Knife River Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Knife River completed its spin-off from MDU Resources on May 31, 2023, and began trading independently as KNF. Pre-spin financial statements are carve-out results and may not reflect the costs or performance of a standalone company.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $785.2 million | $711.8 million | $1,093.1 million | $1,021.8 million |
| Gross profit / margin | $153.0 million / 19.5% | $103.3 million / 14.5% | $157.1 million / 14.4% | $104.5 million / 10.2% |
| Operating income | $93.5 million | $60.4 million | $49.0 million | $15.8 million |
| Net income (loss) | $56.8 million | $38.6 million | $15.5 million | $(1.4) million |
| Diluted EPS | $1.00 | $0.68 | $0.27 | $(0.03) |
| EBITDA* | $125.1 million | $87.3 million | $111.0 million | $69.1 million |
| Operating cash flow | Not separately reported | Not separately reported | $(70.4) million | $(147.8) million |
*EBITDA is a non-GAAP measure. Adjusted EBITDA was $126.3 million for Q2 and $112.5 million for the first half, versus $90.4 million and $74.5 million, respectively.
Business drivers and changes
- Q2 revenue rose about 10%, primarily from higher selling prices and increased contracting-services work. Management attributed $66.5 million of the quarterly revenue increase to pricing; higher prices and EDGE initiatives also supported margin expansion.
- For the first half, higher prices added $96.4 million of revenue, while lower materials volumes reduced revenue by $62.4 million. Wet weather, project timing, absent prior-year impact projects, and the partial sale of southeast Texas assets weighed on volumes.
- Q2 gross margin increased 500 basis points. Management cited pricing, lower equipment costs—particularly fuel—and improved contracting margins. SG&A rose $16.6 million in Q2, partly due to wages, incentive and insurance accruals, professional fees, and public-company costs.
- Q2 interest expense increased $11.7 million year over year, reflecting higher rates and debt balances following the separation. First-half segment EBITDA increased in Northwest, Mountain, and North Central; Pacific EBITDA declined 8%.
Liquidity, debt and capital
- At June 30, cash, cash equivalents and restricted cash were $68.5 million, including $28.4 million of restricted cash; cash and cash equivalents were $40.1 million. Working capital was $574.0 million.
- Debt carrying value was $839.1 million before current maturities and debt issuance costs presentation: $425 million of 7.75% senior notes due 2031, a $275 million term loan, and $155 million drawn on a $350 million revolving facility. The term loan and revolver mature in 2028 and bear variable SOFR-based rates. The term loan and revolver rates were 7.36% and 7.53%, respectively.
- Debt agreements include a maximum total-debt-to-trailing-EBITDA ratio of 4.75:1 and a minimum EBITDA-to-interest ratio of 2.25:1. Management stated the company was in compliance at quarter-end. A 1 percentage-point increase in rates on the $430 million of term and revolving borrowings would add an estimated $4.3 million of interest expense over 12 months.
- First-half capital expenditures were $66.6 million; management estimated full-year 2023 capital expenditures of $125 million. Operating cash use improved from the prior year, largely due to lower working-capital needs, but remained negative.
Outlook, risks and unusual items
- Backlog reached a reported record for a second quarter at $1.041 billion, up from $977.4 million a year earlier; management said backlog margins were higher year over year and approximately 84% related to publicly funded projects. The company cautioned that backlog is not a reliable indicator of future revenue, income or EBITDA.
- Management described markets and construction activity as generally strong, with pricing increases generally outpacing cost increases. It cited ongoing EDGE initiatives and expected 2023 capital spending, but provided no specific earnings or revenue guidance in the supplied filing text.
- Key exposures include seasonality and weather, inflation and labor costs, competition, fuel and liquid-asphalt price volatility, fixed-price contract cost risk, supply-chain delays, and interest-rate increases. First-quarter precipitation in parts of the West and North Central regions delayed activity.
- The company reported $970,000 of accrued litigation and environmental contingencies and a corresponding $325,000 insurance receivable. It also had approximately $905.4 million of surety bonds outstanding, not recorded as balance-sheet liabilities; no amounts were outstanding under disclosed guarantees or letters of credit at quarter-end.
- The separation involved new debt, an $825 million dividend to Centennial, and a net $64.7 million equity contribution to Knife River. Standalone costs, financing, and tax treatment may differ from historical carve-out results. A 2022 interim cost-allocation adjustment reduced reported cost of revenue by $6.0 million ($4.6 million after tax); management said it was not material.
Important facts for investors to verify
- How much margin improvement reflects durable pricing and operating gains versus favorable fuel costs, project mix, and timing.
- Backlog conversion, project profitability, weather impacts, and the share of backlog exposed to fixed-price cost inflation.
- Debt covenant headroom, variable-rate exposure, refinancing needs, and seasonal liquidity as the company operates independently.
- The sustainable level of standalone SG&A, transition-service costs, and cash taxes after the spin-off.
- The filing’s cover page marks “No” for having filed all required reports during the preceding 12 months; investors should verify the context and any compliance implications for this newly independent registrant.