Knife River Corporation Reports Second Quarter Earnings

Achieved record second quarter revenue, net income, EBITDA and backlog

Reduced net debt leverage to 2.3x EBITDA

Raised revenue and EBITDA guidance; initiated adjusted EBITDA guidance

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, 2023.

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Second Quarter Financial Highlights

"I am excited to highlight our record results, including our all-time second quarter highs in revenue, net income and EBITDA," said Brian Gray, Knife River president and CEO. "I want to thank our team members at Knife River for driving our success as a new independent, public company. We successfully completed the tax-free separation from MDU Resources Group, Inc. during the quarter, and we are now better positioned to effectively allocate both capital and resources, and to generate long-term value for our shareholders.

"Reflecting on the quarter, each of our regions benefited from disciplined materials pricing, targeted bidding and solid execution, which are key components of our 'Competitive EDGE' strategy — Knife River's plan for increasing adjusted EBITDA margins and executing on other key initiatives aimed at continued profitable growth," Gray continued. "As we head into the heart of the construction season, we look to further leverage our aggregates-led, vertically integrated business model to take advantage of industry tailwinds.

"Looking to the future, we remain optimistic that the demand environment, including local, state and federal funding, will continue to support strong construction activity," Gray said. "This funding has contributed to a record $1.04 billion in contracting services backlog at improved margins. We anticipate steady demand in the high-growth, mid-sized markets in which we operate and are further encouraged by aggregates opportunities currently within our acquisition pipeline. Since our spin-off, we have paid down $35 million in debt to reduce our net leverage to 2.3x EBITDA, providing us even more financial flexibility to invest and grow our business."

Gray concluded, "Based on our results from the first half of 2023, and the demand we are anticipating for the remainder of the second half of the year, we have raised our revenue guidance to a range of $2.6 billion to $2.8 billion, and raised EBITDA guidance to a range of $320 million to $370 million for fiscal year 2023. To help provide a clear comparison to last year and account for certain one-time costs related to our separation from MDU Resources, we also are transitioning to adjusted EBITDA guidance of $330 million to $380 million. We are highly committed to our EDGE plan, including 15% annual adjusted EBITDA margins by 2025, industry-leading return on invested capital and long-term value creation."

Second Quarter Consolidated Company Results

Knife River reported second quarter consolidated revenue of $785.2 million, a 10% increase from the prior-year period, led by strong results in each region and more than 10% price increases across all consolidated product lines. EDGE-related price adjustments and bidding strategies contributed to a 43% year-over-year increase in EBITDA, to $125.1 million. Contracting services backlog of $1.04 billion was a record for any quarter, and reflects margins greater than the same time last year. For the quarter, adjusted EBITDA was $126.3 million. See the section entitled "Non-GAAP Financial Measures" for more information on all non-GAAP measures and a reconciliation to the nearest GAAP measure.

Financial and Operating Results by Reporting Segment

Second quarter revenue improved $13.8 million year-over-year to $142.2 million, led by strengthened results in Hawaii as the local economy continues to regain momentum through tourism and military spending. The segment also benefited from strong product pricing through continued EDGE-related pricing initiatives, as well as from increased ready-mix volumes in Northern California based in part on our late 2022 acquisition in Modesto. Partially offsetting the region's increased revenues were lower asphalt volumes and decreased contracting services revenues, both resulting from the late start to the construction season. EBITDA increased $6.8 million year-over-year to $22.0 million, the highest level for the second quarter since 2020, as the region saw higher realized prices and lower equipment operating costs, mainly fuel.

Second quarter revenue improved $28.0 million year-over-year to $179.0 million, led by strong product pricing and increased demand for contracting services. EBITDA increased $17.5 million year-over-year to $40.7 million, supported by consistent market demand and continued EDGE-related pricing initiatives. Contracting services backlog increased 52% year-over-year to an all-time record $257.3 million.

Second quarter revenue improved $5.4 million year-over-year to $175.8 million, with strong product pricing more than offsetting the absence of a significant airport project that largely occurred in the prior-year period. EBITDA increased $4.0 million year-over-year to $32.6 million, supported by demand and pricing momentum. Contracting services remains highly active across all markets, with backlog at an all-time second quarter high of $377.3 million, an 8% increase year-over-year.

Second quarter revenue improved $20.4 million year-over-year to $187.6 million, led by strong product pricing across all product lines. EDGE-related aggregate price increases in the region more than offset lower volumes. EBITDA increased $8.3 million year-over-year to $24.4 million. Contracting services also began to benefit from the new EDGE-aligned bidding strategy, positively impacting current results and backlog margins. Second quarter backlog decreased 13% year-over-year to $255.4 million.

Second quarter revenue improved $5.8 million year-over-year to $100.6 million, as a result of higher average selling prices for asphalt products and ready-mix concrete, offset in part by the sale of non-strategic assets in southeast Texas in December 2022. EBITDA improved $1.2 million year-over-year to $5.4 million as a result of increased pricing, partially offset by higher corporate costs as a result of Knife River standing itself up as a publicly traded company.

