After years of growing expectations following the Sept. 11 terrorist attacks, airport security system maker OSI Systems Inc. has received what could prove to be its biggest government contract yet.
Rapiscan Systems, the security division of the diversified Hawthorne company, will provide airports across the country with its advanced 620AT X-ray systems to screen passengers’ carry-on bags.
The $45,000 system is a step up from the bag screening systems currently in use, giving screeners a clearer display of the scanned items and the ability to upgrade the systems as new technology is developed.
The contract, which covers equipment delivery and servicing, is worth up to $97 million if OSI’s technology is chosen by the Transportation Security Administration to equip hundreds of airports after a nationwide pilot program.
“This is a fairly significant award,” said Joshua Jabs, a research analyst who tracks OSI for Roth Capital Partners LLC, a Newport Beach investment bank that seeks business with the firm. Jabs noted the typical OSI contract is far less.
OSI will be competing against L-3 Communications Holdings Inc., based in New York City, and Smiths Detections Inc., a Danbury, Conn. division of Smiths Group PLC., both of which received similar deals from the transportation agency.
Jabs said he believes OSI, which has about a 50 percent market share in U.S. airport security checkpoints, is the low-cost provider among the three companies, which could help its chances when it comes time for the government to purchase the systems.
“TSA will make a cost-performance decision at the end of the pilot,” said Jabs, who has a “buy” rating on the stock. “A sole source award to OSI would be a surprise, but I think they will be included at least on equal footing with the other vendors going forward, which would provide a near-term boost for the company.”
The contract terms allow administration officials to weigh the cost of each company’s system versus its performance and move directly into purchasing without having to request bids for a new contract.
OSI executives did not return repeated calls for comment.
Practical improvements
The contract represents a significant step forward for the government after years of relative inaction in the advancement of airport security technology, according to industry experts.
Despite occasional efforts to adapt to specific threats like the recent crackdown on liquid in passengers’ carry-on bags airport security screening technology has not seen major changes for years.
“It’s been a fairly mature industry with respect to passenger screening,” said Jack Riley, a homeland security expert with the Rand Corp., a non-partisan think tank. “(This) could be a pretty significant advance.”
The decision by the transportation agency to award the contracts for the advance X-ray equipment comes after the agency has shifted its focus away from pursuing even more advanced technology, such as CT scans.
OSI did not have any CT scanner under development. But the company is a leader in so-called backscatter imaging technology, which is able to detect hidden weapons, even those made out of advanced plastics. However, the technology poses privacy concerns, since it can reveal a person’s body in intimate detail.
“(The agency) got new leadership back in December that I think looked at more practical improvements,” Jabs said. “Instead of a full-fledged replacement of the X-ray technology they’re upgrading to a new generation of X-ray machines.”
In addition to airport security equipment, OSI makes electronic components used in office products, aerospace systems and medical devices. It had annual revenue of $505 million in 2006, with less than half of that coming from its cargo inspection airport security systems.
However, the company has lost money two out of the last three years, though it did report a $3.6 million profit for the third quarter ended March 31. And last week OSI forecast a 22 percent jump in fourth quarter revenue to $153 million, slightly below Wall Street estimates.
