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UPDATE 1-General Dynamics profit beats estimates as costs fall

* Q2 earnings from cont ops $1.88/share vs est $1.77

Operating margins rise to 12.7 pct from 12.3 pct

* Potential contract value rises 29 pct to $99.5 bln

(Adds details on Northrop Grumman, analysts' estimates, shares)

July 23 (Reuters) - General Dynamics Corp, maker of Gulfstream jets, tanks and U.S. Navy ships, reported a better-than-expected quarterly profit, as lower operating costs boosted margins.

The company said operating margins rose to 12.7 percent in the second quarter ended June 29, from 12.3 percent a year earlier.

General Dynamics' shares rose 2.9 percent before the bell.

U.S. weapons makers have cut costs to increase profitability in the face of declining defense spending by the U.S. government.

Northrop Grumman Corp, which makes unmanned aircrafts, the B-2 bomber and electronic equipment, also reported a second-quarter profit above analysts' estimates and raised its 2014 earnings forecast.

Northrop said its profit was boosted by a lower pension liability - the result of higher interest rates that changed the discount rate used to calculate the company's pension liabilities.

General Dynamics said its total potential contract value, the sum of all backlog components, rose 29 percent to $99.5 billion.

The company's net income fell 15.5 percent to $541 million, or $1.58 per share, in the second quarter ended June 29, from $640 million, or $1.81 per share, a year earlier.

Excluding a charge of $105 million, income from continuing operations rose 1 percent to $646 million, or $1.88 per share.

Revenue fell 4.6 percent to $7.47 billion.

Analysts on average expected earnings of $1.77 per share on revenue of $7.53 billion, according to Thomson Reuters I/B/E/S.

Operating costs and expenses fell 5 percent to $6.53 billion.

General Dynamics' shares were up at $122 in premarket trading after closing at $118.55 on the New York Stock Exchange on Tuesday. Northrop's shares closed at $126.53.

(Reporting by Sagarika Jaisinghani in Bangalore; Editing by Saumyadeb Chakrabarty and Don Sebastian)