When technology conglomerate OSI Systems
Stock options expensing and a higher tax rate were primarily to blame for the earnings shortfall. However, OSI's overall sales during the quarter were a record $117.1 million; this 14% year-over-year increase beat analyst estimates. If you exclude stock compensation expenses of $1.3 million, operating income rose 31.3% to $4.2 million, compared with last year's $3.2 million.
Of the company's three operating segments, revenue and operating income increased in OSI's optoelectronics and health care groups. Its security group, Rapiscan Systems, saw revenue decline and suffered an operating loss, albeit a smaller one than last year's.
Despite Rapiscan's relatively poor relative performance, I believe it's the company's most interesting business segment, and I think it has significant potential. The Rapiscan division manufactures systems for baggage and parcel screening, cargo and vehicle inspection, and personnel screening. It's a direct competitor of American Science & Engineering
Rapiscan accounts for about a quarter of OSI's current revenues, and it offers the broadest product line in the security and inspection business. The security segment's R&D focuses on cargo and hold baggage screening (HBS) products. The company's new HBS product, the MVXR5000, was approved for use internationally last December. OSI claims this product can scan checked bags 2.5 times faster than competing systems from security companies such as L-3 Communications
In the cargo and vehicle inspection area, OSI expects improved results over the 2007-2008 time frame. To an outsider like me, the line looks promising. The cargo inspection products employ a broad range of radiation types to perform inspections, including gamma rays, X-rays, and neutrons. Their competitors, including AS&E, SAIC, and Smiths Detection, generally focus on just one of these technologies in their cargo inspection products. Each of these types of radiation has its own inspection advantages, and only OSI offers them all in a single product. (Keep in mind that this line only has potential -- unlike AS&E's Z backscatter technology, it hasn't taken off yet.)
Lastly, OSI has a product that performs an X-ray inspection of people to find objects hidden by clothing. Like SmartCheck from AS&E, it's under evaluation by the Transportation Security Administration; OSI refuses to say much about this system, citing confidentiality agreements.
Given the threat of terrorism, security spending likely won't drop dramatically in the future. In fact, President Bush's 2007 budget proposal increases homeland security spending. Consequently, I believe that improved performance at Rapiscan will handsomely benefit OSI Systems in the long run.
For more Foolish security:
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Fool contributor Dan Bloom doesn't own shares of any stock mentioned in this article. He welcomes your feedback at email@example.com.