knf-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

Commission file number 1-41642

Knife River Corporation

(Exact name of registrant as specified in its charter)


Delaware						92-1008893
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1150 West Century Avenue

P.O. Box 5568

Bismarck, North Dakota 58506-5568

(Address of principal executive offices)

(Zip Code)

(701) 530-1400

(Registrant's telephone number, including area code)

Knife River Holding Company

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	KNF	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 3, 2023: 56,566,214 shares.


Index
			Page
Definitions			3
Introduction			4
Part I -- Financial Information
Item 1. Financial Statements			5
Consolidated Statements of Operations -- Three and Six Months Ended June 30, 2023 and 2022			5
Consolidated Statements of Comprehensive Income -- Three and Six Months Ended June 30, 2023 and 2022			6
Consolidated Balance Sheets -- June 30, 2023 and December 31, 2022			7
Consolidated Statements of Equity -- Three and Six Months Ended June 30, 2023 and 2022			8
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2023 and 2022			9
Notes to Consolidated Financial Statements			10
1. Background			10
2. Basis of presentation			10

3. Receivables and allowance for expected credit losses			12
4. Inventories			13
5. Earnings per share			13
6. Equity			13
7. Accumulated other comprehensive loss			14
8. Revenue from contracts with customers			15
9. Uncompleted contracts			16


10. Goodwill and other intangible assets			17
11. Fair value measurements			17
12. Debt			19
13. Income taxes			20
14. Cash flow information			20
15. Business segment data			21
16. Employee benefit plans			22
17. Contingencies			23
18. Related-party transactions			23


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
Part II -- Other Information
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Mine Safety Disclosures			45
Item 5. Other Information			45
Item 6. Exhibits			45
Exhibits Index			46
Signatures			48

Index

Definitions

The following abbreviations and acronyms used in this Form 10-Q are defined below:


Abbreviation or Acronym
Agency			Publicly-funded work completed for state departments of transportation, as well as cities and counties
ASC			FASB Accounting Standards Codification
ASU			FASB Accounting Standards Update
Centennial			Centennial Energy Holdings, Inc., a direct wholly owned subsidiary of MDU Resources and the direct parent company of Knife River prior to the spinoff
Company			Knife River Corporation
COVID-19			Coronavirus disease 2019
Distribution			The distribution of approximately 90 percent of the outstanding shares of Knife River common stock to MDU Resources stockholders on a pro rata basis of one share of Knife River common stock for every four shares held of MDU Resources common stock
Dodd-Frank Act			Dodd-Frank Wall Street Reform and Consumer Protection Act
EBITDA			Earnings before interest, taxes, depreciation, depletion and amortization
EDGE			"Competitive EDGE" strategy implemented by the Company to improve margins and to execute on other strategic initiatives aimed at generating long-term profitable growth
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board

GAAP			Accounting principles generally accepted in the United States of America



KRC Materials, Inc.			A direct wholly owned subsidiary of Knife River and, prior to the Separation, a direct wholly owned subsidiary of Centennial
Knife River Corporation			The holding company established in conjunction with the Separation and, prior to the Separation, a direct wholly owned subsidiary of MDU Resources
MDU Resources			MDU Resources Group, Inc., the indirect parent company of Knife River prior to the spinoff
SEC			United States Securities and Exchange Commission
Separation			The separation of Knife River from MDU Resources' other businesses and the creation of an independent, publicly traded company
SOFR			Secured Overnight Financing Rate

Index

Introduction

Knife River is a leading aggregates-based construction materials and contracting services provider in the United States. The Company's aggregate reserves provide the foundation for its vertically integrated business strategy, with approximately 40 percent of its aggregates for the year ended December 31, 2022, being used internally to support value-added downstream products (ready-mix concrete and asphalt) and contracting services (heavy-civil construction, asphalt paving, concrete construction, site development and grading services). The Company provides construction materials and contracting services for both public and private customers and is focused on being the provider of choice in mid-size, high-growth markets. Knife River is committed to its plan for continued growth and to delivering for its stakeholders — customers, communities, employees and stockholders — by executing on its four core values: people, safety, quality and the environment.

The Company supplies construction materials to customers in 14 states and also provides related contracting services. It has broad access to high-quality aggregates in most of its markets, which forms the foundation of its vertically integrated business model. Knife River shares resources, including plants, equipment and people, across its various locations to maximize efficiency, and it transports its products by truck, rail and barge to complete the vertical value chain, depending on the particular market. The Company's strategically located aggregate sites, ready-mix plants and asphalt plants, along with its fleet of ready-mix and dump trucks, enables Knife River to better serve its customers. The Company believes its vertically integrated business model is a strong competitive advantage that provides scale, efficiency and operational excellence for the benefit of customers, stockholders and the broader communities that it serves.

The Company is organized into six operating regions: Pacific, Northwest, Mountain, North Central, South and Energy Services. These regions are used to determine the Company's reportable segments, which are based on the Company's method of internal reporting and are aligned by key geographic regions due to the production of construction materials and related contracting services following the seasonal nature of the construction industry. Knife River's reportable segments are: Pacific, Northwest, Mountain and North Central, with South and Energy Services included in the All Other category with its corporate services. The internal reporting of these segments is defined based on the reporting and review process used by the Company's chief executive officer. For more information on the Company's business segments, see Note 15 of the Notes to Consolidated Financial Statements.

On May 31, 2023 (the Separation and Distribution date), MDU Resources distributed shares representing approximately 90 percent of Knife River's outstanding common stock to holders of record of MDU Resources' common stock as of the close of business on May 22, 2023, in a spin-off that was tax-free for U.S. federal tax purposes. Following the Distribution, Knife River became an independent, publicly traded company.

Index

Part I -- Financial Information

Item 1. Financial Statements


Knife River Corporation
Consolidated Statements of Operations
(Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Revenue:
Construction materials	$	431,752	$	381,131	$	624,669	$	576,829
Contracting services	353,437		330,682		468,420		444,949
Total revenue	785,189		711,813		1,093,089		1,021,778
Cost of revenue:
Construction materials	316,179		303,498		510,308		506,355
Contracting services	316,027		304,974		425,703		410,968
Total cost of revenue	632,206		608,472		936,011		917,323
Gross profit	152,983		103,341		157,078		104,455
Selling, general and administrative expenses	59,450		42,933		108,108		88,652
Operating income	93,533		60,408		48,970		15,803
Interest expense	19,156		7,424		28,651		12,690
Other income (expense)	2,478		(2,842)		3,304		(4,778)
Income (loss) before income taxes	76,855		50,142		23,623		(1,665)
Income tax expense (benefit)	20,019		11,580		8,107		(217)
Net income (loss)	$	56,836	$	38,562	$	15,516	$	(1,448)

Net income (loss) per share:
Basic	$	1.00	$	.68	$	.27	$	(.03)
Diluted	$	1.00	$	.68	$	.27	$	(.03)
Weighted average common shares outstanding:
Basic	56,566		56,566		56,566		56,566
Diluted	56,599		56,566		56,583		56,566

The accompanying notes are an integral part of these consolidated financial statements.

Index


Knife River Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Net income (loss)	$	56,836	$	38,562	$	15,516	$	(1,448)
Other comprehensive income:
Reclassification adjustment for loss on derivative instruments included in net income (loss), net of tax of $13 and $27 for the three months ended and $28 and $54 for the six months ended in 2023 and 2022, respectively	44		82		90		164
Postretirement liability adjustment:
Postretirement liability gains (losses) arising during the period, net of tax of $(6) and $1,879 for the three months ended and $(6) and $1,879 for the six months ended in 2023 and 2022, respectively	(17)		5,820		(17)		5,820
Amortization of postretirement liability losses included in net periodic benefit cost, net of tax of $15 and $71 for the three months ended and $31 and $142 for the six months ended in 2023 and 2022, respectively	48		220		95		441
Postretirement liability adjustment	31		6,040		78		6,261
Other comprehensive income	75		6,122		168		6,425
Comprehensive income attributable to common stockholders	$	56,911	$	44,684	$	15,684	$	4,977

The accompanying notes are an integral part of these consolidated financial statements.

Index


Knife River Corporation
Consolidated Balance Sheets
(Unaudited)
	June 30, 2023		December 31, 2022
Assets	(In thousands, except shares and per share amounts)
Current assets:
Cash, cash equivalents and restricted cash	$	68,489	$	10,090
Receivables, net	418,620		210,157
Costs and estimated earnings in excess of billings on uncompleted contracts	58,020		31,145
Due from related-party	—		16,050
Inventories	374,377		323,277
Prepayments and other current assets	38,820		17,848
Total current assets	958,326		608,567
Noncurrent assets:
Property, plant and equipment	2,533,435		2,489,408
Less accumulated depreciation, depletion and amortization	1,221,966		1,174,195
Net property, plant and equipment	1,311,469		1,315,213
Goodwill	274,478		274,540
Other intangible assets, net	12,110		13,430
Operating lease right-of-use assets	45,933		45,873
Investments and other	40,581		36,696
Total noncurrent assets	1,684,571		1,685,752
Total assets	$	2,642,897	$	2,294,319
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt - current portion	$	7,082	$	211
Related-party notes payable - current portion	—		238,000
Accounts payable	174,603		87,370
Billings in excess of costs and estimated earnings on uncompleted contracts	44,590		39,843
Taxes payable	29,878		8,502
Accrued compensation	26,041		29,192
Due to related-party	—		20,286
Current operating lease liabilities	14,067		13,210
Other accrued liabilities	88,095		80,276
Total current liabilities	384,356		516,890
Noncurrent liabilities:
Long-term debt	832,047		427
Related-party notes payable	—		446,449
Deferred income taxes	170,502		175,804
Noncurrent operating lease liabilities	31,866		32,663
Other	129,274		93,497
Total liabilities	1,548,045		1,265,730
Commitments and contingencies
Stockholders' equity:
Common stock, 300,000,000 shares authorized, $0.01 par value, 56,997,350 shares issued and 56,566,214 shares outstanding at June 30, 2023; 80,000 shares authorized, issued and outstanding, $10 par value at December 31, 2022	570		800
Other paid-in capital	611,562		549,106
Retained earnings	498,530		494,661
MDU Resources common stock held by subsidiary at cost - 538,921 shares at December 31, 2022	—		(3,626)
Treasury stock held at cost - 431,136 shares	(3,626)		—
Accumulated other comprehensive loss	(12,184)		(12,352)
Total stockholders' equity	1,094,852		1,028,589
Total liabilities and stockholders' equity	$	2,642,897	$	2,294,319

The accompanying notes are an integral part of these consolidated financial statements.

Index


Knife River Corporation
Consolidated Statements of Equity
(Unaudited)
	Common Stock			Other Paid-in Capital		Retained Earnings		MDU Resources' Stock Held by Subsidiary			Accumula-ted Other Comprehe-nsive Loss		Treasury Stock
	Shares	Amount						Shares	Amount				Shares	Amount		Total
	(In thousands, except shares)
At December 31, 2022	80,000	$	800	$	549,106	$	494,661	(538,921)	$	(3,626)	$	(12,352)	—	$	—	$	1,028,589
Net loss	—	—		—		(41,320)		—	—		—		—	—		(41,320)
Other comprehensive income	—	—		—		—		—	—		93		—	—		93
Stock-based compensation	—	—		453		(39)		—	—		—		—	—		414
Net transfers to Centennial	—	—		(1,385)		(11,622)		—	—		—		—	—		(13,007)
At March 31, 2023	80,000	$	800	$	548,174	$	441,680	(538,921)	$	(3,626)	$	(12,259)	—	$	—	$	974,769
Net income	—	—		—		56,836		—	—		—		—	—		56,836
Other comprehensive Income	—	—		—		—		—	—		75		—	—		75
Stock-based compensation	—	—		212		14		—	—		—		—	—		226
Transfer of MDU Resources' stock held by subsidiary	—	—		—		—		538,921	3,626		—		—	—		3,626
Receipt of treasury stock at cost	—	—		—		—		—	—		—		(431,136)	(3,626)		(3,626)
Retirement of historical common stock in connection with the Separation	(80,000)	(800)		800		—		—	—		—		—	—		—
Issuance of common stock in connection with the Separation	56,997,350	570		(596)		—		—	—		—		—	—		(26)
Net transfers from Centennial and MDU Resources including Separation adjustments	—	—		62,972		—		—	—		—		—	—		62,972
At June 30, 2023	56,997,350	$	570	$	611,562	$	498,530	—	$	—	$	(12,184)	(431,136)	$	(3,626)	$	1,094,852





	Common Stock			Other Paid-in Capital		Retained Earnings		MDU Resources' Stock Held by Subsidiary			Accumula-ted Other Comprehe-nsive Loss		Treasury Stock
	Shares	Amount						Shares	Amount				Shares	Amount		Total
	(In thousands, except shares)
At December 31, 2021	80,000	$	800	$	549,714	$	430,446	(538,921)	$	(3,626)	$	(24,490)	—	$	—	$	952,844
Net loss	—	—		—		(40,010)		—	—		—		—	—		(40,010)
Other comprehensive income	—	—		—		—		—	—		303		—	—		303
Stock-based compensation	—	—		333		(27)		—	—		—		—	—		306
Net transfers to Centennial	—	—		(3,432)		(12,976)		—	—		—		—	—		(16,408)
At March 31, 2022	80,000	$	800	$	546,615	$	377,433	(538,921)	$	(3,626)	$	(24,187)	—	$	—	$	897,035
Net income	—	—		—		38,562		—	—		—		—	—		38,562
Other comprehensive income	—	—		—		—		—	—		6,122		—	—		6,122
Stock-based compensation	—	—		333		(27)		—	—		—		—	—		306
Net transfers to Centennial	—	—		(5,063)		(12,974)		—	—		—		—	—		(18,037)
At June 30, 2022	80,000	$	800	$	541,885	$	402,994	(538,921)	$	(3,626)	$	(18,065)	—	$	—	$	923,988

The accompanying notes are an integral part of these consolidated financial statements.

