in July, with CEO Louis Pinkham indicating the potential for several similar contracts in the coming year. This win is seen as a key growth driver for AMC and is expected to boost backlog and mix going into 2026.
• Cross-sell synergies on track: Regal Rexnord reported $120 million in cross-sell synergies through last year and is targeting an incremental $50 million this year. Management noted that the funnel for cross-sell opportunities is growing, with higher-than-average win rates and a focus on larger engineered solutions.
• HVAC and aerospace strength: Despite broader industrial softness, residential and commercial HVAC as well as aerospace performed above expectations. Residential HVAC benefited from strong volume, while aerospace continued to outpace internal forecasts, helping to offset project delays elsewhere.
• Industrial Powertrain backlog growth: The IPS segment saw healthy growth in long-cycle project orders, particularly in metals and mining, contributing to a 15% year-to-date backlog increase. Management expects this backlog to convert into sales at an accelerating rate in late 2025 and into 2026.

Drivers of Future Performance

Regal Rexnord expects near-term growth to be driven by data center orders, backlog conversion in key segments, and continued cost synergy realization, though rare earth supply and tariffs remain risks.

• Data center and automation tailwind: Management anticipates that data center project wins in AMC, along with increased automation orders in IPS, will drive low single-digit revenue growth in the back half of 2025 and help sustain momentum into 2026.
• Margin recovery dependent on supply chain: The company’s outlook for margin improvement hinges on resolving rare earth magnet shortages and normalizing costs associated with expedited sourcing. Management believes these headwinds are temporary, with most margin benefit expected in the fourth quarter and beyond.
• Tariff and macroeconomic uncertainty: While current tariffs have only modestly impacted demand, management is closely monitoring potential changes. Efforts to mitigate tariff costs and optimize global sourcing will be critical to maintaining profitability as geopolitical and macro risks persist.

Catalysts in Upcoming Quarters

In future quarters, our analyst team will closely watch (1) the ramp and monetization of large data center orders in AMC, (2) the pace of backlog conversion in IPS and its impact on sales growth, and (3) the successful mitigation of rare earth supply and tariff challenges. Execution on remaining cost synergies and evidence of margin recovery in the second half will also be key markers of progress.

Regal Rexnord currently trades at $137.95, down from $145.28 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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