UPDATE 1-Lockheed selling 2 units, realigning others

* Lockheed CEO says moves aimed at strengthening company

* One sale linked to conflict of interest concerns

* Company also creating new training, logistics business

WASHINGTON, June 2 (Reuters) - Lockheed Martin Corp LMT.N said it will sell off two business units and realign two more into a new logistics and training line as it braces for slower growth in U.S. and global defense markets.

Lockheed Chairman and Chief Executive Robert Stevens said on Wednesday the changes stemmed from a periodic portfolio review and were aimed at strengthening Lockheed’s business at a time of major changes in the global security and economic environments.

The changes at the No. 1 U.S. defense contractor follow earlier reorganizations of its space and electronic systems businesses, and will affect some 18,000 of Lockheed’s 136,000 employees around the world.

Stevens told Reuters a more complex global security environment and mounting pressure on U.S. defense budgets meant Lockheed was “keenly focused on running our business better.”

In April the company posted a better-than-expected first-quarter-profit but lowered its full-year earnings outlook due to a charge tied to U.S. healthcare reforms.

Stevens said Lockheed’s portfolio, which includes the multinational F-35 fighter jet, the C-130J transport plane, an array of satellites and various missile defense capabilities, aligned well with the Pentagon’s emerging priorities.

But he said U.S. defense officials were clearly insisting on better program execution and affordability, and Lockheed was responding with an array of initiatives to drive “continuous improvement” in quality, program performance and cost.


Lockheed said it would divest most of its Enterprise Integration Group (EIG) unit, which provides systems engineering and integration services, given growing government concerns about perceived organizational conflicts of interest.

Northrop Grumman Corp NOC.N cited the same issue when it sold its TASC Inc advisory services business for $1.65 billion to an investor group led by General Atlantic LLC and affiliates of Kohlberg Kravis Roberts & Co [KKR.UL] last year.

The U.S. Congress, concerned that many defense companies advise government agencies on programs for which they end up bidding, last year passed a law that requires the Defense Department to tighten rules on potential conflicts.

Given the changes and EIG’s growth potential under a company with no perceived conflicts, Stevens said Lockheed decided to sell the unit, which employs about 2,400 people. About 400 of those employees will stay with Lockheed, he said.

Lockheed also plans to sell Pacific Architects and Engineers Inc (PAE), which offers services in mission readiness, peacekeeping, global infrastructure support and disaster relief activities.

He said EIG and PAE combined produced about 3 percent of Lockheed’s annual revenue of over $45 billion and less than 3 percent of its operating profit. He said details on the valuations of both companies were still being worked out, and he hoped to find buyers for both units by the end of the year.

“Each has growth opportunities that will likely stimulate a very sound level of business,” Stevens said.

He said PAE, which has 6,400 employees, offered greater growth potential to a company more focused on infrastructure and construction, while Lockheed saw its focus on other areas.

Stevens said the proceeds from the sales of the two units would be used for internal investments, funding and pre-funding the company’s pension plan, and honoring Lockheed’s commitment to repurchase shares and pay investors a competitive dividend.

Lockheed will also realign two other units, Readiness & Stability Operations (RSO) and Savi Technology Inc, with an existing simulation, training and support unit.

The new line of business, Global Training and Logistics, will employ about 10,000 people and should allow Lockheed to serve its customers in a more concentrated way, Stevens said.

In a statement announcing the changes, Lockheed President and Chief Operating Officer Chris Kubasik said that when Lockheed acquired PAE, it was seen as the key to new customers who would need information technology and other services.

But in the current environment, customers want to combine infrastructure support with the construction of facilities and provision of physical security, services not directly in line with the corporation’s long-term strategy, he said. (Reporting by Andrea Shalal-Esa; editing by John Wallace)