Index


Knife River Corporation
Consolidated Statements of Cash Flows
(Unaudited)
	Six Months Ended
	June 30,
	2023		2022
	(In thousands)
Operating activities:
Net income (loss)	$	15,516	$	(1,448)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization	60,760		58,101
Deferred income taxes	(5,355)		(975)
Provision for credit losses	1,015		(241)
Amortization of debt issuance costs	2,059		228
Employee stock-based compensation costs	665		666
Pension and postretirement benefit plan net periodic benefit cost	595		654
Unrealized (gains) losses on investments	(1,282)		2,631
Gains on sales of assets	(3,356)		(2,498)
Changes in current assets and liabilities, net of acquisitions:
Receivables	(236,395)		(215,158)
Due from related-party	16,050		1,013
Inventories	(51,100)		(66,253)
Other current assets	(20,853)		(16,782)
Accounts payable	102,566		73,082
Due to related-party	(7,310)		9,836
Other current liabilities	25,598		8,749
Pension and postretirement benefit plan contributions	(292)		(208)
Other noncurrent changes	30,741		794
Net cash used in operating activities	(70,378)		(147,809)
Investing activities:
Capital expenditures	(66,578)		(80,254)
Acquisitions, net of cash acquired	—		(524)
Net proceeds from sale or disposition of property and other	4,117		4,294
Investments	(1,655)		(1,608)
Net cash used in investing activities	(64,116)		(78,092)
Financing activities:
Issuance of current related-party notes, net	—		100,000
Issuance of long-term related-party notes, net	205,275		154,923
Issuance of long-term debt	855,000		—
Repayment of long-term debt	(127)		(147)
Debt issuance costs	(16,640)		(749)
Proceeds from issuance of common stock	(26)		—
Net transfers to Centennial	(850,589)		(29,261)
Net cash provided by financing activities	192,893		224,766
Increase (decrease) in cash, cash equivalents and restricted cash	58,399		(1,135)
Cash, cash equivalents and restricted cash -- beginning of year	10,090		13,848
Cash, cash equivalents and restricted cash -- end of period	$	68,489	$	12,713

The accompanying notes are an integral part of these consolidated financial statements.

Index

Knife River Corporation

Notes to Consolidated

Financial Statements

June 30, 2023 and 2022

(Unaudited)

Note 1 - Background

On August 4, 2022, MDU Resources announced that its board of directors approved a plan to pursue the Separation of the Knife River from MDU Resources. On May 31, 2023, the Company settled its net parent investment with Centennial and the Separation was completed by a pro rata distribution of shares representing approximately 90 percent of Knife River's outstanding common stock to MDU Resources' stockholders. MDU Resources' stockholders received one share of Knife River common stock for every four shares of MDU Resources common stock held as of the close of business on May 22, 2023. MDU Resources retained approximately 10 percent of Knife River's common stock. The Distribution was tax-free to its stockholders for U. S. federal income tax purposes. As a result of the Separation, Knife River is now an independent public company trading on the New York Stock Exchange under the symbol "KNF." More information on the Separation and Distribution, as well as the Company's historical results, can be found within the Company's Registration Statement on Form 10.

Note 2 - Basis of presentation

The accompanying consolidated interim financial statements were prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Interim financial statements do not include all disclosures provided in annual financial statements and, accordingly, these financial statements should be read in conjunction with the Company's Registration Statement on Form 10. The information is unaudited but includes adjustments that are, in the opinion of management, necessary for a fair presentation of the accompanying consolidated interim financial statements and are of a normal recurring nature.

On May 31, 2023, the Company became a stand-alone publicly traded company. Prior to the Separation on May 31, 2023, Knife River operated as a wholly owned subsidiary of Centennial and an indirect, wholly owned subsidiary of MDU Resources and not as a stand-alone company. These consolidated financial statements and footnotes reflect the historical financial position, results of operations and cash flows of the Company as historically managed within MDU Resources for the periods prior to the completion of the Separation and reflect the financial position, results of operations and cash flows as a stand-alone company for the period after the completion of the Separation. The historical consolidated financial statements and footnotes were prepared on a “carve-out” basis in connection with the Separation and were derived from the consolidated financial statements of MDU Resources as if the Company operated on a stand-alone basis during the periods presented, and were prepared utilizing the legal entity approach in conformity with GAAP. The results for the three and six months ended June 30, 2022, vary from the previously reported MDU Resources' construction materials and contracting services segment due to an adjustment to a cost allocation for interim periods to conform with the Company's current year accounting. This adjustment does not impact the historical annual financial statements included in the Company's Registration Statement on Form 10. This adjustment decreased cost of revenue by $6.0 million ($4.6 million after tax) for the three and six months ended June 30, 2022. The adjustment is not considered material for the three or six months ended June 30, 2022.

The Company utilized allocations and carve-out methodologies to prepare its historical consolidated financial statements and footnotes. The consolidated financial statements and footnotes herein may not be indicative of the Company's future performance or actual expenses that would have been incurred as a stand-alone company for the periods presented.

All revenues and costs, as well as assets and liabilities, directly associated with the business activity of the Company are included in the consolidated financial statements. In the periods prior to the Separation, the consolidated financial statements include expense allocations for certain functions provided by MDU Resources and Centennial, including, but not limited to certain general corporate expenses related to senior management, legal, human resources, finance and accounting, treasury, information technology, communications, procurement, tax, insurance and other shared services. These general corporate expenses are included in the Consolidated Statements of Operations within selling, general and administrative expenses. The amounts allocated were $4.4 million and $9.0 million for the three and six months ended June 30, 2023, respectively, and $4.7 million and $9.7 million for the three and six months ended June 30, 2022, respectively. These expenses have been allocated to the Company on the basis of direct usage when identifiable, with the remainder principally allocated on the basis of percent of total capital invested or other allocation methodologies that are considered to be a reasonable reflection of the utilization of the services provided to the benefits received, including the following: number of employees paid and stated as cost per check; number of employees served; weighted factor of travel, managed units, national account spending, equipment and fleet acquisitions; purchase order dollars spent and purchase order line count; number of payments, vouchers or unclaimed property reports; labor hours; time tracked; and projected workload.

Index

Prior to the Separation, Knife River historically participated in Centennial’s centralized cash management program, including its overall financing arrangements. This arrangement is not reflective of the manner in which the Company would have been able to finance its operations had it been independent from MDU Resources for the period prior to the completion of the Separation. Knife River had related-party note agreements in place with Centennial for the financing of its capital needs, which are reflected as related-party notes payable on the Consolidated Balance Sheets as of December 31, 2022. The related-party notes payable to Centennial at May 30, 2023, was $889.7 million. As part of the Separation, Centennial made an equity contribution to the Company to release the Company of its obligation related to the outstanding notes payable. Also as part of the Separation, the Company entered into debt agreements and subsequently paid a dividend of $825.0 million from the debt proceeds to Centennial, which Centennial used to repay a portion of the Company's outstanding indebtedness. These transactions resulted in the Company receiving a net equity contribution of $64.7 million and is reflected as "Net transfers from Centennial and MDU Resources including separation adjustments" in the Consolidated Statement of Equity. Interest expense in the Consolidated Statements of Operations includes the allocation of interest on borrowing and funding associated with the related-party note agreements for periods prior to the Separation.

Prior to the Separation, income tax expense and tax balances in the consolidated financial statements were calculated on a separate tax return basis. The separate tax return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company were a separate taxpayer and a standalone enterprise. Management believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. As a stand-alone entity, the Company will file tax returns on its own behalf, and tax balances and effective income tax rate may differ from the amounts reported in the historical periods.

Management has also evaluated the impact of events occurring after June 30, 2023, up to the date of issuance of these consolidated interim financial statements on August 8, 2023, that would require recognition or disclosure in the Consolidated Financial Statements.

Principles of consolidation

For the pre-Separation periods, the accompanying financial statements of the Company were derived from the consolidated financial statements and accounting records of MDU Resources as if the Company and its wholly owned subsidiaries operated on a stand-alone basis during the periods presented. The consolidated financial statements were prepared in accordance with GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions between the businesses comprising the Company have been eliminated in the accompanying consolidated financial statements. Related-party transactions between the Company and MDU Resources or Centennial for general operating activities and intercompany debt have been included in the consolidated financial statements for the pre-Separation periods. These related-party transactions were settled in cash and are reflected in the pre-Separation Consolidated Balance Sheets as “Due from related-party” or “Due to related-party” with the aggregate net effect reflected in the Consolidated Statements of Cash Flows within operating activities and “Related-party notes payable” with the aggregate net effect reflected in the Consolidated Statements of Cash Flows within financing activities.

The aggregate net effect of related-party transactions not settled in cash as part of the Separation have been reflected in the pre-Separation Consolidated Balance Sheet within “Other paid-in capital”. See Note 18 for additional information on related-party transactions.

Use of estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates are used for items such as long-lived assets and goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; aggregate reserves; property depreciable lives; tax provisions; revenue recognized using the cost-to-cost measure of progress for contracts; expected credit losses; environmental and other loss contingencies; costs on contracting services contracts; actuarially determined benefit costs; asset retirement obligations; lease classification; present value of right-of-use assets and lease liabilities; and the valuation of stock-based compensation. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.

New accounting standards

There have been no recent accounting standards that are expected to materially affect the Company.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. At June 30, 2023, the $68.5 million of cash, cash equivalents and restricted cash on the Consolidated Statements of Cash Flows is comprised of $40.1 million of cash and cash equivalents and $28.4 million of restricted cash. At June 30, 2022, the Company did not have any restricted cash. Restricted cash represents deposits held by Knife River's captive insurance company that is required by state insurance regulations to remain in the captive insurance company as cash.

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Seasonality of operations

Some of the Company's operations are seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods, with lower activity in the winter months and higher activity in the summer months. Accordingly, the interim results for particular segments, and for the Company as a whole, may not be indicative of results for the full fiscal year or other future periods.

Note 3 - Receivables and allowance for expected credit losses

Receivables consist primarily of trade and contract receivables for the sale of goods and services net of expected credit losses. A majority of the Company's receivables are due in 30 days or less. The total balance of receivables past due 90 days or more was $11.6 million and $11.2 million at June 30, 2023 and December 31, 2022, respectively. Receivables were as follows:


	June 30, 2023		December 31, 2022
	(In thousands)
Trade receivables	$	220,948	$	104,347
Contract receivables	173,318		82,428
Retention receivables	30,224		28,859
Receivables, gross	424,490		215,634
Less expected credit loss	5,870		5,477
Receivables, net	$	418,620	$	210,157

The Company's expected credit losses are determined through a review using historical credit loss experience; changes in asset specific characteristics; current conditions; and reasonable and supportable future forecasts, among other specific account data, and is performed at least quarterly. The Company develops and documents its methodology to determine its allowance for expected credit losses. Risk characteristics used by the Company may include customer mix, knowledge of customers and general economic conditions of the various local economies, among others. Specific account balances are written off when management determines the amounts to be uncollectible. Management has reviewed the balance reserved through the allowance for expected credit losses and believes it is reasonable.

