Varex's Q3 2025 Earnings Outlook: Navigating China Tariffs and Strategic Resilience in Medical and Industrial Imaging

The U.S.-China trade war has long cast a shadow over global supply chains, and Varex Imaging Corporation (VREX) is no exception. As the third quarter of 2025 approaches, the company faces a dual challenge: mitigating the immediate fallout from China's retaliatory tariffs while positioning itself for long-term growth in a volatile market. With medical and industrial imaging demand evolving rapidly, Varex's ability to adapt its operations and leverage its technological edge will determine its resilience in the coming months.

Near-Term Headwinds: China Tariffs and Revenue Uncertainty

China's 74.9% anti-dumping tariff on U.S. polyformaldehyde copolymer (POM copolymer), announced in May 2025, has directly impacted Varex's medical imaging supply chain. This material is critical for manufacturing X-ray components, and the sudden cost increase has led Chinese customers to delay purchases. In Q2 2025, Varex reported revenue of $213 million, up 3% year-over-year, driven by its Medical segment ($154 million) and Industrial segment ($59 million). However, the company has since revised its Q3 guidance to a range of $180–$200 million, with non-GAAP earnings per share projected to fall between -$0.05 and $0.10. This reflects a significant slowdown in China-based orders and underscores the fragility of its short-term outlook.

The tariffs have also forced Varex to reassess its debt management strategy. The company plans to repay $200 million in convertible notes due in June 2025 using $75 million in cash and $125 million in new debt. While this move simplifies its capital structure, it highlights the need for liquidity in an environment of heightened uncertainty.

Strategic Resilience: Diversification and Innovation

To counter the China tariff crisis, Varex is accelerating its global manufacturing footprint. The company has already begun shifting production to India, where lower labor costs and favorable trade policies could offset some of the losses in China. CEO Sunny Sanyal emphasized that this strategy will reduce reliance on a single market and improve cost efficiency. Additionally, Varex is investing in localized supply chains for key components, a move that could enhance flexibility in the face of future trade disruptions.

The Industrial segment has emerged as a critical growth driver. With double-digit revenue growth in non-destructive testing and semiconductor manufacturing, this division is less sensitive to geopolitical risks. Varex recently secured a $25 million order for cargo inspection systems, signaling strong demand for its industrial imaging solutions. As global supply chains prioritize security and precision, the company's expertise in high-resolution X-ray technology positions it to capture market share in sectors like aerospace and logistics.

Technologically, Varex is doubling down on R&D. Its pipeline includes AI-driven diagnostic tools and next-gen industrial imaging systems, which could differentiate it from competitors like GE and Siemens. The company's 30% market share in X-ray tubes and digital detectors is a testament to its innovation edge, and further advancements in AI integration could unlock new revenue streams in both medical and industrial applications.

Long-Term Growth: Medical Imaging's Global Expansion

Despite near-term challenges, the medical imaging market remains robust. The global X-ray tube market is projected to grow at a 6.7% CAGR through 2032, driven by rising chronic disease prevalence and advancements in diagnostic technology. Varex's focus on AI-enhanced imaging aligns with this trend, offering hospitals and clinics more accurate and efficient diagnostic tools.

However, China's $1.4 trillion stimulus package, which prioritizes domestic suppliers, poses a long-term risk. Varex's 30% market share in the region has already declined due to reduced customer demand. To mitigate this, the company is exploring cost pass-through strategies and expanding into untapped markets in Southeast Asia and Latin America.

Investment Considerations: Balancing Risks and Rewards

Varex's current valuation appears undervalued. With a forward P/E ratio below 20 and shares trading at a 20% discount to their 52-week high, the stock offers an asymmetric upside for long-term investors. However, the company's leverage ratio of 4.5x and S&P downgrade to 'B+' suggest caution.

For investors, the key is to monitor two factors:
1. Tariff developments: A potential extension of the U.S.-China 90-day truce (reducing tariffs to 10%) could stabilize Varex's China business.
2. R&D progress: Successful commercialization of AI-driven imaging systems could drive margin expansion and revenue diversification.

Conclusion: A Company in Transition

Varex's Q3 2025 earnings outlook reflects the turbulence of its trade environment, but its strategic initiatives—supply chain diversification, R&D investment, and industrial market expansion—position it for long-term resilience. While near-term profitability may remain under pressure, the company's technological leadership and adaptability make it a compelling case study in navigating geopolitical headwinds. For investors with a multi-year horizon, Varex's discounted valuation and growth potential in industrial imaging warrant a closer look.