Knife River Corporation Reports Second Quarter Financial Results

Achieved record second quarter revenue, net income and adjusted EBITDA

Continued to improve margins toward long-term goals

Raised guidance on revenue and adjusted EBITDA

Knife River Corporation (NYSE:KNF), an aggregates-led, vertically integrated construction materials and contracting services company, today announced financial results for the second quarter ended June 30, 2024.

"We had a very strong second quarter and start to our construction season, and I'd like to thank our team for their continued effort to execute on our Competitive EDGE plan to help deliver record results," Knife River President and CEO Brian Gray said. "We are pleased to report record second quarter revenue, net income and Adjusted EBITDA, building upon the previous records set in the second quarter of 2023. We also continued to improve our Adjusted EBITDA margin. On a trailing-twelve-month basis through June 30, Adjusted EBITDA margin grew by 240 basis points, to 15.9%. Driving these strong results were favorable market conditions, continued pricing initiatives, disciplined bidding for higher-margin work and solid project execution."

"By completing more preconstruction activities in the first quarter, we pulled costs forward and were able to hit the ground running earlier in the second quarter," Gray said. "Gross profit margin for contracting services increased by 320 basis points from the same quarter last year. Additionally, we have nearly $1 billion in backlog, at margins we expect to be slightly higher than the prior-year period."

"At the same time, we continue to optimize the pricing of our materials to reflect their value in the market," Gray said. "These efforts are creating record profitability and have more than offset volume declines."

"Looking ahead, we see continued support for infrastructure investment," Gray said. "We still expect to benefit from the Infrastructure Investment and Jobs Act — approximately 56% of IIJA funding has yet to be obligated in our market areas. Further, our states are continuing to be proactive. As of July 1, lawmakers in eight of Knife River's 14 states have introduced additional legislation to fund construction projects. Funding in our states is at or near record levels, and the states are continuing to pursue long-term, resilient revenue solutions. It is clear there is public demand for safer, less-congested roads and bridges."

"We are excited about the second half of the year and beyond, including line-of-sight growth opportunities," Gray said. "We are actively working on several potential acquisitions across our segments, focused on materials-based businesses, and we have the strong balance sheet to support these investments. We are in the right markets, with the right team and the right plan to deliver for our shareholders."

"Given our second quarter results and the visibility we have into the second half of the year, we are raising our guidance for 2024," Gray said. "We anticipate revenue in the range of $2.8 billion to $3.0 billion and Adjusted EBITDA in the range of $445 million to $485 million."

For the three months ended June 30, 2024, we reported record consolidated revenue of $806.9 million, a 3% increase from the prior-year record revenue, driven by price increases in our aggregates product line and increased contracting services revenues. We also reported record second quarter net income of $77.9 million, compared to net income of $56.8 million in the prior-year period. EBITDA was a record $151.4 million, compared to $125.1 million in the prior-year period, with our geographic segments all contributing positive increases as our EDGE plan continues to take hold. Energy Services reported an expected decrease in EBITDA as liquid asphalt pricing decreased. Consolidated Adjusted EBITDA for the quarter was a record $154.3 million, compared to $126.3 million in the prior-year period.

In the fourth quarter of 2023, we realigned our reportable segments to better support our operational strategies. The liquid asphalt and related services portion of the Pacific segment's businesses are now reported under the Energy Services segment. In addition, the North Central and South operating segments have been aggregated into one reportable segment, Central. We also reallocated certain amounts to the operating segments that were previously reported within Corporate Services. All periods have been recast to conform with the revised presentation.

See the section entitled "Non-GAAP Financial Measures" for more information on all non-GAAP measures and a reconciliation to the nearest GAAP measure.

Second quarter revenue increased to a record $131.8 million, a 5% increase driven by price increases in all product lines. Public agency-related construction activity in Northern California continued to improve during the second quarter, increasing contracting services revenues and leading to higher asphalt volumes. However, the segment saw a decline in ready-mix volumes due to timing of projects. Gross margin was down for the quarter, driven by lower gross profit on ready-mix and aggregates related to increased repair and maintenance costs, as well as higher depreciation and depletion expense. EBITDA increased year-over-year, largely due to improved contracting services margins.

Second quarter revenue increased 12% year-over-year to a record $201.2 million, as a result of additional public agency construction work in the region. EBITDA was a record $50.7 million for the quarter, a 31% improvement from the previous record set in the prior year. The segment experienced improved contracting services margins, partly due to favorable project execution and disciplined project bidding, and also saw margin increases across its core product lines, with price increases outpacing costs.

Second quarter revenue increased to a record $194.0 million, a 10% increase driven by increased contracting services activity and strong product pricing. EBITDA improved $12.8 million year-over-year to a second-quarter record $43.1 million, largely from aggregate pricing and margin improvement, as well as favorable contracting services project execution.

Second quarter revenue decreased $16.3 million, primarily related to lower volumes as we pushed our EDGE-related initiative of quality of work over quantity of work. Revenue was also impacted by heavy rainfall and flooding across the segment's footprint, which affected project timing in June. EBITDA improved 27% to a second-quarter record of $36.2 million, led by implementation of our pricing strategies and increased margins for contracting services from favorable project execution and disciplined project bidding.

Second quarter revenue decreased year-over-year at Energy Services as market pricing for liquid asphalt continued to decrease across all markets. The decrease in pricing was slightly offset by strong demand in California. EBITDA decreased 11% year-over-year, while EBITDA margin was only slightly lower as a result of lower input costs and lower selling, general and administrative costs, primarily payroll-related costs.

