Thanksgiving is upon us, and travelers will once more be flocking to the airports --whether they like it or not.
New touchy-feely screening measures from the Transportation Security Administration are raising a ruckus online. Irate travelers are airing their resentment about the unhappy choice of having X-ray machines snap essentially naked pictures of them, or getting an uncomfortably thorough frisking from a gloved security officer.
To cut through the uproar and give you some background, we're reprinting an interview Fool Rich Smith held a few years back with Ken Galaznik, CFO for one of the leading manufacturers of the new security machines, American Science & Engineering (Nasdaq: ASEI ) . Here are a few choice excerpts.
Rich Smith: Ken, for those of us not yet familiar with American Science & Engineering, can you give us a thumbnail sketch of what the company does?
Ken Galaznik: We produce a variety of X-ray scanning equipment for security purposes, using patented technology, selling to a global customer base, and utilizing a worldwide service and support group. Our operations break down into cargo, parcel, and personnel scanning, mobile scanning, and of course contract research and development such as the CAARS program.
Smith: In layman's terms, can you explain the difference between the kind of X-rays we get at the dentist's office and AS&E's backscatter technology?
Galaznik: Sure. I've been talking with our CTO to try and come up with the best way to describe this in layman's terms. Basically, the difference is like this: When you get a dental X-ray, a powerful blast of X-rays is transmitted from outside your head, and there's a detector -- the dental plate -- inside your mouth that records an image left by the radiation. So the image you get at the end of the process is an image formed by X-rays that pass through the tissue.
Now, the X-ray blast is localized and brief in that instance. Consequently, it is a lot more powerful than what we use in backscatter. To put things in perspective, the radiation dosage used in a dental X-ray is approximately 16,000 times that used in a backscatter scan. The reason for the difference in magnitude is that in backscatter, what we're doing is reading the X-rays that are "scattered" off the target, rather than those that pass through it. We're reading the image formed by the X-rays that bounce back. These lower energy levels also enable the system to produce the more photo-like images that we have demonstrated.
Smith: Kind of like how radar forms images from bouncing sound waves off a target?
Galaznik: Yes, I think that's a pretty close analogy.
Smith: In August , the Transportation Security Administration awarded AS&E a $10.8 million contract to lease with the option to buy five units of your SmartCheck personnel screening system. What's the timeline on that one?
Galaznik: We've completed the first part of the study at the Phoenix airport and moved on to the second phase, where the equipment will be rolled out to other airports. It's not a particularly fast-moving project for a number of reasons, mainly, as you've probably heard, customers' concerns about the use of radiation and about privacy.
Smith: Can you talk a bit about those two?
Galaznik: Sure. The use of radiation: Let me give you some comparisons to put into context how very little radiation should concern users. If I lived in a high-altitude location like Denver, I'd receive the equivalent of seven backscatter scans worth of radiation every day as compared with someone who lives in Boston, just from the altitude. Higher up, it's equivalent to the dose you receive in two minutes flying in a plane at cruising altitude. I already mentioned the dosage is about 16,000 times less than that of a dental X-ray. It's about 10,000 times less than the dosage from a chest X-ray.
And on privacy, well, I think it's interesting to note that in the Phoenix study, 85% of passengers given the choice between a pat-down search and backscatter chose the latter. We believe this high percentage is attributable to the privacy algorithms that we developed that filter the private parts of individuals without filtering the threats.
Smith: The Electronic Privacy Information Center has criticized SmartCheck as an unreasonable invasion of the privacy of air travel passengers. It has even gone so far as to imply that backscatter X-ray technology is intended to be "more than just a means of detecting terrorists" -- a lightly veiled reference, I take it, to the technology's potential to detect illicit drugs carried on a passenger's body. Can you shed any light on the government's intentions here? Is it really just interested in security, or are there, shall we say, ulterior motives?
Galaznik: Nothing I'm aware of indicates that. And in fact, I'd be surprised if that was a focus. On the contrary, if that was what they had in mind, I'd think it would be like trying to tackle too many problems at once. No, it's the security issue that worries them, and by all indications, that's what they want to use SmartCheck for.
Now, that said, I would point out that the beauty of SmartCheck is that whatever the TSA is actively looking for, SmartCheck still shows whatever is on your person. Whether it's a marijuana cigarette, a ceramic knife, a gun -- they would all show up as something different from tissue. And I'd add that the system has very real advantages over earlier security equipment. For example, not only will SmartCheck detect the ceramic knife that wouldn't show up on a metal detector, it will tell you exactly where to look for the item. And a gun -- a metal detector would register the presence of metal, but SmartCheck will let you see what kind of metallic item a person is carrying, and where it is on his or her person.
Scanning the competition
Smith: Your 10-K doesn't go into a lot of detail about AS&E's competition. From what I can gather, it looks like the most credible rivals include General Electric (NYSE: GE ) , L-3 (NYSE: LLL ) ,OSI Systems (Nasdaq: OSIS ) , and SAIC (NYSE: SAI ) . Am I missing anyone?
[Editors' note: In November 2009, GE sold its GE Security division to United Technologies (NYSE: UTX ) , which now owns the bomb-detection unit that competes with AS&E.]
Galaznik: NucTech in China, for one. We both collaborate and compete with them. And Smiths Group in the U.K. You may have noticed that they teamed up with GE to form a joint venture in the detection and homeland protection markets earlier this year.
Smith: One of the longest-standing interview features at the Fool is a game we call "buy, sell, or hold." Rather than stock tickers, I give you a concept, and you tell us whether you'd buy (think it's got legs), sell (it's bunk), or hold (hard to say). Bans on carrying penknives and soda pop on airlines?
Galaznik: Eventually, yes. Over time, and as technology catches up to the problem. For example, right now SmartCheck can see a liquid, but it can't tell whether the liquid contents are Coca-Cola or chemical explosives. Eventually, I believe we'll be able to do that.
Smith: U.S. troops out of Iraq before a new president takes office?
Galaznik: Sell. And this is just based on my own personal experience in the 1970s, when we were always hearing that the troops would be coming home, but it never seemed to happen.
Smith: Junior detective kits featuring handheld backscatter devices as standard equipment?
Galaznik: Buy. I don't know the exact timeline, but at the rate the technology is advancing, there definitely will come a day when handheld backscatters are effective and available.
And if I could add a thought for you: When I look at the homeland security sector today, it feels to me a lot like the auto industry in the 1930s. The industry just doesn't lend itself to easy definition, and currently the path is not clear. For example, five years ago, we were scanning 3% to 5% of containers coming through our ports. Today, Congress is talking about wanting to scan 100%. The technology and the policies are both evolving quickly, and in ways that I think are really hard to predict.
Members of Motley Fool Rule Breakers can read the whole interview for an even deeper understanding of AS&E's business.