Details of the Company's expected credit losses were as follows:


	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
At December 31, 2022	$	2,045	$	1,253	$	1,278	$	839	$	62	$	5,477
Current expected credit loss provision	45		313		164		(89)		(1)		432
Less write-offs charged against the allowance	1		68		18		—		—		87

At March 31, 2023	$	2,089	$	1,498	$	1,424	$	750	$	61	$	5,822
Current expected credit loss provision	9		74		631		(132)		1		583
Less write-offs charged against the allowance	18		512		3		—		2		535

At June 30, 2023	$	2,080	$	1,060	$	2,052	$	618	$	60	$	5,870


	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
At December 31, 2021	$	2,052	$	512	$	1,610	$	1,152	$	80	$	5,406
Current expected credit loss provision	1		(125)		(130)		6		(5)		(253)
Less write-offs charged against the allowance	1		20		4		1		1		27

At March 31, 2022	$	2,052	$	367	$	1,476	$	1,157	$	74	$	5,126
Current expected credit loss provision	11		58		(17)		(37)		(3)		12
Less write-offs charged against the allowance	—		56		4		47		2		109

At June 30, 2022	$	2,063	$	369	$	1,455	$	1,073	$	69	$	5,029

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Note 4 - Inventories

Inventories on the Consolidated Balance Sheets were as follows:


	June 30, 2023		December 31, 2022
	(In thousands)
Finished products	$	227,683	$	211,496
Raw materials	104,689		78,571
Supplies and parts	42,005		33,210
Total	$	374,377	$	323,277

Inventories are valued at the lower of cost or net realizable value using the average cost method. Inventories include production costs incurred as part of the Company's aggregate mining activities. These inventoriable production costs include all mining and processing costs associated with the production of aggregates. Stripping costs incurred during the production phase, which represent costs of removing overburden and waste materials to access mineral deposits, are a component of inventoriable production costs.

Note 5 - Earnings per share

The calculation for basic and diluted earnings per share for any period presented prior to the Separation were based on the number of shares outstanding on May 31, 2023, the Separation and Distribution date. For periods prior to the Separation, it is assumed that there are no dilutive equity instruments as there were no Knife River stock-based awards outstanding at the time.

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share is computed by dividing net income (loss) by the total of the weighted average number of shares of common stock outstanding during the applicable period, plus the effect of non-vested restricted stock units. Weighted average common shares outstanding is comprised of issued shares of 56,997,350 less shares held in treasury of 431,136, as described in Note 6. Basic and diluted earnings per share are calculated as follows, based on a reconciliation of the weighted-average common shares outstanding on a basic and diluted basis:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Net income (loss)	$	56,836	$	38,562	$	15,516	$	(1,448)
Weighted average common shares outstanding - basic	56,566		56,566		56,566		56,566
Effect of dilutive restricted stock units	33		—		17		—
Weighted average common shares outstanding - diluted	56,599		56,566		56,583		56,566
Shares excluded from the calculation of diluted earnings per share	—		—		—		—
Net income (loss) per share - basic	$	1.00	$	.68	$	.27	$	(.03)
Net income (loss) per share - diluted	$	1.00	$	.68	$	.27	$	(.03)

Note 6 - Equity

On May 31, 2023, the Company issued 56,997,350 shares of common stock with a par value of $0.01 in connection with the Separation.

The Company historically held 538,921 shares of MDU Resources common stock through one of its subsidiaries. The historical shares are presented as MDU Resources' stock held by subsidiary on the Consolidated Statement of Equity. In connection with the Separation, Knife River entered into an agreement with MDU Resources to transfer the stock of MDU Resources held by its subsidiary to MDU Resources in exchange for 431,136 shares of Knife River common stock. The number of shares transferred to Knife River was based on the value of the stock at the time of the Separation. The historical MDU Resources common stock held by subsidiary at cost of $3.6 million at June 30, 2023, on the Consolidated Balance Sheets reflects the value of the MDU Resources common stock at the time it was granted to Knife River's subsidiary and will remain at the historical value since the exchange was between related parties. The 431,136 shares of Knife River common stock are presented as Treasury stock held at cost in the Consolidated Balance Sheet and reduce the number of common stock shares outstanding.

Stock-Based Compensation

Prior to the Separation, key employees of the Company participated in various MDU Resources stock-based compensation plans authorized and managed by MDU Resources. All awards granted under the plans were based on MDU Resources' common shares, however, Knife River recognized the expense for its participants in its financial statements.

At the time of the Separation, each outstanding MDU Resources time-vested restricted stock unit and performance share award held by a Knife River employee was converted into Knife River time-vested restricted stock units. The converted awards will

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continue to vest over the original vesting period, which is generally three years from the grant date. All performance share awards that were converted at the time of the Separation were first adjusted using a combined performance factor based on MDU Resources' actual performance as of December 31, 2022. The number of restricted stock units was determined by taking the closing per share price of MDU Resources on May 31, 2023, and dividing by the closing per share price of Knife River on June 1, 2023. The ratio used to convert the MDU Resources' share-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to the Separation. The existing unvested stock-based awards issued through MDU Resources' stock-based compensation plans were modified in connection with the Separation to maintain an equivalent value immediately before and after Separation. The impact of this modification was not material to the Company's stock-based compensation expense for the three months ended June 30, 2023.

Note 7 - Accumulated other comprehensive loss

The after-tax changes in the components of accumulated other comprehensive loss were as follows:


	Net Unrealized Loss on Derivative Instruments Qualifying as Hedges		Postretirement Liability Adjustment		Total Accumulated Other Comprehensive Loss
	(In thousands)
At December 31, 2022	$	(90)	$	(12,262)	$	(12,352)
Amounts reclassified from accumulated other comprehensive loss	46		47		93
Net current-period other comprehensive income	46		47		93
At March 31, 2023	$	(44)	$	(12,215)	$	(12,259)
Other comprehensive loss before reclassification	—		(17)		(17)
Amounts reclassified from accumulated other comprehensive loss	44		48		92
Net current-period other comprehensive income	44		31		75
At June 30, 2023	$	—	$	(12,184)	$	(12,184)


	Net Unrealized Loss on Derivative Instruments Qualifying as Hedges		Postretirement Liability Adjustment		Total Accumulated Other Comprehensive Loss
	(In thousands)
At December 31, 2021	$	(418)	$	(24,072)	$	(24,490)
Amounts reclassified from accumulated other comprehensive loss	82		221		303
Net current-period other comprehensive income	82		221		303
At March 31, 2022	$	(336)	$	(23,851)	$	(24,187)
Other comprehensive income before reclassification	—		5,820		5,820
Amounts reclassified from accumulated other comprehensive loss	82		220		302
Net current-period other comprehensive income	82		6,040		6,122
At June 30, 2022	$	(254)	$	(17,811)	$	(18,065)

Index

The following amounts were reclassified out of accumulated other comprehensive loss into net income (loss). The amounts presented in parenthesis indicate a decrease to net income (loss) on the Consolidated Statements of Operations. The reclassifications were as follows:


	Three Months Ended				Six Months Ended				Location on Consolidated Statements of Operations
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Reclassification adjustment for loss on derivative instruments included in net income (loss)	$	(57)	$	(109)	$	(118)	$	(218)	Interest expense
	13		27		28		54		Income taxes
	(44)		(82)		(90)		(164)
Amortization of postretirement liability losses included in net periodic benefit cost	(63)		(291)		(126)		(583)		Other income
	15		71		31		142		Income taxes
	(48)		(220)		(95)		(441)
Total reclassifications	$	(92)	$	(302)	$	(185)	$	(605)

Note 8 - Revenue from contracts with customers

Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue includes revenue from the sales of construction materials and contracting services. Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company is considered an agent for certain taxes collected from customers. As such, the Company presents revenues net of these taxes at the time of sale to be remitted to governmental authorities, including sales and use taxes. Revenue for construction materials is recognized at a point in time when delivery of the products has taken place. Contracting revenue is recognized over time using an input method based on the cost-to-cost measure of progress on a project.

Disaggregation

In the following tables, revenue is disaggregated by category for each segment and includes sales of materials to both third parties and internal customers. Due to consolidation requirements, the internal sales revenues must be eliminated against the construction materials product used in downstream materials and contracting services to arrive at the external operating revenues. The Company believes this level of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. For more information on the Company’s reportable segments, see Note 15.


Three Months Ended June 30, 2023	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
Aggregates	$	27,446	$	47,966	$	28,866	$	30,323	$	11,815	$	146,416
Ready-mix concrete	40,526		44,583		34,506		53,900		11,383		184,898
Asphalt	6,275		34,518		29,472		46,719		7,953		124,937
Other	60,968		4,335		8		10,907		66,946		143,164
Contracting services public-sector	16,848		53,301		80,381		94,548		19,477		264,555
Contracting services private-sector	16,575		29,353		37,317		5,249		388		88,882
Internal sales	(26,483)		(35,322)		(34,796)		(54,044)		(17,018)		(167,663)
Revenues from contracts with customers	$	142,155	$	178,734	$	175,754	$	187,602	$	100,944	$	785,189


Three Months Ended June 30, 2022	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
Aggregates	$	24,330	$	43,466	$	26,919	$	26,679	$	14,994	$	136,388
Ready-mix concrete	33,069		39,156		31,446		47,173		17,283		168,127
Asphalt	11,504		26,281		31,137		44,719		7,925		121,566
Other	53,248		4,073		9		9,903		57,049		124,282
Contracting services public-sector	23,626		46,208		30,626		86,011		21,015		207,486
Contracting services private-sector	12,688		19,564		87,786		3,083		75		123,196
Internal sales	(30,053)		(27,963)		(37,504)		(50,330)		(23,382)		(169,232)
Revenues from contracts with customers	$	128,412	$	150,785	$	170,419	$	167,238	$	94,959	$	711,813

Index


Six Months Ended June 30, 2023	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
Aggregates	$	46,143	$	90,540	$	38,532	$	34,343	$	20,379	$	229,937
Ready-mix concrete	66,670		78,488		48,876		66,187		21,446		281,667
Asphalt	7,591		41,445		30,282		46,888		12,350		138,556
Other	87,023		7,016		11		12,493		75,214		181,757
Contracting services public-sector	20,819		70,304		108,619		99,074		37,811		336,627
Contracting services private-sector	19,474		55,115		50,762		5,357		1,085		131,793
Internal sales	(37,779)		(48,290)		(40,710)		(55,766)		(24,703)		(207,248)
Revenues from contracts with customers	$	209,941	$	294,618	$	236,372	$	208,576	$	143,582	$	1,093,089


Six Months Ended June 30, 2022	Pacific		Northwest		Mountain		North Central		All Other		Total
	(In thousands)
Aggregates	$	43,393	$	77,138	$	36,129	$	30,679	$	26,696	$	214,035
Ready-mix concrete	63,125		75,480		47,616		59,529		30,876		276,626
Asphalt	15,975		34,691		31,468		44,765		12,753		139,652
Other	80,138		7,356		15		12,055		62,218		161,782
Contracting services public-sector	32,921		63,119		53,029		91,531		34,058		274,658
Contracting services private-sector	24,410		39,897		102,197		3,144		643		170,291
Internal Sales	(46,201)		(42,106)		(41,566)		(51,641)		(33,752)		(215,266)
Revenues from contracts with customers	$	213,761	$	255,575	$	228,888	$	190,062	$	133,492	$	1,021,778

Note 9 - Uncompleted contracts

The timing of revenue recognition may differ from the timing of invoicing to customers. The timing of invoicing to customers does not necessarily correlate with the timing of revenues being recognized under the cost-to-cost method of accounting. Contracts from contracting services are billed as work progresses in accordance with agreed upon contractual terms. Generally, billing to the customer occurs contemporaneous to revenue recognition. A variance in timing of the billings may result in a contract asset or a contract liability. A contract asset occurs when revenues are recognized under the cost-to-cost measure of progress, which exceeds amounts billed on uncompleted contracts. Such amounts will be billed as standard contract terms allow, usually based on various measures of performance or achievement. A contract liability occurs when there are billings in excess of revenues recognized under the cost-to-cost measure of progress on uncompleted contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation.

