OSI Systems Inc (OSIS.O) said it received a show-cause letter from the federal agency for transportation security related to a privacy system of passenger scanning machines it was developing for the agency.
The company said the U.S. Transportation Security Administration (TSA) alleged that the unit, Rapiscan, did not disclose issues related to the privacy system in a timely or complete manner.
Rapiscan's systems, the company's main product, are used to inspect baggage, cargo, people, and other objects for weapons, explosives, drugs and other contraband in U.S. airports.
A Bloomberg report on Wednesday quoted a lawmaker as alleging that the company might have manipulated an operational test, sending OSI's shares down 36 percent on Thursday.
OSI denied those allegations on Thursday.
"At no time did Rapiscan Systems falsify test data or engage in any fraudulent conduct," OSI Systems Chief Executive Deepak Chopra said in a statement.
Rapiscan might have falsified tests of software intended to stop the machines from recording graphic images of travelers, Bloomberg quoted Representative Mike Rogers as saying. r.reuters.com/nar93t
"TSA testimony to Congress today confirms that this was at all times a government-controlled test and that Rapiscan could not have manipulated any test data," the company said.
The lawmaker's office was not immediately available for comment when contacted by Reuters.
The unit received the show-cause letter on November 9, OSI said.
OSI Systems shares were down 30 percent in afternoon trade at $50.30 on the Nasdaq. They touched a low of $48.51 earlier.
(Reporting by Bijoy Koyitty and Mridhula Raghavan in Bangalore; Editing by Sriraj Kalluvila)