Staff Reporter

Even though the hubbub over a Dubai company taking over U.S. ports has died down, executives at OSI Systems Inc. hope the issue doesn't go away completely.

The furor along with complimentary words by CNBC market mover Jim Cramer helped push the maker of cargo inspection systems to a 52-week high of $23.34 in March.

Since then, the controversy has faded and so has the Hawthorne company's stock, which closed at $19.18 on June 15. But that's still well above the $15 range it was trading at in September. The company can thank the security concerns that remain a political priority.

Indeed, a company executive testified earlier this month on port security before a congressional subcommittee, an exercise that Chief Executive Deepak Chopra hopes will become a regular event.

"Thanks to the Dubai Ports World incident, there's more awareness in Washington that we need more security," he said. "There has been a lot of talk about funding approval for U.S. Customs in next year's budget, and we're hoping that we will capture more of that next year."

The Hawthorne-based company's Rapiscan division provides security and inspection equipment for airline passenger screening and cargo and baggage screening. It is the largest provider of checkpoint X-ray equipment to the Transportation Security Administration.

But that's still not a huge amount. To date, about 75 percent of the unit's revenues come from overseas customers, with the company providing screening and security equipment to all airports in the United Kingdom, Israel, and various airports in Europe and Africa.

But the company's fortunes with U.S. airports may be about to change. It was just selected by TSA for a project linking 429 airport security systems in the U.S. The initial phase of the contract is worth about $800,000 and will have OSI developing software that will be used to integrate all the security screening systems. It should be completed by the end of summer.

The idea is to create a network of the metal detectors, X-ray machines and other systems that will be able to share data among airports. Phase one is admittedly a small amount of money, but the full contract would be to implement the program at all the airports, and that could stretch into the multimillions of dollars.

Analyst Brian Ruttenbur with Morgan Keegan & Co. said the company is well positioned for the coming increase in spending in large cargo and baggage screening over the next year or two. "We like the long term prospects for the company, particularly in the security arena," Ruttenbur wrote in a recent research note. The analyst maintains a "market perform" rating on the stock, along with two other analysts. Three others maintain a buy rating.

Long-term results

Rapiscan has been waiting for the U.S. government to beef up cargo inspection equipment for some time it's focused much of its research and development spending over the past two years in the area, and that had hurt its bottom line in the past.

But OSI's investment started paying off last quarter, when all of its units tipped to profitability. The company reported net income of $1 million on revenues of $108 million for the quarter ended March 31, compared to a loss of $3 million on revenues of $94 million for the year-ago period.

It was the first quarter of profitability for the company's cargo inspection unit, a milestone for the fledgling division. And the company has already announced $30 million in new cargo orders this year.

"The reason we're reaching profitability now is that we're beginning to ship some of those past orders," Chopra said. "Definitely there is more traction in our cargo products, both domestic and international."

In the meantime, Rapiscan just won a contract to provide screening equipment for all border crossings between Israel and Gaza and the West Bank. A notoriously security-rigorous country, Israel has been deploying Rapiscan equipment since the 1990s.

Between a recent lawsuit and high-profile security stories, the company's baggage and cargo screening usually gets the most attention, but only accounts for about 30 percent of company revenues.

OSI's largest segment is its health-care division, which brings in about 50 percent of revenues. The oddly named Spacelabs Healthcare unit sells patient monitoring equipment, such as bedside systems, that monitor a patient's vital signs. (The company's opto-electronics division manufactures sensors that are used in both security screening and medical monitoring equipment.)

The medical unit competes with giants such as General Electric Co.'s GE Medical Systems, and with Royal Philips Electronics NV's Philips Medical Systems and has seen sales grow 18 percent so far this year.

Meanwhile, the company was just freed from a lawsuit filed by L-3 Communications Inc., one of its competitors, when a jury in New York awarded OSI about $125 million in damages. That prompted a temporary surge in its stock price to $20.18 before it pulled back.

The four-year lawsuit concerned security technology and assets that OSI and L-3 were supposed to acquire in a joint acquisition of a third company, Perkin Elmer Security Detection Systems. OSI's lawyers successfully argued that L-3 defrauded OSI out of its share of the technology, and caused the company to lose significant security business in the post-9/11 surge in security spending.

A victory in the lawsuit substantially reduces OSI's legal costs, which had been running close to half a million dollars per quarter. "It's been a very expensive lawsuit for us," Chopra said.

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