‘Naked Scanner’ Maker OSI Falls After Losing TSA Order

OSI Systems Inc. (OSIS), a top U.S. Transportation Security Administration vendor, fell almost 10 percent after the agency canceled a contract for carry-on baggage screening equipment awarded less than three months ago.

The cancellation came five weeks after a competitor protested the award, saying OSI’s Rapiscan unit planned to make the machines in Malaysia in violation of federal rules and was using outdated technology that might miss dangerous objects and trigger false alarms.

The TSA awarded Rapiscan a $60 million order three months after almost barring the company from future contracts, over how it handled software fixes for body-scanning machines called “naked scanners” by some privacy advocates.

The contract loss “sounds rather pedestrian but in the context of the recent dispute with the TSA raises serious questions about the day-to-day management of OSI’s most important segment,” Oppenheimer & Co. Inc. analysts Yair Reiner and William Lee said in a research note.

OSI shares fell the most in six months, dropping 9.7 percent to $64.75 at the New York close. That was the biggest decline since May 21 and left the stock at its lowest since July 2.

‘More Jaundiced’

OSI, based in Hawthorne, California, had hundreds of the body-scanning machines removed from U.S. airports earlier this year after the TSA concluded the company couldn’t meet a congressional deadline to make their revealing images more generic.

Photographer: Andrew Harrer/Bloomberg

Passengers wait in the Transportation Security Administration (TSA) line at Ronald Reagan National Airport in Washington. Close

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Photographer: Andrew Harrer/Bloomberg

Passengers wait in the Transportation Security Administration (TSA) line at Ronald Reagan National Airport in Washington.

The company in June agreed with the Department of Homeland Security to hire new executives and reassign five senior managers after the agency had threatened debarment. Rapiscan last year denied accusations by U.S. Representative Mike Rogers, an Alabama Republican, that it fabricated software tests.

The baggage-screening contract, signed Sept. 26, was canceled “due to a violation of contractual requirements,” Sterling Payne, a TSA spokeswoman, said in an e-mail. She declined to elaborate.

According to the Oppenheimer report, the agency acted after Rapiscan included an unapproved design component. Peter Kant, a Rapiscan executive vice president, didn’t reply to a phone call and e-mail seeking comment.

The development suggests, in the future, Rapiscan “will have to convince a more jaundiced agency that has been conditioned to audit OSIS products and claims with added care,” Reiner and Lee wrote.

House Bill

The protest by the Smiths Detection unit of London-based Smiths Group Plc (SMIN), filed Oct. 30 with the U.S. Government Accountability Office, said its machines would have come with less risk than Rapiscan’s and would lower costs over their full life.

Given that the TSA considered debarring Rapiscan, it shouldn’t have deemed the company’s past performance adequate for bidding on the current agreement, Smiths said in its protest to the GAO, which arbitrates contract disputes.

Rapiscan also ran afoul of a law that requires most equipment for U.S. agencies to be purchased from certain countries, Smiths said in its protest. Malaysia, where the machines probably would have been manufactured, isn’t on the list, it said.

The TSA has been under pressure from Congress to change its procedures for acquiring equipment. The House passed a bill Dec. 3 that will force the agency to make public a multiyear technology investment plan.

The legislation, which hasn’t been taken up by the Senate, would require the TSA to notify lawmakers within 30 days of learning about cost overruns, delays or technical failures.

Two House committees said in a report last year that the TSA spent $184 million on screening equipment that was being stored in a warehouse instead of being deployed at airports. The agency was spending $3.5 million a year to lease and manage the warehouse, the committees said.

The House bill is H.R. 2719.

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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