What happened

Kratos Defense & Security Solutions Inc. (NASDAQ:KTOS) is seeing its stock rise more than 12% at the midpoint of trading Wednesday. As of noon EST, the shares are up 12.2% in response to earnings that appear to have exceeded expectations.

Heading into earnings, Wall Street expected Kratos to report profits of $0.03 per share on sales of $157.2 million. In actual fact, GAAP profits were only $0.02, but pro forma profits were $0.08, which AP is characterizing as an earnings beat.

Sales, meanwhile, came in clearly ahead of estimates -- $159.4 million.

Drone firing rockets at a tank

Drone-maker Kratos is right on target in Q3. Image source: Getty Images.

So what

Don't get too excited about Kratos' "sales beat." While sales were more than expected in the quarter, they actually increased less than 1.5% year over year.

The better news was on earnings, where Kratos turned in a strong operating profit of $10.1 million (a 6.3% operating profit margin), versus just $0.01 million a year ago. Farther down the income statement, Kratos also reported $1.7 million profit in net income -- the company's first honest-to-goodness bottom-line profit since late 2015. Kratos also reported positive free cash flow in Q3 -- the first time that has happened since late 2016. Although Kratos remains $2.5 million "in the red" on negative free cash flow for this year to date, it's headed in the right direction -- and it might even end the year in the black from a cash profits perspective.

Now what

Will the good news keep coming in Q4? I'd like to think so, but consider:

Looking forward, Kratos is guiding investors to expect $182 million to $192 million in Q4 sales -- a bit below the $190.7 million Wall Street will be expecting. Management's prediction of $0.03 to $0.06 in "adjusted EPS" likewise looks a bit light relative to Wall Street's hopes for $0.08 per share.

On the other hand, management's "adjusted EPS guidance" of $0.18 to $0.21 for the year as a whole, and its prediction of $635 to $645 million in full-year sales both look closer to Wall Street estimates. Thanks to a respectable performance in Q3, I'd say Kratos now has a much better chance of hitting its numbers for 2018 as a whole.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.