Investors bid up the stock of OSI Systems Inc. after the Sept. 11 terrorist attacks, but the past year has been a rollercoaster.
The Hawthorne-based manufacturer of medical equipment and X-ray scanners still sees potential profits in the billions of dollars that the U.S. Department of Homeland Security will ultimately allocate for machines like the ones it makes that detect explosive devices, drugs and other illegal contraband in large trucks and cargo containers.
But until the spigots open, OSI is in limbo. It derives most of its profits from medical instruments, while spending more to research and develop security equipment. It’s also paid more than it expected to comply with new accounting rules and is embroiled in lawsuits with two competitors.
“We are in a transition period because of the large cargo business,” said Nikhil Mehta, vice president of corporate development for OSI. “Being a public company, sometimes it is not easy to play this game of patience.”
OSI’s stock has climbed and then fallen off sharply three times in the past year, most recently after the company announced on April 27 that it would report a loss for the fiscal third quarter ended March 31. The unexpected loss, resulting from legal and auditing expenses and various other items, shaved nearly 15 percent off OSI’s stock price in one day.
As of May 4, OSI shares were trading at $14.65 each, down more than 35 percent from $22.84 one year earlier.
“They have to rebuild credibility with Wall Street,” said Steven Gish, a senior research analyst for Roth Capital Partners LLC.
OSI’s health care group, which comprises at least 50 percent of the OSI’s annual sales, stumbled with lower-than-expected revenues during the third quarter.
Meanwhile, OSI remains tied up in litigation with L-3 Communications Holdings Inc. and Science Applications International Corp., which are battling with OSI for market share in the cargo protection market. The company said it’s spending $300,000 to $500,000 per quarter in legal fees.
The big gamble for OSI, though, is its security equipment business, which now makes up about 35 percent of revenues (optoelectronic devices make up the other 15 percent).
Roth Capital projects OSI will invest $36 million in research and development in the fiscal year ending June 30, up from $14.6 million in the prior year.
The company’s possible breakthrough, the Pulsed Fast Neutron Analysis machine, shoots neutrons into containers to determine which chemical substances are present, in addition to tracing objects’ shapes the way X-rays do. The product is now being tested at a U.S. Customs Service and Border Protection site in El Paso.
A successful test could potentially help customs officials reach their goal of inspecting 40 percent of trucks and containers that enter the country. They now examine only 3 percent, mostly by hand and using X-rays.
“(OSI) has some very specific technologies that nobody else has that are going to be extremely important for inspecting large cargo,” said Brian Ruttenbur, a research analyst for Morgan Keegan & Co. “We think in the next year or so, there is going to be a wave of spending for large cargo inspection systems, not just by our government but governments around the world.”
For every neutron machine OSI made, it would reap not only the sales price (which it doesn’t disclose) but also installation revenues of as much as $15 million, Mehta said.
To hedge its bets, the company is also developing large portable X-ray and gamma ray machines that would capture images of cargo by moving along lines of containers or trucks.
OSI official hope that if the government won’t buy the Pulse Fast Neutron Analysis technology in bulk, it will at least purchase the other systems and use a neutron-based scanner for suspicious cargo.
OSI acquired the neutron-based technology when it purchased Santa Clara-based Ancore Corp. for $2 million in cash and 347,915 in OSI stock shares in late 2002. The technology complements the baggage of X-ray systems for airports, courthouses, prisons and schools made by OSI subsidiary Rapsican Systems.
Some analysts expect OSI to break the medical-optoelectronic and security units into separate companies to create a higher overall valuation. Mehta said company officials are considering several strategies with shareholders in mind.
“We have definitely signaled to everybody that we will do something to realize the value which we have created,” he said.