The changes in contract assets and liabilities were as follows:


	June 30, 2023		December 31, 2022		Change		Location on Consolidated Balance Sheets
	(In thousands)
Contract assets	$	58,020	$	31,145	$	26,875	Costs and estimated earnings in excess of billings on uncompleted contracts
Contract liabilities	(44,590)		(39,843)		(4,747)		Billings in excess of costs and estimated earnings on uncompleted contracts
Net contract assets (liabilities)	$	13,430	$	(8,698)	$	22,128

The Company recognized $11.4 million and $31.7 million in revenue for the three and six months ended June 30, 2023, respectively, which was previously included in contract liabilities at December 31, 2022. The Company recognized $6.2 million and $26.2 million in revenue for the three and six months ended June 30, 2022, respectively, which was previously included in contract liabilities at December 31, 2021.

The Company recognized a net increase in revenues of $7.4 million and $8.1 million for the three and six months ended June 30, 2023, respectively, from performance obligations satisfied in prior periods. The Company recognized a net increase in revenues of $5.7 million and $9.2 million for the three and six months ended June 30, 2022, respectively, from performance obligations satisfied in prior periods.

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Remaining performance obligations

The remaining performance obligations, also referred to as backlog, include unrecognized revenues that the Company reasonably expects to be realized. These unrecognized revenues can include: projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. The majority of the Company's contracts for contracting services have an original duration of less than one year.

At June 30, 2023, the Company's remaining performance obligations were $1.04 billion. The Company expects to recognize the following revenue amounts in future periods related to these remaining performance obligations: $960.9 million within the next 12 months or less; $58.8 million within the next 13 to 24 months; and $21.2 million in 25 months or more.

Note 10 - Goodwill and other intangible assets

The changes in the carrying amount of goodwill were as follows:


	Balance at January 1, 2023		Goodwill Acquired During the Year		Measurement Period Adjustments		Balance at June 30, 2023
	(In thousands)
Pacific	$	38,339	$	—	$	(62)	$	38,277
Northwest	90,978		—		—		90,978
Mountain	26,816		—		—		26,816
North Central	75,879		—		—		75,879
All Other	42,528		—		—		42,528
Total	$	274,540	$	—	$	(62)	$	274,478

Other amortizable intangible assets were as follows:


	June 30, 2023		December 31, 2022
	(In thousands)
Customer relationships	$	18,540	$	18,540
Less accumulated amortization	8,235		7,367
	10,305		11,173
Noncompete agreements	4,039		4,039
Less accumulated amortization	3,239		2,985
	800		1,054
Other	2,479		5,279
Less accumulated amortization	1,474		4,076
	1,005		1,203
Total	$	12,110	$	13,430

Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2023, was $653,000 and $1.3 million, respectively. Amortization expense for amortizable intangible assets for the three and six months ended June 30, 2022, was $780,000 and $1.4 million, respectively. Estimated amortization expense for identifiable intangible assets as of June 30, 2023, was:


	Remainder of 2023		2024		2025		2026		2027		Thereafter
	(In thousands)
Amortization expense	$	1,237	$	2,157	$	2,042	$	1,739	$	1,717	$	3,218

Note 11 - Fair value measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The fair value ASC establishes a hierarchy for grouping assets and liabilities, based on the significance of inputs. The estimated fair values of the Company's assets and liabilities measured on a recurring basis are determined using the market approach.

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The Company measures its investments in certain fixed-income and equity securities at fair value with changes in fair value recognized in income. The Company anticipates using these investments, which consist of insurance contracts, to satisfy its obligations under its unfunded, nonqualified defined benefit and defined contribution plans for the Company's executive officers and certain key management employees, and invests in these fixed-income and equity securities for the purpose of earning investment returns and capital appreciation. These investments, which totaled $19.1 million and $20.1 million at June 30, 2023 and December 31, 2022, respectively, are classified as investments on the Consolidated Balance Sheets. The net unrealized gain on these investments was $197,000 and $1.1 million for the three and six months ended June 30, 2023, respectively. The net unrealized loss on these investments was $1.6 million and $2.6 million for the three and six months ended June 30, 2022, respectively. The change in fair value, which is considered part of the cost of the plan, is classified in other income on the Consolidated Statements of Operations.

As part of the Separation, the Company retired certain insurance contracts used to satisfy its obligations under its unfunded, nonqualified defined contribution plan for the Company's executive officers and certain key management employees. The proceeds of the retired contracts totaled $4.8 million and was held in a money market account as of June 30, 2023. This amount will be used to purchase life insurance policies and re-invested in fixed-income and equity securities in the third quarter of 2023.

The Company's assets measured at fair value on a recurring basis were as follows:


	Fair Value Measurements at June 30, 2023, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2023
	(In thousands)
Assets:
Money market funds	$	—	$	7,529	$	—	$	7,529
Insurance contracts*	—		19,141		—		19,141




Total assets measured at fair value	$	—	$	26,670	$	—	$	26,670

* The insurance contracts invest approximately 47 percent in fixed-income investments, 20 percent in cash equivalents, 15 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies and 4 percent in target date investments.


	Fair Value Measurements at December 31, 2022, Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2022
	(In thousands)
Assets:
Money market funds	$	—	$	2,448	$	—	$	2,448
Insurance contracts*	—		20,083		—		20,083




Total assets measured at fair value	$	—	$	22,531	$	—	$	22,531

* The insurance contracts invest approximately 63 percent in fixed-income investments, 15 percent in common stock of large-cap companies, 8 percent in common stock of mid-cap companies, 6 percent in common stock of small-cap companies, 6 percent in target date investments and 2 percent in cash equivalents.

The Company’s Level 2 money market funds are valued at the net asset value of shares held at the end of the period, based on published market quotations on active markets, or using other known sources including pricing from outside sources. The estimated fair value of the Company’s Level 2 insurance contracts are based on contractual cash surrender values that are determined primarily by investments in managed separate accounts of the insurer. These amounts approximate fair value. The managed separate accounts are valued based on other observable inputs or corroborated market data.

Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.

The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including long-lived asset impairments. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company reviews the carrying value of its long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable.

Index

The Company's long-term debt is not measured at fair value on the Consolidated Balance Sheets and the fair value is being provided for disclosure purposes only. The fair value was categorized as Level 2 in the fair value hierarchy and was based on discounted cash flows using current market interest rates. The estimated fair value of the Company's Level 2 long-term debt was as follows:


	June 30, 2023
	(In thousands)
Carrying amount	$	855,000
Fair value	$	862,420

The carrying amounts of the Company's remaining financial instruments included in current assets and current liabilities approximate their fair values.

Note 12 - Debt

Certain debt instruments of the Company contain restrictive covenants and cross-default provisions. In order to borrow under the debt agreements, the Company must be in compliance with the applicable covenants and certain other conditions, all of which management believes the Company, as applicable, was in compliance with at June 30, 2023. In the event the Company does not comply with the applicable covenants and other conditions, alternative sources of funding may need to be pursued.

On April 25, 2023, the Company issued $425.0 million of 7.75 percent senior notes due May 1, 2031, pursuant to an indenture.

On May 31, 2023, the Company entered into a senior secured credit agreement consisting of a $275.0 million term loan and a $350.0 million revolving credit facility, of which $190.0 million was drawn down and $35.0 million was repaid during the period. Each debt facility has a SOFR-based interest rate and a maturity date of May 31, 2028. The term loan has a mandatory annual amortization of 2.50 percent for years one and two, 5.00 percent for years three and four, and 7.50 percent in the fifth year. The agreement contains customary covenants and provisions, including a covenant of Knife River not to permit, at any time, the ratio of total debt to trailing twelve month EBITDA to be greater than 4.75 to 1.00. The agreement also contains an interest coverage ratio covenant stating that Knife River’s trailing twelve month EBITDA to interest expense is to be no less than 2.25 to 1.00. The covenants also include restrictions on the sale of certain assets, loans and investments.

Long-term debt

Long-term Debt Outstanding Long-term debt outstanding was as follows:


	Weighted Average Interest Rate at June 30, 2023		June 30, 2023
			(In thousands)
Term loan agreement due on May 31, 2028	7.36	%	$	275,000
Revolving credit agreement	7.53	%	155,000
Senior notes due on May 1, 2031	7.75	%	425,000
Other notes due on January 1, 2061	—	%	511
Less unamortized debt issuance costs			16,382
Total long-term debt			839,129
Less current maturities			7,082
Net long-term debt			$	832,047

Schedule of Debt Maturities Long-term debt maturities, which excludes unamortized debt issuance costs, at June 30, 2023, were as follows:


	Remainder of 2023		2024		2025		2026		2027		Thereafter
	(In thousands)
Long-term debt maturities	$	3,645	$	6,977	$	10,414	$	13,850	$	17,187	$	803,438

The Company currently borrows under the revolving credit agreement on a short-term basis and can refinance the draws throughout the term of the credit facility, which extends to May 31, 2028. For this reason, the credit agreement has been classified as long-term, given the intent and ability to refinance on a long-term basis.

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Note 13 - Income Taxes

Prior to the Separation, income tax expense and tax balances in the consolidated financial statements were calculated on a separate tax return basis. The separate tax return method applies the accounting guidance for income taxes to the stand-alone financial statements as if the Company were a separate taxpayer and a stand-alone enterprise. Management believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. As a stand-alone entity, the Company will file tax returns on its own behalf, and tax balances and effective income tax rate may differ from the amounts reported in the historical periods.

Post-Separation, the income tax provisions are calculated based on Knife River's operating footprint, as well as tax return elections and assertions. Current income tax liabilities including amounts for unrecognized tax benefits related to the Company's activities included in MDU Resources' income tax returns were deemed to be immediately settled with MDU Resources' final settlement allocation process as dictated by the MDU Resources' Tax Sharing Agreement.

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws.

Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies and actions. When there is a change in determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to provision for income taxes in the period in which such determination is made.

The Company's cash tax payments for the year may vary significantly from prior years as a result of the timing of the Separation and the seasonality of the Company's business.

Other Tax Matters

Tax Matters Agreement In connection with the Separation, the Company entered into a tax matters agreement with MDU Resources. The tax matters agreement governs the respective rights, responsibilities, and obligations between the Company and MDU Resources after the Separation with respect to tax liabilities and benefits, tax attributes, tax returns, tax contests and other tax sharing regarding U.S. federal, state and local income taxes, other tax matters and related tax returns.

Tax Refunds and Attributes The tax matters agreement provides for the allocation of certain pre-closing tax attributes between the Company and MDU Resources. Tax attributes will be allocated in accordance with the principles set forth in the MDU Resources' Tax Sharing Agreement, then existing, unless otherwise required by law. Under the tax matters agreement, the Company will be entitled to refunds for taxes for which the Company is responsible.

Note 14 - Cash flow information

Cash expenditures for interest and income taxes were as follows:


	Six Months Ended
	June 30,
	2023		2022
	(In thousands)
Interest, net	$	24,802	$	10,721
Income taxes paid, net	$	558	$	16,470

Noncash investing and financing transactions were as follows:


	Six Months Ended
	June 30,
	2023		2022
	(In thousands)
Right-of-use assets obtained in exchange for new operating lease liabilities	$	7,552	$	4,758
Property, plant and equipment additions in accounts payable	$	3,359	$	5,785

Equity contribution from Centennial related to the Separation	$	64,724	$	—
Equity contribution to MDU Resources for asset/liability transfers related to the Separation	$	(1,548)	$	—
MDU Resources' stock issued prior to spin in connection with a business combination	$	383	$	—

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Note 15 - Business segment data

The Company focuses on the vertical integration of its products and services by offering customers a single-source for construction materials and related contracting services. The Company operates in 14 states across the United States. Its operating segments include: Pacific, Northwest, Mountain, North Central, South and Energy Services. The operating segments are organized by geographic region in the United States due to the cyclical nature of the construction work performed. The Company’s reportable segments are those that are based on the Company’s method of internal reporting and management of the business and are Pacific, Northwest, Mountain and North Central. The South and Energy Services operating segments do not meet the criteria to be reportable segments and, as such, are combined with its corporate services in All Other. Each segment is led by a segment president that reports to the Company’s chief executive officer who is also the Company’s chief operating decision maker. The Company’s chief operating decision maker evaluates the performance of the segments and allocates resources to them based on EBITDA.

