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No-Nudes Edict on Scanners May Mean No Contract for OSI

L-3 Gets Boost from De-Nuded Images as Rapiscan Waits Approval
A body scanner is tested at the Heathrow Express boarding platform in West London. Photographer: Thomas Engstrom/Bloomberg

Rapiscan’s airport body scanners are so well-known that “there is not a dance anywhere in the world that we will not be invited to,” Deepak Chopra, chief executive officer of Rapiscan parent OSI Systems Inc., told investors last month.

New scanner standards set by the U.S. Transportation Security Administration may leave OSI $245 million short of a full dance card.

The agency on April 4 closed the bidding for a contract for as much as $245 million without approving Rapiscan’s technology for devices that don’t show the “nude” images that have outraged passengers and lawmakers. That may give rival L-3 Communications Holdings Inc., whose upgrades showing generic images have received the TSA’s blessing, a leg up on the award and deprive OSI of a revenue boost equal to 35 percent of its total sales last year.

“Most people associate Rapiscan with body scanners,” said Josephine Millward, an analyst with The Benchmark Co. in Arlington, Virginia. “This would be an opportunity lost.”

Rapiscan, the biggest unit of Hawthorne, California-based OSI, and L-3 have been the only suppliers of full-body scanners to the TSA since the U.S. began purchasing them in 2007.

The TSA says it has installed more than 640 full-body scanners at about 165 U.S. airports. The machines cost as much as $170,000 each, according to the agency.

Generic Images

While L-3 already had retrofitted all of its 245 existing scanners to provide the less-revealing generic images, the new contract is the first to require that technology.

TSA Administrator John Pistole “has committed to only purchasing and deploying” such machines, Greg Soule, an agency spokesman, said in an e-mail. He declined to say whether Rapiscan submitted a bid for the contract by the April 4 deadline even though its system lacked TSA approval at the time.

The agency began testing Rapiscan software and equipment in November 2010 and received an updated version for review and testing in November, Soule said. He wouldn’t say when the testing would be completed or whether Rapiscan would have a shot at the contract should its technology be approved before a TSA decision is made.

“They are in the last stages of getting approval,” Benchmark’s Millward said. “I would expect it anytime now. I don’t think this will affect them in the long run.” She rates OSI shares a buy.

OSI rose 6 cents, or 0.1 percent, to $60.32 in Nasdaq trading today. L-3 shares fell 54 cents, or 0.8 percent, to $69.02 in New York Stock Exchange composite trading.

Planned to Bid

An outside spokesman for OSI said on March 29 that the Rapiscan equipment complies with TSA standards and that OSI would bid for the contract.

“Rapiscan is bidding and they are bidding a compliant system,” John Terrill, a spokesman with SpeakerBox Communications LLC, of McLean, Virginia, said in an e-mail. On April 11, he declined to say whether OSI had submitted a bid. Chopra and other OSI executives declined to be interviewed for this story, Terrill said.

L-3 and Rapiscan use different technology to run their full-body scanners. L-3 uses a millimeter wave radio frequency to detect metallic and non-metallic items. Rapiscan uses a type of X-ray.

Based on the companies’ sizes, the new contract would mean more to OSI than to L-3. OSI’s security equipment business, which includes cargo, baggage and people screening, represented about 45 percent of the company’s sales of $656.1 million in 2011, according to data compiled by Bloomberg.

Shares Rise

Revenue for OSI’s security business increased 17 percent to $294.7 million last year. The U.S. government accounted for 17 percent of the company’s revenue, according to data compiled by Bloomberg.

OSI shares have increased 67 percent in the past year. They are recommended by four of six analysts monitored by Bloomberg.

New York-based L-3 had 2011 sales of $15.2 billion. The company doesn’t disclose revenue from its body-scanner business, Jennifer Barton, a spokeswoman, said in an e-mail. The products are included in the company’s electronic systems segment, L-3’s biggest business with 37 percent of the company’s 2011 revenue, according to data compiled by Bloomberg.

L-3 shares have declined 10 percent in the past year.

OSI has a diverse range of products, from medical equipment to cargo scanners for ports, said Millward, the Benchmark analyst.

Broad Portfolio

“Their portfolio is broad enough that they can get along without body scanner sales if that’s what it comes to,” she said in an interview. “Body scanners are really a small part of their business. They are winning a lot of contracts in other areas.”

While OSI hasn’t sold any body scanners to the TSA for three quarters, the company has won scanner and related services contracts from Mexico’s tax and customs authority, the Puerto Rico Ports Authority and the London Olympic games, CEO Chopra told investors in a March 8 presentation.

Selling scanners to the TSA is one of the company’s “growth opportunities,” he said.

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