Knife River Corp. (Knife River Holding Company) — Q1 2023 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022. Knife River supplies aggregates-based construction materials and contracting services in 14 states. The financial statements are prepared on a carve-out basis from MDU Resources and include allocated corporate costs; these results may not reflect the costs or performance of the company as a standalone entity. The business is seasonal, with lower activity in winter.
Financial results and liquidity
- Revenue: $307.9 million, down 0.7% from $310.0 million. Construction materials revenue was $192.9 million; contracting services revenue was $115.0 million.
- Profitability: Gross profit was $4.1 million versus $1.1 million; gross margin was 1.3% versus 0.4%. Operating loss was $44.6 million, essentially unchanged. Net loss was $41.3 million versus $40.0 million; net margin was (13.4)% versus (12.9)%. Interest expense rose to $9.5 million from $5.3 million.
- EBITDA: Loss of $14.1 million versus $18.2 million; Adjusted EBITDA loss of $13.7 million versus $16.0 million. Both are non-GAAP measures.
- Cash flow: Operating cash use was $79.3 million versus $76.2 million; investing cash use was $40.8 million versus $40.2 million. Financing provided $117.2 million, primarily through related-party borrowings. Cash declined $2.9 million to $7.2 million. Capital expenditures were $42.4 million on a cash-flow statement basis.
- Liquidity and debt: Working capital was $166.0 million. Related-party notes payable totaled $816.1 million, including $238.0 million current, compared with $684.4 million at year-end. Long-term debt was minimal. Centennial committed to fund Knife River’s obligations through at least one year and a day after issuance of the financial statements; post-separation liquidity was expected to rely on standalone financing and cash flows.
- Backlog: Contracting-services remaining performance obligations were $958.5 million at March 31, 2023, versus $778.0 million a year earlier. The company expected to recognize $863.8 million within 12 months or less.
Changes, outlook, and risks
- Higher selling prices and cost-saving initiatives improved gross profit and margin, partially offsetting inflation in labor, fuel, cement and other costs. Sales volumes were pressured by unfavorable weather, especially in Pacific and North Central. Management reported near-record precipitation in parts of the West early in 2023.
- Management described markets and construction activity as generally strong and backlog as record first-quarter backlog. It noted that backlog is not a reliable predictor of future revenue or earnings, and supply delays or price increases could cause customers to delay or terminate work.
- Management estimated 2023 capital expenditures of $125 million, excluding potential acquisitions and other growth opportunities. It expected purchase commitments to decline as seasonal obligations are fulfilled and related-party borrowing to rise through Q2 before declining in the second half.
- After quarter-end, Knife River Holding Company issued $425 million of 7.75% senior notes due 2031; proceeds were held in escrow pending the separation. The company also anticipated up to $625 million of additional separation-related debt, comprising a proposed $275 million term loan and up to $350 million revolving facility, with SOFR-based variable rates. Proceeds were expected in part to repay related-party debt.
- The planned separation from MDU Resources was expected on May 31, 2023, subject to conditions. MDU Resources’ stockholders were to receive approximately 90% of shares at one share for every four MDU shares held on the May 22 record date; MDU Resources expected to retain approximately 10% initially. The filing cautions that separation timing and terms were not assured.
- Key risks include weather, seasonality, inflation and commodity-price volatility, labor shortages and rising labor costs, interest-rate exposure, and dependence on public funding and construction demand. Surety bonds outstanding were approximately $822.7 million and were not recorded as balance-sheet liabilities; no amounts were outstanding under the disclosed guarantees and letters of credit. Accrued litigation and environmental contingencies were $2.0 million, with $1.3 million of related insurance receivables.
Most important facts to verify
- Whether the separation closed on the expected terms and timeline, and the final distribution and retained ownership percentages.
- Standalone debt, interest rates, covenants, liquidity availability and repayment of related-party notes after separation.
- Whether pricing and cost controls can offset inflation, particularly on fixed-price contracts, and whether weather normalizes during peak construction season.
- Backlog conversion, project delays or cancellations, and the timing of cash collections and seasonal working-capital needs.
- The effect of carve-out allocations and transition-service arrangements on post-separation expenses. The filing reports 80,000 shares in the financial statements but 1,000 shares outstanding on the cover; verify the share-count presentation and its context.