All of the reportable segments mine, process and sell construction aggregates (crushed stone and sand and gravel); produce and sell asphalt; and produce and sell ready-mix concrete, as well as in some segments the sale of merchandise and other building materials and related services, as well as vertically integrating their contracting services to support the aggregate-based product lines including heavy-civil construction, asphalt and concrete paving, and site development and grading, and in some segments the manufacturing of prestressed concrete products. The Pacific segment and All Other also produce and sell liquid asphalt products and the Pacific segment sells cement. Although not common to all locations, within All Other is the sale of merchandise and other building materials and related services.

The information below follows the same accounting policies as described in the audited financial statements and notes included in the Company's Registration Statement on Form 10. Information on the Company's segments was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
External operating revenues:
Pacific	$	142,155	$	128,412	$	209,941	$	213,761
Northwest	178,734		150,785		294,618		255,575
Mountain	175,754		170,419		236,372		228,888
North Central	187,602		167,238		208,576		190,062
All Other	100,944		94,959		143,582		133,492
Total external operating revenues	$	785,189	$	711,813	$	1,093,089	$	1,021,778

Intersegment operating revenues:
Pacific	$	26,483	$	30,053	$	37,779	$	46,201
Northwest	35,322		27,963		48,290		42,106
Mountain	34,796		37,504		40,710		41,566
North Central	54,044		50,330		55,766		51,641
All Other	17,018		23,382		24,703		33,752
Total intersegment operating revenues	$	167,663	$	169,232	$	207,248	$	215,266

EBITDA:
Pacific	$	22,041	$	15,198	$	18,928	$	20,631
Northwest	40,706		23,196		53,844		35,976
Mountain	32,561		28,643		26,014		20,601
North Central	24,461		16,108		894		(8,160)
All Other	5,346		4,173		11,328		78
Total segment EBITDA	$	125,115	$	87,318	$	111,008	$	69,126

A reconciliation of reportable segment operating revenues to consolidated operating revenues is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Total reportable segment operating revenues	$	834,890	$	762,704	$	1,132,052	$	1,069,800
Other operating revenues	117,962		118,341		168,285		167,244
Elimination of intersegment operating revenues	(167,663)		(169,232)		(207,248)		(215,266)
Total consolidated operating revenues	$	785,189	$	711,813	$	1,093,089	$	1,021,778

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A reconciliation of reportable segment EBITDA to consolidated income (loss) before income taxes is as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Total EBITDA for reportable segments	$	119,769	$	83,145	$	99,680	$	69,048
Other EBITDA	5,346		4,173		11,328		78
Depreciation, depletion and amortization	31,130		29,752		60,760		58,101
Interest expense, net*	17,130		7,424		26,625		12,690
Total consolidated income (loss) before income taxes	$	76,855	$	50,142	$	23,623	$	(1,665)
*Interest, net is interest expense net of interest income.

Note 16 - Employee benefit plans

Pension and other postretirement plans

The Company has noncontributory qualified defined benefit pension plans and other postretirement benefit plans for certain eligible employees. Prior to the Separation, Knife River was a participant in the MDU Resources postretirement benefit plan. The Company historically treated its share of the postretirement obligation under that plan as a single employer plan in accordance with ASC 715 - Compensation - Retirement Benefits and recorded the funded status and net periodic benefit cost associated with Knife River employees at Knife River. In connection with the Separation, effective June 1, 2023, Knife River established a new, stand-alone postretirement plan comparable to that of MDU Resources and transferred its obligations of $1.5 million for current participants (inclusive of employees that transferred to the Company from MDU Resources) to that plan. The Company's pension benefit plans were stand-alone for Knife River prior to the Separation.

Components of net periodic benefit cost for the Company's pension benefit plans were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2022		2021
	(In thousands)
Components of net periodic benefit cost:

Interest cost	$	408	$	282	$	816	$	564
Expected return on assets	(450)		(493)		(900)		(986)

Amortization of net actuarial loss	128		214		256		428
Net periodic benefit cost	$	86	$	3	$	172	$	6

Components of net periodic benefit cost for the Company's other postretirement benefit plans were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	90	$	131	$	179	$	262
Interest cost	180		128		361		256
Expected return on assets	5		(3)		12		(6)
Amortization of prior service credit	(20)		(20)		(40)		(40)
Amortization of net actuarial (gain) loss	(44)		88		(89)		176
Net periodic benefit cost	$	211	$	324	$	423	$	648

The components of net periodic benefit cost, other than the service cost component, are included in other income on the Consolidated Statements of Operations. The service cost component is included in selling, general and administrative expenses on the Consolidated Statements of Operations.

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Note 17 - Contingencies

The Company is party to claims and lawsuits arising out of its business and that of its consolidated subsidiaries, which may include, but are not limited to, matters involving property damage, personal injury, and environmental, contractual and statutory obligations. The Company accrues a liability for those contingencies when the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss. Accruals are based on the best information available, but in certain situations management is unable to estimate an amount or range of a reasonably possible loss including, but not limited to when: (1) the damages are unsubstantiated or indeterminate, (2) the proceedings are in the early stages, (3) numerous parties are involved, or (4) the matter involves novel or unsettled legal theories.

At June 30, 2023 and December 31, 2022, the Company accrued contingent liabilities, which have not been discounted, of $970,000 and $1.0 million, respectively. At June 30, 2023 and December 31, 2022, the Company also recorded corresponding insurance receivables of $325,000 in both periods related to the accrued liabilities. The accruals are for contingencies resulting from litigation and environmental matters. Most of these claims and lawsuits are covered by insurance, thus the Company's exposure is typically limited to its deductible amount. The Company will continue to monitor each matter and adjust accruals as might be warranted based on new information and further developments. Management believes that the outcomes with respect to probable and reasonably possible losses in excess of the amounts accrued, net of insurance recoveries, while uncertain, either cannot be estimated or will not have a material effect upon the Company's financial position, results of operations or cash flows. Unless otherwise required by GAAP, legal costs are expensed as they are incurred.

Environmental matters

The Company is a party to claims for the cleanup of a superfund site in Portland, Oregon. There were no material changes to the Company's environmental matters that were previously reported in the audited financial statements and notes included in the Company's Registration Statement on Form 10.

Guarantees

Certain subsidiaries of the Company have outstanding obligations to third parties where the Company has guaranteed their performance. These guarantees are related to contracts for contracting services and certain other guarantees. At June 30, 2023, the fixed maximum amounts guaranteed under these agreements aggregated to $11.5 million, all of which have no scheduled maturity date. Certain of the guarantees also have no fixed maximum amounts specified. There were no amounts outstanding under the previously mentioned guarantees at June 30, 2023.

Certain subsidiaries of the Company have outstanding letters of credit to third parties related to insurance policies, cement purchases and other agreements. At June 30, 2023, the fixed maximum amounts guaranteed under these letters of credit aggregated $4.9 million. At June 30, 2023, the amounts of scheduled expiration of the maximum amounts guaranteed under these letters of credit aggregate to $4.5 million in 2023 and $436,000 in 2024. There were no amounts outstanding under the previously mentioned letters of credit at June 30, 2023.

In the normal course of business, the Company has surety bonds related to contracts for contracting services and reclamation obligations of its subsidiaries. In the event a subsidiary of the Company does not fulfill a bonded obligation, the Company would be responsible to the surety bond company for completion of the bonded contract or obligation. A large portion of the surety bonds is expected to expire within the next 12 months; however, the Company will likely continue to enter into surety bonds for its subsidiaries in the future. At June 30, 2023, approximately $905.4 million of surety bonds were outstanding, which were not reflected on the Consolidated Balance Sheet.

Note 18 - Related-party transactions

Transition services agreements

As part of the Separation, MDU Resources is providing transition services to the Company and the Company is providing transition services to MDU Resources in accordance with the Transition Services Agreement entered into on May 30, 2023. For the three and six months ended June 30, 2023, the Company paid $599,000 and received $277,000 related to these activities. The majority of the transition services are expected to be completed over a period of one year, but no longer than two years after the Separation.

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Related-party notes payable

The related-party notes payable to Centennial at May 30, 2023, was $889.7 million. As part of the Separation, Centennial made an equity contribution to the Company to release the Company of its obligation related to the outstanding notes payable. Also as part of the Separation, the Company issued $425.0 million of 7.75 percent senior notes due May 1, 2031, a credit agreement consisting of a $275.0 million term loan and a $350.0 million revolving credit facility, of which $190.0 million was drawn down at the time of the Separation. On May 31, 2023, the Company paid a dividend of $825.0 million from these proceeds to Centennial, which Centennial used to repay a portion of the Company's outstanding indebtedness. These transactions resulted in the Company receiving a net equity contribution of $64.7 million and is reflected as "Net transfers from Centennial and MDU Resources including separation adjustments" in the Consolidated Statement of Equity. Refer to Note 12 for additional information on the debt facilities entered into in connection with the Separation.

For additional information on the presentation of related-party transactions, see Note 2.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Knife River is a people-first construction materials and contracting services company. The Company provides construction materials and contracting services to build safe roads, bridges and airport runways that connect people with where they want to go and with the supplies they need. Knife River also champions a positive workplace culture by focusing on safety, training, inclusion, compensation and work-life balance, and focuses on sustainable business practices for the benefit of its team, its stockholders and the public.

Knife River is one of the leading providers of crushed stone and sand and gravel in the United States and operates through six operating regions: Pacific, Northwest, Mountain, North Central, South and Energy Services, with operations across 14 states. These regions are used to determine the Company's reportable segments and are based on the Company's method of internal reporting and management of the business. The Company's reportable segments are: Pacific, Northwest, Mountain, and North Central, with South and Energy Services included in All Other with its corporate services. The segments primarily provide aggregates, asphalt and ready-mix concrete, as well as supporting contracting services such as heavy-civil construction, asphalt paving, concrete delivery and paving, site development and grading.

As a leading aggregates-based construction materials and contracting services provider in the United States, the Company's 1.1 billion tons of aggregate reserves provide the foundation for a vertically integrated business strategy with approximately 40 percent of its aggregates for the year ended December 31, 2022, being used internally to support value-added downstream products (ready-mix concrete and asphalt) and contracting services (heavy-civil construction, asphalt paving, concrete construction, site development and grading services, and in some segments the manufacturing of prestressed concrete products). Its aggregate sites and associated asphalt and ready-mix plants are primarily in strategic locations near mid-sized, high-growth markets, providing Knife River with a transportation advantage for its materials that supports competitive pricing and increased margins. Knife River provides its products and services to both public and private markets, with public markets tending to be more stable across economic cycles, which helps offset the cyclical nature of the private markets.

Each segment provides various products and services and operates various facility types, including aggregate quarries and mines, ready-mix concrete plants, asphalt plants and distribution facilities. Each segment operates in the following states:

•Pacific: Alaska, California and Hawaii

•Northwest: Oregon and Washington

•Mountain: Idaho, Montana and Wyoming

•North Central: Iowa, Minnesota, North Dakota and South Dakota

•All Other: Iowa, Nebraska, North Dakota, South Dakota, Texas and Wyoming

The following table presents a summary of products and services provided, as well as modes of transporting those products, by each segment:

Products and Services

Modes of Transportation

Precast/

Ready-Mix

Construction

Prestressed

Liquid

Heavy

Aggregates

Asphalt

Concrete

Services

Concrete

Asphalt

Cement

Equipment

Trucking

Rail

Barge

Pacific

Northwest

Mountain

North Central

All Other

The Separation

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Exchange Act. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words "anticipates," "estimates," "expects," "intends," "plans," "predicts" and similar expressions, and include statements concerning plans, trends, objectives, goals, strategies, future events or performance, and

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underlying assumptions (many of which are based, in turn, upon further assumptions) and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements related to EDGE, that are contained within the Market Conditions and Outlook and Business Segment Financial and Operating Data sections.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties. Nonetheless, the Company's expectations, beliefs or projections may not be achieved or accomplished and changes in such assumptions and factors could cause actual future results to differ materially.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for management to predict all the factors, nor can it assess the effect of each factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements reported in the section entitled "Risk Factors" in the Company's Registration Statement on Form 10 and subsequent filings with the SEC.

