COMPANY CLOSEUP -- Dicey Days for This Bomb Detector
Technology: COMPANY CLOSEUP
By Jim Kerstetter in San Mateo, Calif.
When Pan Am Flight 103 was destroyed by a luggage bomb over Lockerbie, Scotland, on Dec. 21, 1988, federal aviation experts panicked. Was there, they wondered, any way to scan luggage for explosives? An answer came from medical-equipment manufacturers that believed they could turn cutting-edge CT [computer tomography] scanning equipment into a new type of bomb-detection machine. One company that pulled off the transition was InVision Technologies (NasdaqNM:INVN - news), a bomb-detection-machine maker spun out of medical equipment manufacturer Imatron in 1990.
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InVision has been laboring in obscurity for 11 years. But after the September 11 terrorist attacks, the company has been thrust in the spotlight. In the two months after the attacks, shares of the Newark [Calif.] company jumped nearly 10-fold, to $47.09, before settling back to $27.74. The reason? InVision is one of only two companies licensed by the Federal Aviation Administration to sell automatic bomb-detection scanners for airports. Analysts say it's a market that could be worth $2 billion in the U.S. alone.
DOMINANT VENDOR. InVision has a Microsoft-like grip on this nascent market. To date, the outfit has some 160 machines installed around the country, about 90% of total American sales, according to the FAA. And the agency's officials estimate that they'll need 2,000 of the machines -- which typically sell for $1 million each -- by yearend to ensure that every bag loaded onto a plane is scanned for bombs. InVision's only FAA-licensed competitor, L-3 Commmunications, has a mere 10% market share and expects, at full capacity, to be able to produce about half as many machines as InVision. Little surprise, then, that InVision execs are preparing to scale back work on other product lines, such as wood-scanning units, in order to meed the FAA's demand.
But is this 300-employee company up to the task? While it looks like InVision is sitting on a pile of gold, production limitations and uncertainty about who will actually pay for the equipment complicate the company's obscurity-to-riches story. For now, though, CEO Sergio Magistri is happy to have this problem. ``I think the future of the company is very bright,'' says Magistri. ``We are still trying to zoom in on how bright.''
So far, InVision has seen little benefit from increased orders. In the third quarter, it reported $16.4 million in revenues, down 25.8% from the year before. Net income more than doubled, to $447,000. Company executives say the fourth quarter should be up slightly but haven't yet released a forecast for 2002. Prior to September 11, they were saying revenues for 2002 would be up $10 million, to $55 million.
3D IMAGES. ``Is that an understatement? Yes and no,'' says Magistri. The CEO has shied from forecasts in recent months. The total could be far greater, he says, but he can't say for sure until it's clear how much the government wants and who's going to pay for it.
InVision's machines are essentially souped-up scanners. In the same way a medical CT scan provides a three-dimensional representation of a human brain, a bomb-detection unit using CT technology offers a three-dimensional image of a suitcase's contents. Using special camera sensors, it can pinpoint a threat by matching what's inside a bag against a library of known explosives.
The scanners look like an airport x-ray machine, often as big as two cars set end-to-end. Typically, about one out of every five bags scanned by the device sets off a warning -- forcing handlers to scan them again.
LONG INCUBATION. But do they work? The answer appears to be yes, though installation and maintenance can add $1 million annually to their cost. Every machine must be checked out by the FAA before it can be used at an airport. Still, the biggest question is not effectiveness. It's speed. Airlines worry that bomb-scanning equipment will slow the boarding process to a crawl.
That said, it took InVision four years to perfect its first machine. In 1990, Congress passed the Aviation Security Improvement Act, which allowed the FAA to fund and certify new bomb-detection equipment. Armed with $6 million in FAA funding and $14 million more in private funding, InVision finished its first bomb-scanning machine in 1994. The machine was sold to Brussels International Airport in Belgium. In 1995, San Francisco International Airport became the first American airport to use the equipment.
Such a device wouldn't have stopped the attacks on the World Trade Center and the Pentagon. Nor would it have even stopped the man accused of hiding explosives in his high-top sneakers on a recent American Airlines flight [though InVision is working on a bomb-detection wand that could sense such explosives]. But it does close the door on one possible threat, say FAA officials. ``We take all potential threats very serious and intend to eliminate them,'' says FAA spokeswoman Rebecca Trexler.
NOT ENOUGH CASH. But the question remains: Who'll foot the bill? The airlines and regional airports expect the government to fork over the funds. But enough money hasn't been apppropriated, according to a Salomon Smith Barney report. Before September 11, the Transportation Dept., which oversees the FAA, allotted $97.5 million for bomb-detection systems, with $38 million expected to be spent on new machines. After the attacks, the total 2002 fiscal spending for the machines is expected to near $150 million. That's enough money to buy only 150 devices -- out of an estimated 2,000 needed by the end of the year.
Even if the money were there, analysts wonder whether InVision could beef up production fast enough. That and the funding concerns are reasons the company's stock has slipped nearly 40% in recent weeks. InVision is now producing about eight machines per month and is ready to increase montly production to 50 or so in its own facilities. Execs say they could do a lot more with contract manufacturers.
But ramping up could be tough, say aviation experts. San Francisco International Airport is already using 13 InVision machines to scan 20% of bags on domestic flights. Scanning 100% would require at least 40 more machines. ``You can't build these things overnight,'' says San Francisco International Airport spokesman Ron Wilson. FAA officials are also concerned. ``We need to work with the companies that manufacture the systems to see how quickly they can produce more,'' FAA Administrator Jane F. Garvey told Congress in October.
Company execs insist that they're ready to increase production as soon as possible. But it's very likely that they're waiting to hear, definitively, who exactly is going to be paying for those machines. ``I think it will take some time to understand what the government wants and when,'' says Magistri. Still, if the federal government ponies up, and InVision fills the orders, Magistri will have to wear sunglasses the next time he looks at that future.
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