OSI Tumbles on Possible Contract Ban for Chinese Parts

OSI Systems Inc. fell as much as 40 percent, the biggest intraday drop ever, after lawmakers said the company may face a ban on U.S. contracts for using unapproved Chinese-made parts in baggage-screening equipment.

The disclosure came after the Transportation Security Administration canceled a $60 million order last week. The TSA has resumed an effort to bar OSI’s Rapiscan Systems unit from future contracts, Representatives Michael McCaul, a Texas Republican, and Bennie Thompson, a Mississippi Democrat, said in a letter dated Dec. 6.

“TSA has strict requirements that all vendors must meet for security effectiveness and efficiency and does not tolerate any violation of contract obligations,” David Castelveter, a spokesman, said in an e-mail. “TSA is responsible for the safety and security of the nearly two million travelers screened each day.”

Shares fell 26.8 percent to $47.38 at 4 p.m. in New York. Earlier, they were at $39.00, lowest since October 2011. Trading volume was 7.94 million shares, 60 times the three-month average.

OSI’s security division, which includes its work for the TSA, generated 46 percent of the company’s revenue in the last fiscal year, according to a 10-K filing dated Aug. 16.

The contract raises questions about whether the unapproved component made the Rapiscan machines vulnerable to sabotage or espionage, the lawmakers said. The House Homeland Security Committee, as part of a congressional investigation, asked the TSA for documents relating to communications between the company and the government.

Chinese Part

Ajay Vashishat, OSI Systems’ vice president for business development, didn’t respond to an e-mail and phone call seeking comment.

A part in the machines made under the canceled contract was manufactured in China, OSI Systems said in a news release today explaining why the TSA ended an order signed less than three months ago.

OSI Systems, based in Hawthorne, California, said the company didn’t get TSA’s approval for the part, violating its contract. The part made by Shanghai Advanced Non-Destructive Testing was “effectively an X-ray light bulb” and didn’t contain software, Chief Executive Officer Deepak Chopra said in the statement.

TSA Review

TSA is in the process of completing a thorough review in advance of a final decision on proceeding with debarment, Castelveter said. The agency will respond directly to the lawmakers, he said.

The equipment in the canceled contract isn’t used to physically screen passengers, Castelveter said. The agency hasn’t identified any degradation of security or impact on operational performance from the Rapiscan violations, he said.

Rapiscan averted debarment by the Department of Homeland Security last year over accusations it misled the TSA about testing of updated body-scanning machines. The company, in its 10-K, said Homeland Security could start debarment proceedings again if Rapiscan failed to live up to an agreement signed in June.

OSI 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.

The company in June agreed with Homeland Security officials to hire new executives and reassign five senior managers. Rapiscan denied accusations by Representative Mike Rogers, an Alabama Republican, that it fabricated software tests.

Since fiscal 2009, OSI Systems has received $463 million in U.S. government contracts, according to data compiled by Bloomberg. The company received $267 million in Department of Homeland Security work over the same period.