Naked-Image Scanners to Be Removed From U.S. Airports - Bloomberg

The U.S. Transportation Security Administration will remove airport body scanners that privacy advocates likened to strip searches after OSI Systems Inc. (OSIS) couldn’t write software to make passenger images less revealing.

TSA will end a $5 million contract with OSI’s Rapiscan unit for the software after Administrator John Pistole concluded the company couldn’t meet a congressional deadline to produce generic passenger images, agency officials said in interviews.

The agency removed 76 of the machines from busier U.S. airports last year. It will now get rid of the remaining 174 Rapiscan machines, with the company absorbing the cost, said Karen Shelton Waters, the agency’s assistant administrator for acquisitions. The TSA will use 60 machines manufactured by L-3 Communications Holdings Inc. (LLL), the agency’s other supplier of body scanners, and will move some scanners to busier airports to reduce waiting times.

“It became clear to TSA they would be unable to meet our timeline,” Waters said. “As a result of that, we terminated the contract for the convenience of the government.”

OSI Systems rose $3.03, or 4.5 percent, to $70.68 at 11:32 a.m. in Nasdaq trading.

The decision to cancel the Rapiscan software contract and remove its scanners wasn’t related to an agency probe of whether the company faked testing data on the software fix, Waters said.

Operational Tests

In November, Representative Mike Rogers, then chairman of the House Transportation Security subcommittee, wrote in a letter to Pistole that the company “may have attempted to defraud the government by knowingly manipulating an operational test.” Rogers, an Alabama Republican, said the panel had received a tip about falsified tests.

Rapiscan has denied manipulating data or information related to the reviews.

OSI Systems is “pleased to reach a mutually satisfactory agreement with the TSA” that will involve moving the machines to other government agencies, Chief Executive Officer Deepak Chopra said in a statement. The company, based in Hawthorne,California, said it expects to report a $2.7 million one-time charge during the quarter that ended Dec. 31.

OSI Systems hasn’t sold a body-image scanner to TSA in two years, and the company’s share price has been down since a November House hearing, said Timothy Quillin, a technology analyst with Stephens Inc. in Little Rock, Arkansas.

‘Positive Outcome’

“They hadn’t really intended to sell more body scanners to airports,” said Quillin, who has an overweight rating on OSI Systems. “To have a resolution to just cancel the contract on the privacy software development is a positive outcome.”

The TSA accelerated its use of advanced scanners in 2010 following the failed Dec. 25, 2009, attempt by Umar Farouk Abdulmutallab to blow up a Northwest Airlines flight by igniting explosives in his underwear.

L-3 scanning machines rely on millimeter-wave technology, which uses radio frequencies that can find both metallic and non-metallic items. Rapiscan’s machines are based on backscatter technology, which uses low-dose X-ray radiation to detect objects under a passenger’s clothes.

Airline passengers were offended by the revealing images, including those of children and the elderly. The Washington- based Electronic Privacy Information Center sued the agency in July 2010, claiming the scanners violated privacy laws and has called use of the machines equivalent to a “physically invasive strip search.”

Privacy Objections

Under pressure from privacy advocates and some members of Congress, the TSA moved its screens to separate rooms away from airport security checkpoints. Officials monitoring the scanner images alert agents if they see a possible risk.

The agency put out a contract in August 2010 asking L-3 and Rapiscan to develop the software to make images less revealing. L-3 developed its product in 2011, according to John Sanders, the TSA’s assistant administrator for security capabilities.

Rapiscan recently indicated to agency officials that it couldn’t deliver its software until 2014, Sanders said. It couldn’t come up with an algorithm that met the agency’s standards for accurately detecting objects without generating false alarms, he said.

‘Everybody’s Alarming’

“You can have a high probability of detection but a great deal of alarm,” Sanders said. “Everybody’s alarming. That doesn’t work from an operational perspective.”

TSA has contracted with L-3, Smiths Group Plc (SMIN) and American Science & Engineering Inc. (ASEI) for new body-image scanners, all of which must have privacy software. L-3 and Smiths used millimeter-wave technology. American Science uses backscatter.

The agency’s strategy for handling passenger traffic relies on the capability of L-3’s millimeter-wave machines to process passengers in about half the time for Rapiscan machines, Sanders said. TSA will be getting about 60 more L-3 scanners in January and February, he said.

TSA is also planning to move some scanners from airports where they’re underutilized, Sanders said. The agency plans to expand the PreCheck program, in which passengers share personal data before going to the airport in exchange for less-invasive screening that lets them keep their belts and shoes on.

PreCheck Passengers

PreCheck passengers go through metal detectors instead of body-image scanners. As PreCheck expands, it will free up millimeter-wave machines to ease crowding, Sanders said.

Sanders said the Rapiscan units did their job by screening 130 million passengers, and the agency wouldn’t have acted if not for the congressional mandate for privacy software.

“We are not pulling them out because they haven’t been effective, and we are not pulling them out for safety reasons,” Sanders said. “We’re pulling them out because there’s a congressional mandate.”

The TSA is talking to other government agencies with screening needs that might not require the same level of privacy called for in a crowded airport, Sanders said.

Rapiscan sells its body-image scanner, known as the Secure 1000, to the Pentagon for screening visitors and to U.S. forces in Iraq and Kuwait, according to federal contract databases. The company’s website also says it sells the machines to prisons.

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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OSI Systems Inc.'s Rapiscan Backscatter

A Transportation Security Administration (TSA) employee, center, is scanned during a demonstration of the Rapiscan Backscatter advanced imaging technology machine at Logan International airport in Boston on March 5, 2010.

A Transportation Security Administration (TSA) employee, center, is scanned during a demonstration of the Rapiscan Backscatter advanced imaging technology machine at Logan International airport in Boston on March 5, 2010. Photographer: Michael Fein/Bloomberg

Sept. 9 (Bloomberg) -- Peter Kant, executive vice president of OSI Systems Inc.'s Rapiscan Systems Inc. division, talks about the impact of U.S. defense budget changes on the company's sales. He speaks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Dec. 30 (Bloomberg) -- Alan Edrick, chief financial officer of OSI Systems Inc., talks with Bloomberg's Matt Miller and Zahra Burton about the outlook for the company's full-body scanning equipment at airports following a suspect terrorist's attempt to blow up a U.S. airline on Christmas Day. OSI’s Rapiscan unit makes machines that can detect liquids and other potential explosives beneath passengers’ clothing. In October, the U.S. Transportation Security Administration placed an order valued at $25 million for Rapiscan’s imaging equipment. (Source: Bloomberg)