UPDATE 2-Northrop raises 2012 forecast, says future less certain

* Third-quarter EPS $1.82 versus Wall Street's $1.69

Full year EPS forecast raised to $7.35 to $7.40

By Andrea Shalal-Esa

Oct 24 (Reuters) - Weapons maker Northrop Grumman Corp on Wednesday raised its earnings forecast for 2012 but said revenues would be lower next year even if Congress averts $500 billion in further budget cuts that are due to start taking effect in January.

Northrop posted a lower quarterly profit, mainly due to a $66 million drop in net pension income, but said it expects full-year earnings of between $7.35 per share and $7.40 per share, up from its prior view of between $7.05 and $7.25 per share.

Northrop, which builds Global Hawk unmanned surveillance planes, radar and electronic systems, beat analyst forecasts, reporting earnings per share of $1.82 for the third quarter, down from $1.86 in the year-earlier quarter.

Revenue fell to $6.27 billion in the quarter, compared with $6.61 billion a year earlier.

Analysts polled by Thomson Reuters I/B/E/S had expected earnings per share of $1.69 on revenue of $6.33 billion for the quarter ended Sept. 30.

Rob Stallard at RBC Capital Markets said the company improved its margins due to operational efficiencies, but backlog levels continued to slip in its aerospace systems, technical services and information systems divisions.

Chief Executive Wes Bush said Northrop remained focused on performance, effective cash deployment, and portfolio alignment, and all four business areas performed well during the quarter, generating strong operating income, margin rates, and cash flow.

He told analysts that Northrop continues to view share buybacks as a ``very, very good use'' of its cash.

The company said it repurchased about 4.4 million shares for $290 million during the third quarter, bringing the year-to-date total to 13.6 million shares for about $850 million.

Bush said Northrop believe share repurchases were particularly important to maintain value for shareholders given the long cycles involved in the defense business.

The company's board recently increased its remaining share repurchase authorization to $2 billion, he said, which gave the company additional flexibility in a dynamic environment.

Bush said uncertainty about future U.S. defense budgets and the continuing resolution (CR), or stop-gap measure that is funding the Pentagon for fiscal 2013, which prohibits any new program starts, was taking a toll on the company's results.

``Under any reasonable scenario we would expect lower 2013 sales as a result of the CR restriction on new starts along with the other constraints our customers (are) facing,'' Bush said.

He said Northrop would provide more detailed 2013 guidance when it reported fourth-quarter earnings in January.

He said the environment would likely remain challenging, but Northrop was well-positioned for more austere times after streamlining its operations in recent years.

He said the company also had good prospects for increasing sales overseas given U.S. policy moves to sell more aerospace systems and other defense equipment to other countries.

``We see a growing push to make those (capabilities) more available to our partners,'' he said, although he cautioned that it would take time to increase exports in a meaningful way.

Bush said he remained concerned about the lasting consequences of mandatory budget cuts that are now due to take effect on Jan. 2 under the process known as ``sequestration,'' although he hoped there would be a negotiated settlement.

If the cuts took effect, the immediate impact would be less harsh on the defense industry than on the civilian workforce at the Pentagon and other critical government agencies, he said.

``We're talking about impacting individuals who support air traffic control, individuals who support all of the federal enforcement agencies and law enforcement agencies across the board,'' Bush said.

``This is a broader set of national issues and national concerns than just the defense community,'' he said.