As of June 30, 2024, Knife River had $15.5 million of unrestricted cash and cash equivalents and had $693.5 million of gross debt and $329.1 million of available capacity under its revolving credit facility, net of outstanding letters of credit. Net leverage, defined as the ratio of net debt to trailing-twelve-month Adjusted EBITDA, was 1.5x at June 30, 2024.

During the first half of 2024, we invested approximately $103.6 million in capital projects, with the majority being spent on routine replacement of vehicles and equipment, plant and building improvements, organic growth projects, expansion projects and replacement of aggregate reserves. We continue to anticipate capital expenditures to be approximately 5% to 7% of revenue for the full year 2024, consisting of both maintenance and organic growth projects. Also, during the second quarter, we acquired a small ready-mix operation in South Dakota and an aggregates site in Oregon.

Knife River increased its financial guidance ranges for the full year 2024 to better reflect momentum in pricing strength, cost optimization and continued positive impact from EDGE initiatives. For the full year 2024, we anticipate price increases of high single digits for aggregates and ready-mix and low single digits for asphalt. We expect continued pricing strength to be partially offset by volume declines for the materials product lines. The guidance ranges are based on normal weather, economic and operating conditions.

Knife River will host a conference call at 10 a.m. EDT on August 6, 2024, to discuss second quarter results, 2024 guidance and conduct a question-and-answer session. The event will be webcast at https://events.q4inc.com/attendee/560145310.

To participate in the live call:

• Domestic: 1-800-549-8228
• International: 1-289-819-1520
  
  Conference ID: 44238

Knife River Corporation, a member of the S&P MidCap 400 index, mines aggregates and markets crushed stone, sand, gravel and related construction materials, including ready-mix concrete, asphalt and other value-added products. Knife River also performs vertically integrated contracting services, specializing in publicly funded DOT projects and private projects across the industrial, commercial and residential space. For more information about the company, visit www.kniferiver.com.

The following table summarizes backlog for the company.

Margins on backlog at June 30, 2024, are expected to be higher than the margins on backlog at June 30, 2023. Approximately 87% of the company's contracting services backlog relates to publicly funded projects, including street and highway construction projects. Period over period increases or decreases should not be used as an indicator of future revenues or earnings.

NON-GAAP FINANCIAL MEASURES

EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin, including those measures by segment, as applicable, net debt and net leverage are considered non-GAAP measures of financial performance. These non-GAAP financial measures are not measures of financial performance under GAAP. The items excluded from these non-GAAP financial measures are significant components in understanding and assessing financial performance. Therefore, these non-GAAP financial measures should not be considered substitutes for the applicable GAAP metric.

EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin are most directly comparable to the corresponding GAAP measures of net income and net income margin. Net debt and net leverage are most directly comparable to the corresponding GAAP measures of total debt. We believe these non-GAAP financial measures, in addition to corresponding GAAP measures, are useful to investors by providing meaningful information about operational efficiency compared to our peers by excluding the impacts of differences in tax jurisdictions and structures, debt levels and capital investment. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance by excluding stock-based compensation and unrealized gains and losses on benefit plan investments as they are considered non-cash and not part of our core operations. We also exclude the one-time, non-recurring costs associated with the separation of Knife River from MDU Resources as those are not expected to continue. We believe EBITDA and Adjusted EBITDA assist rating agencies and investors in comparing operating performance across operating periods on a consistent basis by excluding items management does not believe are indicative of the company's operating performance, including using EBITDA and Adjusted EBITDA to calculate Knife River's leverage as a multiple of EBITDA and Adjusted EBITDA. Additionally, EBITDA and Adjusted EBITDA are important financial metrics for debt investors who utilize debt to EBITDA and debt to Adjusted EBITDA ratios. We believe EBITDA and EBITDA margin, including those measures by segment, are useful performance measures because they provide clarity as to the operational results of the company. Management believes net debt and net leverage are useful performance measures because they provide a measure of how long it would take the company to pay back its debt if net debt and Adjusted EBITDA were constant. Net leverage also allows management to assess our borrowing capacity and optimal leverage ratio. Our management uses these non-GAAP financial measures in conjunction with GAAP results when evaluating our operating results internally and calculating employee incentive compensation, and leverage as a multiple of Adjusted EBITDA to determine the appropriate method of funding our operations.

EBITDA is calculated by adding back income taxes, interest expense (net of interest income) and depreciation, depletion and amortization expense to net income. EBITDA margin is calculated by dividing EBITDA by revenues. Adjusted EBITDA is calculated by adding back unrealized gains and losses on benefit plan investments, stock-based compensation and one-time separation costs, to EBITDA. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenues. Net debt is calculated by adding unamortized debt issuance costs to the total debt balance presented on the balance sheet, less any unrestricted cash. Net leverage is calculated by dividing net debt by trailing-twelve-month Adjusted EBITDA. These non-GAAP financial measures are calculated the same for both the segment and consolidated metrics and should not be considered as alternatives to, or more meaningful than, GAAP financial measures such as net income, net income margin and total debt and are intended to be helpful supplemental financial measures for investors' understanding of our operating performance. Our non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA Margin, net debt and net leverage measures having the same or similar names.

The following information reconciles segment and consolidated net income to EBITDA and Adjusted EBITDA and provides the calculation of EBITDA margin, Adjusted EBITDA margin, net debt and net leverage. Interest expense, net, is net of interest income that is included in other income (expense) on the Consolidated Statements of Operations.