Basis of Presentation

Knife River historically operated as a wholly owned subsidiary of Centennial and an indirect, wholly owned subsidiary of MDU Resources and not as a stand-alone company until the Separation from MDU Resources was completed. The accompanying historical consolidated financial statements and footnotes, which were prepared on a “carve-out” basis in connection with the Separation, were derived from the consolidated financial statements of MDU Resources as if the Company operated on a stand-alone basis during the historical periods presented, and were prepared utilizing the legal entity approach in conformity with GAAP. For additional information related to the basis of presentation, see Note 2.

Prior to the Separation, Knife River historically participated in Centennial’s centralized cash management program, including its overall financing arrangements. Knife River had related-party note agreements in place with Centennial for the financing of its capital needs, which are reflected as related-party notes payable on the Consolidated Balance Sheet at December 31, 2022. Interest expense in the Consolidated Statements of Operations reflects the allocation of interest on borrowing and funding associated with the related-party note agreements. Upon the completion of the Separation, Knife River implemented its own financing agreements with lenders.

All intercompany balances and transactions between the businesses comprising Knife River have been eliminated in the accompanying consolidated financial statements.

Market Conditions and Outlook

Knife River’s markets remain resilient and construction activity remains generally strong despite general and economic challenges, such as transportation disruptions, supply-chain constraints, inflation and rising interest rates. With approximately 80 percent of the contracting revenue from public-sector projects, Knife River is able to balance the cyclical nature of its private-sector customers. While Knife River experienced inflationary pressures in the past year, price increases have generally outpaced the increased costs. For more information on factors that may negatively impact Knife River's business, see the section entitled "Risk Factors" in the Company's Registration Statement on Form 10.

Backlog. There continues to be high demand for Knife River’s contracting services as evidenced by record second quarter backlog as it begins to enter its peak construction season.


	June 30, 2023		June 30, 2022
	(In millions)
Pacific	$	78.3	$	92.5
Northwest	257.3		169.4
Mountain	377.3		348.9
North Central	255.4		294.9
All Other	72.6		71.7
	$	1,040.9	$	977.4

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Margins on backlog at June 30, 2023, are higher than the margins on backlog at June 30, 2022. Approximately 84 percent of the Company's 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, net income or EBITDA. While the Company believes the current backlog of work remains firm, prolonged delays in the receipts of critical supplies and materials or continued increases to pricing, among other things, could result in customers seeking to delay or terminate existing or pending agreements. See the section entitled “Risk Factors” in the Company's Registration Statement on Form 10 for a list of factors that can cause revenues to be realized in periods and at levels that are different from originally projected.

Public Funding. Funding for public projects is dependent on federal and state funding, such as appropriations to the Federal Highway Administration. The American Rescue Plan Act enacted in the first quarter of 2021 provides $1.9 trillion in COVID-19 relief funding for states, schools and local governments. States are moving forward with allocating these funds based on federal criteria and state needs, and in some cases, funding of infrastructure projects could positively impact Knife River. Additionally, the Infrastructure Investment and Jobs Act was enacted in the fourth quarter of 2021 and is providing long-term opportunities by designating $119 billion for the repair and rebuilding of roads and bridges across Knife River’s footprint. In addition, the Inflation Reduction Act provides $369 billion in new funding for clean energy programs. These programs include new tax incentives for solar, battery storage and hydrogen development along with funding to expand the production of electric vehicles and build out the infrastructure to support electric vehicles. In addition to federal funding, 12 out of the 14 states in which Knife River operates have implemented new funding mechanisms for public projects, including projects related to highways, airports and other public infrastructure. Knife River continues to monitor the implementation and impact of these legislative items.

Profitability. Knife River’s management continually monitors its margins and has been proactive in applying strategies to address the inflationary impacts seen across the United States. The Company has implemented a strategy called "Competitive EDGE" to improve margins and to execute on other strategic initiatives aimed at generating long-term profitable growth. The EDGE acronym stands for EBITDA Margin Improvement, Discipline, Growth and Excellence. As part of this strategy, Knife River has increased its product pricing in each region over the past year and continues to implement cost savings initiatives to mitigate the effects of inflation on its gross margin. Due to existing contractual provisions, there can be a lag between announced price increases and the time when they are fully recognized. The Company continues to evaluate future price increases on a regular cadence to help maintain and increase margins to stay ahead of inflationary pressures and enhance stockholder value.

Knife River operates in geographically diverse and competitive markets yet strives to maximize efficiencies, including transportation costs and economies of scale, to maintain strong margins. Its margins can experience negative pressure from competition, as well as impacts from the volatility in the cost of raw materials, such as diesel fuel, gasoline, natural gas, liquid asphalt, cement and steel, with fuel and liquid asphalt costs having the most significant impact on results. Such volatility and inflationary pressures may have an impact on the Company’s margins, including fixed-price contracting services contracts that are particularly vulnerable to the volatility of energy and material prices. While the Company has experienced some supply-chain constraints, it continues to have good relationships with its suppliers and has not experienced any material adverse impacts of shortages or delays on materials.

Knife River's operations can also be significantly impacted by both favorable and unfavorable weather conditions. Unseasonably wet and/or cold weather in the states it operates in can delay the start to construction season or cause temporary delays on specific projects, while unseasonably dry or warm weather in the states it operates in can allow for an early start to construction season or allow for early completions on specific projects. Either of these conditions can impact both its construction materials sales and contracting services revenues. In early 2023, the western part of the United States had near record levels of precipitation, which negatively impacted results for various segments. Other variables that can impact Knife River’s margins include the timing of project starts or completions, and declines or delays in new and existing projects due to the cyclical nature of the construction industry. Accordingly, operating results in any particular period may not be indicative of the results that can be expected for any other period.

Workforce. As a people-first company, Knife River continually takes steps to address the challenge of recruitment and retention of employees. To help attract new workers to the construction industry and enhance the skills of its current employees, Knife River has constructed and operates a state-of-the-art training facility. The training facility offers hands-on training for construction-related careers, including heavy-equipment operators and truck drivers in addition to safety and leadership training. In October 2022, the training center was presented with the Liberty Mutual Risk Management Excellence Award for its commitment to safety. As an accredited school able to train people to get their commercial driver’s license, the new training facility is helping to address some of the recent labor shortages and trends.

Today’s labor market includes an aging workforce and labor shortages, including shortages of truck drivers, which has caused increased labor-related costs. Knife River continues to monitor the labor markets and assess additional opportunities to enhance and support its workforce. Despite these efforts, Knife River expects labor costs to continue to increase based on the increased demand for services.

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Consolidated Overview


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In millions)
Revenue	$	785.2	$	711.8	$	1,093.1	$	1,021.8
Cost of revenue	632.2		608.5		936.0		917.3
Gross profit	153.0		103.3		157.1		104.5
Selling, general and administrative expenses	59.5		42.9		108.1		88.7
Operating income	93.5		60.4		49.0		15.8
Interest expense	19.1		7.4		28.7		12.7
Other income (expense)	2.5		(2.8)		3.3		(4.8)
Income (loss) before income taxes	76.9		50.2		23.6		(1.7)
Income tax expense (benefit)	20.1		11.6		8.1		(.2)
Net income (loss)	$	56.8	$	38.6	$	15.5	$	(1.5)

EBITDA*	$	125.1	$	87.3	$	111.0	$	69.1
Adjusted EBITDA*	$	126.3	$	90.4	$	112.5	$	74.5

*EBITDA and Adjusted EBITDA are non-GAAP financial measures. For more information and reconciliations to the nearest GAAP measures, see the section entitled "Non-GAAP Financial Measures."

Revenue includes revenue from the sale of construction materials and contracting services. Revenue for construction materials is recognized at a point in time when delivery of the products has taken place. Contracting revenue is recognized over time using an input method based on the cost-to-cost measure of progress on a project.

Cost of revenue includes all material, labor and overhead costs incurred in the production process for Knife River's products and services. These costs are impacted by various drivers, the most significant of which includes changes in raw material costs, energy costs and salary and benefits costs. Cost of revenue also includes depreciation, depletion and amortization attributable to the assets used in the production process.

Gross profit includes revenue less cost of revenue, as defined above, and is the difference between revenue and the cost of making a product or providing a service, before deducting selling, general and administrative expenses, income taxes and interest expense.

Selling, general and administrative expenses include the costs for estimating, bidding and business development, as well as costs related to corporate functions. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. Other general and administrative expenses include outside services; information technology; depreciation and amortization; training, travel and entertainment; office supplies; allowance for expected credit losses; gains or losses on the sale of assets; and other miscellaneous expenses.

Other income (expense) includes net periodic benefit costs for the Company’s benefit plan expenses, other than service costs; interest income; unrealized gains and losses on investments for the Company’s nonqualified benefit plans; earnings or losses on joint venture arrangements; and other miscellaneous income or expenses.

Income tax expense (benefit) consists of corporate income taxes related to the sale of the Company's products and services. The effective tax rate can be affected by many factors, including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations and changes to the Company's overall levels of income before income tax.

The discussion that follows focuses on the key financial measures the Company uses to evaluate the performance of its business, which include revenue, gross profit, gross margin, EBITDA and EBITDA margin. Gross margin is calculated by dividing gross profit by revenue. Gross margin reflects the percentage of revenue earned in comparison to cost. EBITDA and EBITDA margin are non-GAAP financial measures. For more information and reconciliations to the nearest GAAP measures, see the section entitled "Non-GAAP Financial Measures."

Index

The following tables summarize operating results for the Company.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
	Amount		% of Revenues	Amount		% of Revenues	Amount		% of Revenues	Amount		% of Revenues
	(In millions)
Revenues by operating segment:
Pacific	$	142.2		$	128.4		$	209.9		$	213.8
Northwest	179.0			151.0			294.9			256.5
Mountain	175.8			170.4			236.4			228.9
North Central	187.6			167.2			208.6			190.1
All Other and internal sales	100.6			94.8			143.3			132.5
Total revenues	$	785.2		$	711.8		$	1,093.1		$	1,021.8

Gross profit by operating segment:
Pacific	$	27.2	19.1%	$	18.3	14.2%	$	28.9	13.8%	$	26.6	12.4%
Northwest	43.1		24.0%	24.2		16.1%	58.8		19.9%	38.3		14.9%
Mountain	34.4		19.6%	29.5		17.3%	28.6		12.1%	23.8		10.4%
North Central	28.4		15.2%	17.9		10.7%	8.2		4.0%	(3.1)		(1.6)%
All Other	19.9		19.8%	13.4		14.1%	32.6		22.7%	18.9		14.3%
Total gross profit	$	153.0	19.5%	$	103.3	14.5%	$	157.1	14.4%	$	104.5	10.2%

EBITDA*:
Pacific	$	22.0	15.5%	$	15.2	11.8%	$	18.9	9.0%	$	20.6	9.7%
Northwest	40.7		22.7%	23.2		15.4%	53.8		18.3%	36.0		14.0%
Mountain	32.6		18.5%	28.6		16.8%	26.0		11.0%	20.6		9.0%
North Central	24.4		13.0%	16.1		9.6%	.9		.4%	(8.2)		(4.3)%
All Other	5.4		5.3%	4.2		4.4%	11.4		7.9%	.1		.1%
Total EBITDA*	$	125.1	15.9%	$	87.3	12.3%	$	111.0	10.2%	$	69.1	6.8%

*EBITDA, Segment EBITDA, and EBITDA margin are non-GAAP financial measures. For more information and a reconciliation to the nearest GAAP measure, see the section entitled "Non-GAAP Financial Measures."


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Sales (thousands):
Aggregates (tons)	9,181		9,521		14,049		14,491
Ready-mix concrete (cubic yards)	1,113		1,140		1,674		1,873
Asphalt (tons)	1,913		2,101		2,092		2,417

Average selling price:*
Aggregates (per ton)	$	15.95	$	14.33	$	16.37	$	14.77
Ready-mix concrete (per cubic yard)	$	166.11	$	147.53	$	168.30	$	147.67
Asphalt (per ton)	$	65.32	$	57.85	$	66.24	$	57.77

*The average selling price includes freight and delivery and other revenues.

