The Transportation Security Administration’s (TSA) award of a nearly $6 million contract for further development and delivery of an advanced Explosive Detection System (EDS) will vault OSI Systems [OSIS] into the forefront of technology for screening checked bags at airports within the next two years, company officials say.
TSA awarded the $5.8 million contract to OSI’s Rapiscan division last month under the Stationary Gantry/Fixed Source Screening (SG/FSS) Systems project (TR2, Oct. 15).
The contract is a “validation” from the TSA that the Real Time Tomography (RTT) technology has arrived, says Deepak Chopra, chairman and CEO of OSI. This validation will also increase international interest in the RTT system, he says. Capability wise, he suggests, the RTT system will be second to none.
“This finally does the last hurdle if anyone out there had a doubt [whether] our technology would work, whether our technology would be validated by TSA,” Chopra says during his company’s recent first quarter earnings call. “We have achieved that. This is a great milestone; bigger than what people realize. What it really says to the to the world, that is L-3 Communications [LLL], General Electric [GE], and Analogic [ALOG], is Rapiscan does have a technology that is superior, [offers] better performance, and now is validated by TSA.”
However, Chopra acknowledges that “validated” does not mean “certified,” which refers to the fact that TSA must certify any EDS system before it can be deployed in U.S. airports. There are still “many hurdles” to clear before certification, he says.
In addition to Rapiscan, L-3 Communications and SureScan also received $2.8 million and $5.3 million development and production contracts respectively under the SG/FSS program. L-3, which is teamed with Analogic, and GE are two of the companies with certified EDS systems. Reveal Imaging Technologies, which makes a smaller EDS system, is the third company.
Rapiscan has been developing its RTT EDS for over two years, using millions of dollars of its own money along with nearly $2 million in development funding received in early 2006 from the Manchester Airport Group in the United Kingdom (TR2, March 22, 2006). That contract includes production options if Rapiscan demonstrates that the technology works.
Rapiscan, which in September completed the first quarter of its 2009 fiscal year, expects it will first showcase its RTT system for the Manchester Airport Group later this fiscal year. While company officials declined to give development and delivery timelines under the TSA award, Rapiscan is expected to deliver at least one system to TSA’s new Integration Facility in less than a year. Chopra also says the award will help accelerate RTT development.
The RTT system uses Computed Tomography just like currently deployed EDS systems in U.S. airports except for a crucial difference. Existing EDS systems employ a rotating gantry, which can’t image the contents of luggage anywhere near the speed at which baggage handling systems operate, thereby limiting throughput. And because a rotating gantry uses moving parts, it is relatively high maintenance, which leads to higher life-cycle costs. Current EDS systems can screen up to several hundred bags per hour.
The RTT system on the other hand, because its gantry system is stationary, can take advantage of the high conveyor belt speeds, and possibly screen at least 1,000 bags per hour. Being able to work with the high conveyor speeds, which top out at 1,500 bags per hour, means the system will more easily integrate with existing and future planned baggage handling systems. That ease of integration combined with fact that RTT has fewer moving parts, means the system is expected to lower maintenance and life-cycle costs.
On top of all that, OSI says the RTT offers higher image resolution, which means it can more accurately detect threats and lower false alarm rates.
Chopra says not to expect the RTT system to draw in significant revenues next year. Sales are more of a “2010 thing,” he says.
Citing market analysis by market research firm Frost & Sullivan, Chopra says the market for automated high-speed baggage inspection systems is over $600 million beginning in 2008, increasing between 5 and 7 percent annually through the next five years. He adds that airports have been delaying their purchases of new and replacement EDS systems. Chopra believes that the introduction of the high-speed inspection systems like RTT will “rejuvenate” the market.
What about GE?
One of the interesting questions arising from the three TSA awards for the SG/FSS systems is what this means for GE’s future EDS business. The company has developed an upgrade path for its CTX 9000 series EDS that relies on software enhancements for new and deployed systems to improve their throughput and detection capabilities (TR2, Feb. 20).
GE has hundreds of its TSA certified EDS systems deployed in U.S. and international airports. But if TSA eventually certifies the SG/FSS systems like Rapiscan’s RTT, GE’s business in the EDS market could begin to decline.
Reveal Imaging’s EDS systems are typically deployed in lobbies of small airports or in the baggage handling system of small airports where high-speed inspection systems aren’t needed.
First Quarter Financials
In the first quarter of its new fiscal year, OSI posted mixed results. Net earnings swung to a small $100,000 profit, 1 cent earnings per share (EPS), from a $2.1 million loss (12 cents EPS) a year ago, driven by strong operating earnings in the Security and Optoelectronics Groups. The company’s Healthcare Group posted a loss as hospitals that typically rely on financing for their purchases are delaying orders due to the ongoing credit crisis. Restructuring charges in the quarter were $800,000, which dampened earnings. Free cash flow was a record $12.5 million.
Sales increased 13 percent to $148.2 million from $131 million a year ago, again driven by strong results in the Security and Optoelectronics businesses. Security sales were up 20 percent to $58.7 million and Optoelectronic sales increased 23 percent to $44.9 million.
Due to the impact of the credit crisis on the Healthcare Group, OSI withdrew guidance for the current fiscal year. Company officials say that so far medical systems orders have only been delayed not canceled.
Backlog stands at $231 million, up $19 million since the start of the fiscal year. Security backlog stands at $141 million, up $26 million during the first quarter, providing strong visibility in this business segment for the rest of the fiscal year. Rapiscan garnered $91 million in new orders during the quarter. The recent TSA award, as well as a $3 million contract to supply MVXR 5000 X-Ray systems to a freight forwarder, came in the second quarter.
Analysts like the company’s strong growth in its Security business along with the strong outlook for that business.