By Andrea Shalal-Esa
WASHINGTON (Reuters) - Shares of Lockheed Martin Corp, the Pentagon's biggest supplier, and some other defense companies rallied on Monday after Defense Secretary Chuck Hagel recalled most civilian defense employees despite the ongoing shutdown of the U.S. government.
Lockheed shares closed $1.06 higher at $123.56 on the New York Stock Exchange, while shares of Northrop Grumman Corp closed $1.66 or 1.78 percent higher at $94.98. Raytheon Co shares closed 1.3 perent higher at $75.22.
Arms makers warned Hagel in a letter last week that they would be forced to stop building weapons if the shutdown went on because of the absence of government inspectors and auditors.
They also cited concerns about the Defense Financing and Accounting Service, which pays contractors' invoices and managed $60.9 billion in foreign military sales in fiscal year 2012.
The Pentagon on Saturday said it would recall the majority of some 350,000 civilian Defense Department employees sent home as a result of the shutdown -- about half the 800,000 federal employees currently furloughed.
Lockheed said on Monday it was scaling back its planned furlough of 3,000 workers by 20 percent given Hagel's decision.
The company, which is also the largest informational technology provider for the U.S. government, said about 2,400 of its workers would still be unable to return to work because the government facilities where they work are closed or work has been halted on their programs.
Of the 2,400 affected Lockheed workers in 27 states, about 2,100 worked on programs for civilian agencies, with the remainder working on military programs, the company said, noting that most of the workers were based in the Washington area.
Lockheed, which also builds fighter jets and coastal warships, had announced on Friday that it would furlough about 3,000 workers on Monday because of the shutdown.
"Lockheed Martin will work closely with our customers to support the return of (Defense Contract Management Agency) inspectors, and other (Department of Defense) civilian customers, as they resume their important work on many of our programs," said Lockheed spokesman Gordon Johndroe.
Sikorsky Aircraft, a unit of United Technologies Corp, also canceled temporary layoffs that had been scheduled to start on Monday after news that the Pentagon was recalling most civilian workers.
Sikorsky, which builds Black Hawk and Seahawk helicopters for the U.S. military, had announced last week that it would lay off nearly 2,000 workers beginning Monday, and possibly as many as 5,000 if the shutdown continued into November.
United Technologies' shares closed 24 cents lower at $104.03.
Another weapons maker whose shares traded lower on Monday was Boeing Co, whose commercial aircraft arm lost a big contract to its European rival. Boeing shares closed 51 cents lower at $116.69.
While federal auditors and inspectors have returned to work, defense firms still face potential cash flow problems given the expected depletion of funds available for the Pentagon's Defense Finance and Accounting Service to pay invoices.
The agency's working capital fund could start to run out next week or the week after, if the shutdown continues, said one industry official familiar with the matter.
"This is a huge problem," said the official. "It could be devastating to small- and mid-sized companies, who rely on payments for their cash flow. The smaller you are, the more impact it's going to have."
More than 150 chief executives from firms that make parts for the aerospace industry are expected to discuss the shutdown at a previously scheduled twice-yearly meeting hosted by the Aerospace Industries Association in San Francisco this week.
The executives will also meet with executives from Silicon Valley to discuss joint concerns about cutbacks in government spending on information technology equipment and services.
(Reporting by Andrea Shalal-Esa; Editing by Chris Reese and Leslie Gevirtz)