The pending acquisition of a developer and manufacture of small, medium and large unmanned underwater vehicles (UUVs) coupled with existing capabilities in extra-large UUVs has Huntington Ingalls Industries [HII] well positioned to further improve technology in this space and grow the business, HII’s top executive said on Thursday.
HII last week announced an agreement to acquire Hydroid Inc., which manufactures the Remus line of small, medium and large autonomous UUVs for various customers, including the U.S. Navy. That deal, which is expected to close in the first quarter of 2020, follows the acquisition in 2015 of a small company that designed and built the undersea craft Proteus, which can operate either manned or unmanned.
Several years ago, the Navy was “talking about unmanned vehicles and we really didn’t have a footprint there” so the Proteus acquisition provided a technology that was being tested in the water for various customers, including the Navy, Mike Petters, HII’s president and CEO, said in response to an analyst’s question on the company’s fourth quarter earnings call.
“We acquired that group and the first thing we found out was there’s a whole set of technologies and customers and people and processes that we were not very familiar with,” Petters said. “And so not only did we get some technology there we got some access and in the course of that access we then realized we could bring some of our own core capability to this area that might actually accelerate the adoption of the technology as well as create a business for us.”
The Proteus experience led to HII teaming with Boeing [BA] on that company’s Orca extra-large UUV (XLUUV) program for the Navy, which is in production. Petters said HII is bringing its manufacturing expertise to bear on Orca.
Last year, the Navy awarded Boeing a series of contracts and related modifications valued at $274 million to build five Orca XLUUVs. The 54-inch diameter vessels could be used for various missions including mine countermeasures, anti-submarine warfare, and intelligence, surveillance and reconnaissance.
Petters mentioned that submarines give users asymmetric advantages such as one vessel being able to hole up a fleet inside a port.
The experience with Orca has given HII greater understanding with the large UUVs and when the company reviewed the landscape it realized there is a lot going on in the small UUV space, Petters said, beginning a “journey” that led to the agreement to acquire Massachusetts-based Hydroid from Norway’s Kongsberg.
“That gives us a footprint in basically the full range of unmanned undersea capability,” Petters said.
HII expects that once the deal closes, its business with Hydroid will grow in the “high single digits” in the near-term and “we believe it can only get better beyond that,” Christopher Kastner, the company’s chief financial officer, said on the investor call.
The Navy’s interest and increasing demand for unmanned systems can be matched by industry and HII, Petters said, noting that technologies are maturing and more companies have products.
“So, our view is let’s bring some of our capability, our ability to build workforce, our technology, our manufacturing expertise, our contact information, let’s bring all of that to bear in this space to accelerate the development of the unmanned space on behalf of our customer,” Petters said. “And so, we think that this is a step in that direction,” he said, adding “I would tell you is that if you’re in the water you’re learning about it and we’re in the water.”
Petters doesn’t expect the Navy’s market for unmanned systems to turn sharply upward overnight.
The budget for traditional ships remains historically strong and “you’re not going to see a hard-left turn here where we’re going to say we don’t need big platforms with people on them anymore,” Petters said. Having a visible “presence” remains important and helps maintain stability, he said.
There will be an “evolution” in the Navy’s force structure and “I think that the Navy is going to be moving toward more unmanned systems to amplify the platforms that they have and then see where that goes from there and we want to be, as their principal partners, right there with them and help them make that successful,” he said.
Asked about the mix of undersea capabilities the Navy might want beyond traditional attack and ballistic missile submarines, Petters highlighted that UUVs provide options.
“There’s a lot of things that you could do underwater that you may not want to send a Virginia-class submarine with a bunch of people on it to go do,” he said. “On the other hand, there’s a significant amount of things underwater that you want to have a Virginia-class submarine or something like that fully manned, fully capable and complying with rules of engagement and all that sort of thing, you want to be able to do that to.”
The Navy will have to “find a way to take advantage of” the asymmetrical advantage of undersea vehicles, he said.