Liquidity and Capital Allocation

As of June 30, 2023, Knife River held $68.5 million of cash, cash equivalents and restricted cash, and $839.1 million of outstanding debt. The company had $155 million outstanding of the $350 million revolving credit facility at June 30, 2023. Net debt to trailing-twelve-month EBITDA was 2.3x. The company remains committed to the stated long-term annualized goal of approximately 2.5x net debt to trailing-twelve-month EBITDA.

Knife River has spent approximately $56.0 million of the planned $125 million of capital projects for 2023, with the majority allocated to maintenance projects. Future acquisitions are not included in this amount and would be incremental to the capital program. The company remains focused on its EDGE strategy, including a disciplined capital allocation plan.

Guidance

For the full year 2023, Knife River is increasing its guidance ranges on revenue and EBITDA to better reflect momentum in pricing strength, cost optimization, federal funding tailwinds, and continued positive impacts from the EDGE initiatives. The company also is transitioning to adjusted EBITDA guidance to more clearly account for certain one-time costs related to the tax-free separation from MDU Resources.

• Revenues in the range of $2.6 billion to $2.8 billion.
• EBITDA in the range of $320 million to $370 million.
• Adjusted EBITDA in the range of $330 million to $380 million.
• Capital expenditures of approximately $125 million.*

* Future acquisitions are not included in this amount and would be incremental to the capital program

Conference Call

Knife River will host a conference call at 10 a.m. EDT on August 8, 2023, to discuss second quarter results and answer questions. The event will be webcast at https://events.q4inc.com/attendee/986161993. To participate in the live call:

• Domestic: 1-888-396-8049
• International: 1-416-764-8646

About Knife River Corporation

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.

Forward-Looking Statements

The information in this news release highlights the key growth strategies, projections and certain assumptions for the company and its subsidiaries. Many of these highlighted statements and other statements not historical in nature are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations are based on reasonable assumptions, there is no assurance the company’s projections or estimates for growth, shareholder value creation and financial guidance or other proposed strategies will be achieved. Please refer to assumptions contained in this news release, as well as the various important factors listed in Part I, Item 1A - Risk Factors in the company's registration statement on Form 10 and subsequent filings with the Securities and Exchange Commission.

Changes in such assumptions and factors could cause actual future results to differ materially from growth and financial guidance. All forward-looking statements in this news release are expressly qualified by such cautionary statements and by reference to the underlying assumptions. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Except as required by law, the company does not undertake to update forward-looking statements, whether as a result of new information, future events or otherwise.

Throughout this news release, the company presents financial information prepared in accordance with GAAP, as well as EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin, including those measures by segment, which are considered non-GAAP financial measures. The use of these non-GAAP financial measures should not be construed as alternatives to net income or net income margin. The company believes the use of these non-GAAP financial measures are beneficial in evaluating the company's operating performance. Please refer to the "Non-GAAP Financial Measures" section contained in this document for additional information.

Segment Financial Data and Highlights (Unaudited)

The following table summarizes backlog for the company.

Margins on backlog at June 30, 2023, are higher than the margins on backlog at June 30, 2022. Approximately 84% of the company's contracting services backlog relates to publicly funded projects, including street and highway construction projects, which are driven primarily by public works projects for state departments of transportation. Period over period increases or decreases cannot be used as an indicator of future revenues or earnings.

Non-GAAP Financial Measures

EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA Margin, including those measures by segment, are considered non-GAAP financial measures and are most directly comparable to the corresponding GAAP measures of net income, net income margin, gross profit and gross margin. Knife River believes these non-GAAP financial measures, in addition to corresponding GAAP measures, are useful to investors by providing meaningful information about operational efficiency compared to its peers by excluding the impacts of differences in tax jurisdictions and structures, debt levels and capital investment. Management believes Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of the company's 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 the company's core operations. The company also excludes the one-time, non-recurring costs associated with the separation of Knife River from MDU Resources as those are not expected to continue. Rating agencies and investors also use 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. Management believes 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. Knife River’s management uses these non-GAAP financial measures in conjunction with GAAP results when evaluating its operating results internally and calculating employee incentive compensation, and leverage as a multiple of EBITDA and Adjusted EBITDA to determine the appropriate method of funding operations of the company.

EBITDA is calculated by adding back income taxes, interest expense 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. 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 or net income margin and are intended to be helpful supplemental financial measures for investors’ understanding of Knife River’s operating performance. Knife River’s 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 and Adjusted EBITDA Margin measures having the same or similar names.

The following information reconciles segment and consolidated net income to EBITDA and EBITDA to Adjusted EBITDA and provides the calculation of EBITDA margin and adjusted EBITDA margin.

The following tables provide the reconciliation to trailing twelve month EBITDA as of June 30, 2023, as well as the leverage calculation of net debt to trailing twelve month EBITDA.

The following table provides a reconciliation of consolidated GAAP net income to EBITDA and adjusted EBITDA for forecasted results.

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