Knife River Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context and reporting period
Knife River supplies aggregates, asphalt, ready-mix concrete and related construction services in 14 states. Its vertically integrated model uses about 40% of its aggregates internally. The company completed its spin-off from MDU Resources on May 31, 2023, and became an independent public company. Results before the spin-off are presented on a carve-out basis and may not reflect the costs or performance of a standalone company.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,090.4 | $975.4 | $2,183.5 | $1,997.2 |
| Gross profit / margin | $269.4 / 24.7% | $184.5 / 18.9% | $426.5 / 19.5% | $288.9 / 14.5% |
| Operating income | $210.2 | $142.9 | $259.2 | $158.7 |
| Net income | $146.7 | $99.7 | $162.2 | $98.2 |
| Diluted EPS | $2.58 | $1.76 | $2.86 | $1.74 |
| EBITDA (non-GAAP) | $241.4 | $172.1 | $352.4 | $241.2 |
| Adjusted EBITDA (non-GAAP) | $247.5 | $173.1 | $360.0 | $247.6 |
For the nine months, operating cash flow was $152.9, capital expenditures were $86.5, investing cash use was $83.0, and financing cash provided was $36.1. Cash, cash equivalents and restricted cash totaled $116.2 at September 30, including $84.0 of unrestricted cash and $32.2 of restricted cash.
At September 30, total debt was approximately $698.7 before unamortized issuance costs ($682.7 net); the company had no revolver borrowings. Working capital was $586.4. Current assets were $1,011.4 and current liabilities $425.0.
Material changes versus prior comparable periods
- Q3 revenue rose 11.8%, while nine-month revenue rose 9.3%. Management attributed growth mainly to higher pricing, including EDGE initiatives, and demand for contracting services, partly offset by lower product volumes.
- Gross margin increased 5.8 percentage points in Q3 and 5.0 points for the nine-month period. Management cited prices outpacing costs, improved contracting margins, productivity and lower equipment and fuel costs.
- Nine-month net income increased to $162.2 from $98.2. Interest expense rose to $44.0 from $21.5, primarily reflecting higher rates and the post-spin financing structure.
- Operating cash flow increased to $152.9 from $39.4, supported by higher earnings and lower working-capital cash use. Receivables nevertheless used $302.5 of cash during the 2023 nine-month period.
- Debt structure changed substantially with the spin-off: the company issued $425.0 of 7.75% senior notes and entered into a $275.0 term loan and $350.0 revolving facility. The prior related-party notes were settled as part of the separation.
Outlook, management commentary and risks
- Management described markets as resilient and construction activity as generally strong despite inflation, higher interest rates, supply-chain constraints and transportation disruptions. Price increases have generally exceeded cost increases. The filing gives no specific revenue, earnings or EBITDA guidance.
- Contracting backlog was $732.2 at September 30, down from $803.7 a year earlier; management reported expected backlog margins were higher year over year. About 83% of backlog related to publicly funded projects. The company cautioned that backlog is not a reliable indicator of future revenue or earnings and that delays, supply costs or customer cancellations could affect results.
- Management cited infrastructure funding opportunities, including IIJA allocations, and the EDGE program’s focus on margin improvement, discipline, growth and execution. It also expects labor costs to continue rising and noted workforce shortages.
- Operations are seasonal and exposed to weather, construction cycles, competition, and volatile fuel, liquid asphalt and other material costs. Fixed-price contracts may be particularly sensitive to cost increases. A 1 percentage-point increase in the term loan rate would raise estimated interest expense by $2.7 over 12 months.
- The company estimated 2023 capital expenditures of $125.0, with about $50.0 remaining after September 30. It said liquidity, operating cash flow and borrowing capacity should cover commitments and anticipated capital spending for at least the next 12 months.
- Debt agreements include leverage and interest-coverage covenants; management said the company was in compliance at quarter-end. Outstanding surety bonds were approximately $619.2, with no amounts outstanding under disclosed guarantees or letters of credit. Litigation accruals were $0.6; management did not expect probable or reasonably possible losses beyond accruals, net of insurance, to materially affect results, though some losses could not be estimated.
- Separation-related one-time costs were $4.4 in Q3 and $7.1 for nine months, partly offset by transition-service income. Standalone operations also brought recurring costs, including additional payroll, insurance and professional services.
Most important facts for investors to verify
- Whether improved pricing and margins can be sustained as input costs, labor expenses and interest rates evolve.
- Backlog conversion, project timing and the effect of lower volumes in certain product lines and regions.
- Standalone cost levels after transition services with MDU Resources wind down, and the full recurring impact of separation.
- Debt covenant headroom, variable-rate exposure, debt maturities and the ability to fund seasonal working capital and capital expenditures.
- Cash-flow quality and collections, given the large receivables balance and cash use from receivables during the first nine months.
- The filing’s cover page marks “No” for having filed all required reports during the preceding 12 months; investors may wish to confirm the filing-status context for a company that became independent in May 2023.