* Raises 2014 profit forecast to $10.85-$11.15/share
* Q2 earnings $2.76/share vs $2.64 a year earlier
* Records pension income of $85 mln (Adds revised 2014 profit forecast, share price)
July 22 (Reuters) - Lockheed Martin Corp, the Pentagon's largest defense supplier, reported a 3.5 percent rise in quarterly profit on Tuesday and raised its full-year earnings forecast, sending its shares up more than 2 percent.
Analysts cited a strong profit margin performance, while sales fell 1 percent but still topped expectations.
The company said it was optimistic that an investigation into the engine failure that grounded its F-35 fighter jet for nearly a month would finish soon. U.S. military officials last week approved limited flights of the F-35 following its grounding after the failure of a Pratt & Whitney engine on a U.S. Air Force model at a Florida air base on June 23.
Lockheed said higher interest rates lowered its pension liability in the second quarter, ended June 29. The defense contractor has amended some of its pension plans for non-union employees to freeze future retirement benefits and will instead transition them to a contribution retirement savings plan.
The company said it recorded pension income of $85 million for the second quarter, compared with an expense of $120 million a year earlier.
Lockheed also said it expects to resume share repurchases in the current quarter. The company had ceased buybacks while it was considering amendments to its benefit pension plans.
Net income rose to $889 million, or $2.76 a share, from $859 million, or $2.64 a share, a year earlier. Analysts had expected $2.66 a share, on average, according to Thomson Reuters I/B/E/S.
Total revenue fell about 1 percent to $11.31 billion, hurt by a decline in U.S. government spending. Analysts had expected sales of $11.1 billion.
Lockheed reported a 13 percent rise in revenue at its aeronautics business - its largest unit - due to a larger number of production contracts for the F-35 fighter jet and an increase in C-130 plane deliveries. With an estimated cost of $400 billion, the radar-evading F-35 is the world's most expensive weapons project.
Sales also rose slightly in the company's mission systems and training segment, but fell in the information systems and global solutions division, the missiles and fire control division and space systems.
Lockheed, which also makes satellites and coastal warships, raised its 2014 earnings forecast to $10.85-$11.15 a share from $10.50-$10.80.
Lockheed's shares have gained about 41 percent in the past year, compared with a 16 percent rise in the S&P 500 index . They were up 2.7 percent at $167.41 in afternoon trading on Tuesday. (Reporting by Sagarika Jaisinghani in Bangalore and Karen Jacobs in Atlanta; Editing by Maju Samuel, Saumyadeb Chakrabarty and Peter Galloway)