Index


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
	Amount		% of Revenues	Amount		% of Revenues	Amount		% of Revenues	Amount		% of Revenues
	(In millions)
Revenues by product line:
Aggregates	$	146.4		$	136.4		$	229.9		$	214.0
Ready-mix concrete	184.9			168.1			281.7			276.6
Asphalt	125.0			121.5			138.5			139.7
Other*	143.2			124.3			181.8			161.8
Contracting services	353.4			330.7			468.4			445.0
Internal sales	(167.7)			(169.2)			(207.2)			(215.3)
Total revenues	$	785.2		$	711.8		$	1,093.1		$	1,021.8

Gross profit by product line:
Aggregates	$	36.4	24.9%	$	29.7	21.8%	$	38.8	16.9%	$	30.0	14.0%
Ready-mix concrete	28.1		15.2%	23.4		13.9%	36.8		13.1%	32.7		11.8%
Asphalt	16.4		13.1%	11.4		9.4%	10.3		7.5%	6.3		4.5%
Other*	34.7		24.2%	13.1		10.5%	28.5		15.6%	1.5		.9%
Contracting services	37.4		10.6%	25.7		7.8%	42.7		9.1%	34.0		7.6%
Total gross profit	$	153.0	19.5%	$	103.3	14.5%	$	157.1	14.4%	$	104.5	10.2%

*Other includes cement, liquid asphalt, merchandise, fabric and spreading, and other products and services that individually are not considered to be a major line of business.

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $73.4 million, due in large part to higher average selling prices across all product lines. The increase in pricing resulted in $66.5 million more in revenue, which was primarily the result of continued EDGE-related pricing initiatives and increases in commodity pricing. Contracting services revenues increased by $22.7 million due mostly to more available work and a few impact projects in the Northwest and North Central segments. Partially offsetting these increases were decreased asphalt, aggregate and ready-mix concrete sales volumes of $22.1 million, primarily attributable to the absence of impact projects and project timing as the construction season was slow to start in some regions, as well as the partial sale of non-strategic assets in southeast Texas.

Gross profit and gross margin

Gross profit increased $49.7 million, and gross margin increased 500 basis points, primarily due to higher realized prices resulting from continued EDGE-related pricing initiatives across all product lines of $30.6 million and lower equipment operating costs of $8.1 million, primarily fuel costs. In addition, contracting services margins increased, contributing an additional $11.7 million, primarily attributable to more available work in most areas of operations, allowing for higher bid margins.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $16.6 million as a result of higher payroll-related costs of $8.5 million related to both inflationary pressures driving up wages and increased staff after the Separation, as well as higher incentive and health insurance accruals. In addition, the Company has incurred higher professional service fees of $2.0 million, higher taxes, dues and subscriptions of $1.3 million, and other miscellaneous costs, including equipment, insurance, office, and information technology expenses, partially as a result of standing itself up as a publicly traded company.

Interest expense

Interest expense increased $11.7 million due primarily to higher average interest rates, which resulted in additional interest expense in the period of $9.9 million. Interest rates were higher as a result of the Company settling historical related-party notes payable as part of the Separation and entering into new debt arrangements. The Company also had higher average debt balances.

Other income (expense)

Other income increased $5.3 million due in part to improved performance on the Company's nonqualified benefit plan investments of $2.8 million, as discussed in Note 11, as well as interest income of $2.0 million on the cash held in escrow for the $425.0 million of senior notes issued prior to the completion of the Separation.

Income tax expense

Income tax expense increased $8.5 million, corresponding with higher income before income taxes.

Index

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Revenue

Revenue increased $71.3 million, as the Company benefited from higher average selling prices across all product lines of $96.4 million, largely the result of EDGE-related pricing initiatives. Contracting services revenues increased by $23.4 million, primarily due to more available work in the Northwest segment. Partially offsetting these increases were decreased asphalt, aggregate and ready-mix concrete sales volumes of $62.4 million, primarily attributable to the absence in 2023 of impact projects, project timing and unseasonably wet weather conditions in certain regions in the early part of the year causing a late start to the construction season, as well as the partial sale of non-strategic assets in southeast Texas in December 2022.

Gross profit and gross margin

Gross profit increased $52.6 million, and gross margin increased 420 basis points, primarily due to higher realized prices resulting from EDGE-related pricing initiatives across all product lines of $36.3 million, and lower equipment operating costs of $11.4 million, mainly fuel and timing of costs. In addition, contracting services margins benefited by $8.7 million as strong markets and more available work in most areas of operations during the second quarter more than offset the unfavorable weather impacts experienced during the first quarter.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $19.4 million, resulting from higher payroll-related costs of $8.7 million related to both inflationary pressures driving up wages and increased staff after the Separation, as well as higher incentive accruals. In addition, the Company has incurred higher professional service fees of $2.9 million; higher office expenses of $1.2 million; higher dues and subscriptions of $1.2 million; higher insurance expenses of $1.1 million; and other miscellaneous costs, including equipment and information technology expenses, partially as a result of standing itself up as a publicly traded company. Additionally, the Company increased expected credit losses by $1.4 million associated with an increase in receivable balances over 90 days and the absence of bad debt recoveries in 2022.

Interest expense

Interest expense increased $16.0 million due primarily to higher average interest rates, which resulted in additional interest expense in the period of $14.6 million. Interest rates were higher as a result of the Company settling historical related-party notes payable as part of the Separation and entering into new debt arrangements. The Company also had higher average debt balances.

Other income (expense)

Other income increased $8.1 million due in part to improved performance on the Company's nonqualified benefit plan investments of $5.7 million, as discussed in Note 11, as well as interest income of $2.0 million on the cash held in escrow for the $425.0 million of senior notes issued prior to the completion of the Separation.

Income tax expense

Income tax expense increased $8.3 million corresponding with higher income before income taxes.

Business Segment Financial and Operating Data

A discussion of key financial data from Knife River’s business segments follows. This discussion is focused on the key financial measures the Company uses to evaluate the performance of its business from a segment level, which include revenue, gross profit, gross margin, EBITDA and EBITDA margin. Knife River focuses on gross margin, which is defined as gross profit as a percent of revenue, as a key metric when assessing the performance of the business as management believes that analyzing changes in costs in relation to changes in revenue provides more meaningful insight into the results of operations than examining costs in isolation. EBITDA and EBITDA margin are non-GAAP financial measures. For more information and reconciliations to the nearest GAAP measure, see the section entitled "Non-GAAP Financial Measures.”

Index

Results of Operations - Pacific


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2023		2022		% Change	2023		2022		% Change
	(In millions)
Revenue	$	142.2	$	128.4	11%	$	209.9	$	213.8	(2)%
Gross profit	$	27.2	$	18.3	49%	$	28.9	$	26.6	9%
Gross margin	19.1%		14.2%			13.8%		12.4%
EBITDA	$	22.0	$	15.2	45%	$	18.9	$	20.6	(8)%
EBITDA margin	15.5%		11.8%			9.0%		9.7%


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In millions)
Revenues:
Aggregates	$	27.5	$	24.3	$	46.1	$	43.4
Ready-mix concrete	40.5		33.1		66.7		63.1
Asphalt	6.3		11.5		7.6		16.0
Other*	61.0		53.3		87.0		80.2
Contracting services	33.4		36.3		40.3		57.3
Internal sales	(26.5)		(30.1)		(37.8)		(46.2)
	$	142.2	$	128.4	$	209.9	$	213.8

*Other includes cement, liquid asphalt, merchandise, fabric and spreading, and other products that individually are not considered to be a major line of business for the segment.

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $13.8 million, as increased pricing across most product lines contributed an additional $11.7 million, largely resulting from EDGE-related pricing initiatives. Also contributing to the increase were strong volumes of ready-mix concrete products of $7.2 million from higher demand in Hawaii as the local economy continues to regain momentum through tourism and military spending, as well as higher demand in northern California based in part on an acquisition in December 2022. Partially offsetting the increased revenues were lower asphalt volumes and decreased contracting services revenues of $9.4 million, both resulting from the late start to the construction season and the absence of impact projects in California.

Gross profit and gross margin

Gross profit increased $8.9 million and gross margin increased 490 basis points, largely the result of strong product pricing adding $7.1 million, as previously discussed. In addition, lower equipment operating costs, mainly fuel, had a positive impact to gross margin.

EBITDA and EBITDA margin

EBITDA increased $6.8 million and EBITDA margin increased 370 basis points. These increases were the direct result of the previously discussed higher gross profit, partially offset by higher selling, general and administrative costs. The increase in selling, general and administrative costs includes higher payroll-related costs of $1.4 million, due in part to increased personnel from an acquisition in December 2022 and higher incentive accruals; increased rent and overhead expenses of $200,000 each; and higher professional service fees and other miscellaneous expenses.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Revenue

Revenue decreased $3.9 million as the segment experienced wet weather conditions in California during the first quarter of 2023. Certain areas in Northern California experienced precipitation rates that were four to five times higher during the first three months of 2023 compared to the drought conditions experienced during the same timeframe in 2022. These weather conditions prevented the Company from executing on contracting services projects of $9.2 million, including asphalt paving work, and affected demand for products, which contributed to the decrease in sales volumes of $11.0 million across most of its product lines. The absence in 2023 of an impact project further decreased contracting services revenues. Partially offsetting the decreased revenues were the positive effects of EDGE-related pricing initiatives across all product lines of $20.1 million, and higher volumes in Hawaii supported by the strong economic environment during the second quarter, as previously discussed.

Index

Gross profit and gross margin

Gross profit increased $2.3 million and gross margin increased 140 basis points, driven primarily by the previously discussed strong product pricing that more than offset the decreased volumes and contracting services resulting from the wet weather conditions in California, as previously discussed, as well as cost overruns on a project in California. In addition, the segment experienced higher utility and labor-related costs, which increased year over year on a cost-per-unit basis.

EBITDA and EBITDA margin

EBITDA decreased $1.7 million and EBITDA margin decreased 70 basis points. These decreases were the result of higher selling, general and administrative costs. The increase in selling, general and administrative costs includes higher payroll-related costs of $2.3 million, due in part to increased personnel from an acquisition in December 2022 and higher incentive accruals; higher legal and other professional services of $500,000; increased rent expense of $400,000; higher overhead expenses and lower asset sale gains of $300,000 each; decreased recovery of bad debt of $200,000; and increased other miscellaneous expenses. Partially offsetting the decreases was higher gross profit, as previously discussed.

Results of Operations - Northwest


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2023		2022		% Change	2023		2022		% Change
	(In millions)
Revenue	$	179.0	$	151.0	19%	$	294.9	$	256.5	15%
Gross profit	$	43.1	$	24.2	78%	$	58.8	$	38.3	54%
Gross margin	24.0%		16.1%			19.9%		14.9%
EBITDA	$	40.7	$	23.2	75%	$	53.8	$	36.0	49%
EBITDA margin	22.7%		15.4%			18.3%		14.0%


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In millions)
Revenues:
Aggregates	$	47.9	$	43.5	$	90.5	$	77.1
Ready-mix concrete	44.6		39.1		78.5		75.5
Asphalt	34.5		26.3		41.4		34.7
Other*	4.4		4.0		7.1		7.4
Contracting services	82.7		65.8		125.4		103.0
Internal sales	(35.1)		(27.7)		(48.0)		(41.2)
	$	179.0	$	151.0	$	294.9	$	256.5

*Other includes merchandise, transportation services and other products that individually are not considered to be a major line of business for the segment.

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $28.0 million, largely the result of higher contracting services revenues of $16.9 million and higher average selling prices contributing an additional $14.8 million in revenue, supported by consistent market demand and EDGE-related pricing initiatives. Contracting services work benefited from more available work than the previous year, including Agency, data center, and parking garage work. Higher asphalt volumes of $4.9 million and higher ready-mix concrete volumes of $1.7 million also benefited from the increased contracting services work, highlighting the Company's successful vertical integration. Partially offsetting the increases were decreased aggregate volumes of $3.2 million, due in part to project timing.

Gross profit and gross margin

Gross profit increased $18.9 million and gross margin increased 790 basis points, resulting from the higher realized prices contributing $9.7 million in gross profit, largely from aggregates and asphalt, and the higher available contracting services work adding an additional $5.3 million, as previously discussed. Lower overall equipment operating costs, including fuel costs, also had a positive benefit in the quarter of approximately $3.8 million.

Index

EBITDA and EBITDA margin

EBITDA increased $17.5 million and EBITDA margin increased 730 basis points, directly resulting from the increased gross profit previously discussed. Partially offsetting the increase was higher selling, general and administrative expenses of $2.1 million, including higher labor-related costs of $1.1 million, lower asset sales gains and higher other miscellaneous expenses.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Revenue

Revenue increased $38.4 million, largely the result of higher average selling prices adding $27.3 million of revenue, primarily due to EDGE-related pricing initiatives on all product lines, and higher contracting services revenues of $22.4 million. Contracting services work benefited from more available work than the previous year, including data center, parking garage, railroad and Agency work. Partially offsetting the increases were lower ready-mix concrete and aggregate volumes of $5.2 million, due in part to the absence of impact projects in 2023, colder temperatures and decreased demand for residential work.

Gross profit and gross margin

Gross profit increased $20.5 million and gross margin increased 500 basis points, resulting from higher aggregates gross profit of $7.6 million and higher asphalt gross profit of $4.0 million, due to higher average realized prices and product mix. Contracting services margins improved by $4.8 million due to the strong backlog of work established and the reduction of job losses as compared to the prior year. In addition, lower per unit fuel costs had a positive impact on gross profit.

EBITDA and EBITDA margin

EBITDA increased $17.8 million and EBITDA margin increased 430 basis points, directly resulting from the increased gross profit previously discussed. Partially offsetting the increase was higher selling, general and administrative expenses of $4.2 million, including higher labor-related costs of $2.0 million related to higher incentive accruals and wages, lower asset sales gains of $1.0 million, higher dues and subscriptions, and higher other expenses.

Results of Operations - Mountain


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2023		2022		% Change	2023		2022		% Change
	(In millions)
Revenue	$	175.8	$	170.4	3%	$	236.4	$	228.9	3%
Gross profit	$	34.4	$	29.5	17%	$	28.6	$	23.8	20%
Gross margin	19.6%		17.3%			12.1%		10.4%
EBITDA	$	32.6	$	28.6	14%	$	26.0	$	20.6	26%
EBITDA margin	18.5%		16.8%			11.0%		9.0%


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In millions)
Revenues:
Aggregates	$	28.9	$	26.9	$	38.5	$	36.1
Ready-mix concrete	34.5		31.5		48.9		47.6
Asphalt	29.5		31.1		30.3		31.5

Contracting services	117.7		118.4		159.4		155.3
Internal sales	(34.8)		(37.5)		(40.7)		(41.6)
	$	175.8	$	170.4	$	236.4	$	228.9

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $5.4 million, primarily the result of higher average selling prices on all product lines of $8.2 million, supported by demand and EDGE-related pricing momentum. Partially offsetting the increase were lower asphalt volumes and contracting services revenues as a result of the absence in 2023 of an impact airport project substantially completed during the second quarter of 2022. Overall asphalt volumes decreased an additional $3.5 million affected by unfavorable weather conditions in some locations, as were ready-mix concrete volumes.

Index

Gross profit and gross margin

Gross profit increased $4.9 million and gross margin increased 230 basis points, as a result of higher contracting services margins contributing profit of $2.7 million due to strong markets in most locations, along with higher realized prices for ready-mix concrete and aggregates of $1.9 million, as previously discussed. Lower overall equipment operating costs, largely related to fuel, also had a positive benefit in the quarter of approximately $2.3 million. Partially offsetting the increase was the absence in 2023 of an impact airport project substantially completed during the second quarter of 2022, which affected both asphalt and contracting services margins.

EBITDA and EBITDA margin

EBITDA increased $4.0 million and EBITDA margin increased 170 basis points, directly resulting from the increased gross profit previously discussed. Partially offsetting the increase was higher selling, general and administrative expenses, including higher payroll-related costs of $600,000 and higher credit loss provisions of $600,000.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Revenue

Revenue increased $7.5 million, primarily the result of higher average selling prices on all product lines of $11.8 million, supported by demand, EDGE-related pricing and momentum in growing markets. Contracting services revenues increased by $4.1 million due to strong markets in all locations, offset partially by the absence in 2023 of an impact airport project substantially completed during the second quarter of 2022. Aggregate volumes also benefited by $1.1 million due to increased demand in Montana. Partially offsetting these increases were lower ready-mix concrete and asphalt volumes of $10.5 million, largely the result of unfavorable weather conditions in some locations. Asphalt volumes were also affected by the absence of the impact airport project previously discussed.

Gross profit and gross margin

Gross profit increased $4.8 million and gross margin increased 170 basis points, as a result of higher contracting services margins contributing profit of $3.4 million due to strong markets in most locations, as well as higher realized prices for ready-mix concrete of $2.7 million. Lower overall equipment operating costs, including fuel, also had a positive impact on the segment of approximately $1.7 million. Partially offsetting these increases was the absence in 2023 of an impact airport project substantially completed during the second quarter of 2022, which affected both asphalt and contracting services margins.

EBITDA and EBITDA margin

EBITDA increased $5.4 million and EBITDA margin increased 200 basis points, directly resulting from the increased gross profit previously discussed.

Results of Operations - North Central


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2023		2022		% Change	2023		2022		% Change
	(In millions)
Revenue	$	187.6	$	167.2	12%	$	208.6	$	190.1	10%
Gross profit	$	28.4	$	17.9	59%	$	8.2	$	(3.1)	365%
Gross margin	15.2%		10.7%			4.0%		(1.6)%
EBITDA	$	24.4	$	16.1	52%	$	.9	$	(8.2)	111%
EBITDA margin	13.0%		9.6%			.4%		(4.3)%


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
	(In millions)
Revenues:
Aggregates	$	30.3	$	26.7	$	34.4	$	30.7
Ready-mix concrete	53.9		47.1		66.2		59.5
Asphalt	46.7		44.7		46.8		44.8
Other*	10.9		9.9		12.5		12.0
Contracting services	99.8		89.1		104.4		94.7
Internal sales	(54.0)		(50.3)		(55.7)		(51.6)
	$	187.6	$	167.2	$	208.6	$	190.1

*Other includes merchandise and other products that individually are not considered to be a major line of business for the segment.

Index

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $20.4 million, largely resulting from higher average selling prices due to EDGE-related pricing initiatives on all product lines contributing an additional $19.0 million in revenue, and higher contracting services revenue of $10.7 million benefiting from impact projects in certain locations and timing of some projects. Ready-mix concrete volumes also increased $2.2 million due to strong markets in certain locations resulting in more commercial and paving projects. Partially offsetting these increases were lower asphalt volumes of $5.6 million, largely related to seasonal heavy-load road restrictions in certain locations, and decreased aggregate volumes of $2.3 million from the absence of an impact project during 2022, as well as lower internal sales volumes due to a late start for paving projects.

Gross profit and gross margin

Gross profit increased $10.5 million and gross margin increased 450 basis points, largely due to higher realized prices on asphalt and aggregates of $4.1 million, and higher contracting services margins contributing profit of $4.1 million related to improved bid margins and impact projects. Lower overall equipment operating costs, largely related to fuel, also had a positive benefit in the quarter of approximately $3.2 million. Partially offsetting these increases were lower aggregates and asphalt margins related to the decreased volumes previously discussed.

EBITDA and EBITDA margin

EBITDA increased $8.3 million and EBITDA margin increased 340 basis points, directly resulting from the increased gross profit previously discussed. Partially offsetting the increase was higher selling, general and administrative expenses of $2.4 million, largely higher labor-related costs for higher incentive and profit sharing accruals.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022

Revenue

Revenue increased $18.5 million as a result of higher average selling prices across all product lines of $21.6 million due to EDGE-related pricing initiatives, and contracting services revenue of $9.7 million benefiting from impact projects in certain markets and timing of some projects. Certain areas in Minnesota, North Dakota and South Dakota experienced precipitation rates that were two to three times higher during the first three months of 2023 compared to the same timeframe in 2022. These weather conditions affected demand for products and resulted in a decrease in sales volumes of $9.3 million for asphalt and aggregates.

Gross profit and gross margin

Gross profit increased $11.3 million and gross margin increased 560 basis points, largely due to higher realized prices on aggregates and asphalt of $4.4 million. Contracting services margins contributed profit of $3.6 million from improved bid margins and impact projects. Lower overall equipment operating costs, largely fuel, also had a positive benefit in the quarter.

EBITDA and EBITDA margin

EBITDA increased $9.1 million and EBITDA margin increased 470 basis points, directly resulting from the increased gross profit previously discussed. Partially offsetting the increase was higher selling, general and administrative expenses of $2.6 million, primarily higher labor-related costs for higher incentive and profit sharing accruals.

Results of Operations - All Other and Intersegment Eliminations


	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2023			2022			% Change	2023			2022			% Change
	(In millions)
Revenue	$	100.6		$	94.8		6%	$	143.3		$	132.5		8%
Gross profit	$	19.9		$	13.4		49%	$	32.6		$	18.9		72%
Gross margin	19.8		%	14.1		%		22.7		%	14.3		%
EBITDA	$	5.4		$	4.2		29%	$	11.4		$	.1		n.m.
EBITDA margin	5.3		%	4.4		%		7.9		%	.1		%

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022

Revenue

Revenue increased $5.8 million, driven by higher average selling prices for asphalt products and ready-mix concrete of $14.7 million, partially offset by decreased asphalt product volumes of $5.4 million due primarily to timing of sales, lower availability of asphalt paving work and competitive market pricing in the geographic areas in which the Company operates. Also offsetting the increases were decreased ready-mix concrete and aggregates sales of $8.1 million due to a partial sale of non-strategic assets in southeast Texas in December 2022.

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Gross profit and gross margin

Gross profit increased $6.5 million and gross margin increased 570 basis points, resulting from higher realized prices for asphalt products and ready-mix concrete of $13.4 million. Partially offsetting these increases was a decrease in ready-mix concrete margins, which resulted in a reduction to gross profit of $1.1 million, largely as a result of the partial sale of non-strategic assets in southeast Texas in December 2022.

EBITDA and EBITDA margin

EBITDA increased $1.2 million and EBITDA margin increased 90 basis points. The increase in EBITDA was the direct result of increased gross profit previously discussed and improved performance on the Company's nonqualified benefit plan investments of $2.9 million. Partially offsetting the increases were higher selling, general and administrative costs, including increased payroll-related costs of $2.8 million, higher professional service fees of $1.6 million, higher taxes and licensing fees of $500,000 and other miscellaneous costs, partially as a result of standing itself up as a publicly traded company.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Revenue

Revenue increased $10.8 million, driven by higher average selling prices for asphalt products and ready-mix concrete of $17.7 million, and contracting services revenues increased $4.2 million due to cost increases and improving margins on contracts. Partially offsetting these increases were decreased aggregate and ready-mix concrete sales of $14.9 million due to the partial sale of non-strategic assets in southeast Texas in December 2022. In addition, asphalt sales volumes decreased $3.5 million related to a combination of lower availability of asphalt paving work and competitive market pricing in the geographic areas in which the Company operates.

Gross profit and gross margin

Gross profit increased $13.7 million and gross margin increased 840 basis points due primarily to higher realized prices for asphalt products and ready-mix concrete of $14.9 million. Partially offsetting these increases were decreased ready-mix concrete margins as a result of the partial sale of non-strategic assets in southeast Texas in December 2022.

EBITDA and EBITDA margin

EBITDA increased $11.3 million and EBITDA margin increased 780 basis points. The increase in EBITDA was the direct result of increased gross profit previously discussed and improved performance on the Company's nonqualified benefit plan investments of $5.7 million. Partially offsetting the increases were higher selling, general and administrative costs, including professional service fees of $2.1 million, insurance of $700,000, payroll-related costs of $400,000 and other miscellaneous costs, partially as a result of standing itself up as a publicly traded company.

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Liquidity and Capital Resources

At June 30, 2023, Knife River had cash, cash equivalents and restricted cash of $68.5 million and working capital of $574.0 million. Working capital is calculated as current assets less current liabilities. Subsequent to the completion of the Separation, Knife River’s cash management, capital structure and liquidity sources have changed significantly. Knife River implemented its own centralized cash management model and intends to use cash on hand and third-party credit facilities to fund day-to-day operations.

Given the seasonality of its business, the Company typically experiences significant fluctuations in working capital needs and balances throughout the year. Working capital requirements generally increase in the first half of the year as the Company builds up inventory and focuses on preparing equipment and facilities and other start-up costs for its construction season. Working capital levels then decrease as the construction season winds down and the Company collects on receivables.

Knife River’s ability to fund its cash needs will depend on the ongoing ability to generate cash from operations and obtain debt financing with competitive rates. Knife River relies on access to capital markets as sources of liquidity for capital requirements not satisfied by cash flows from operations, particularly in the first half of the year due to the seasonal nature of the industry. Knife River’s principal uses of cash in the future will be to fund its operations, working capital needs, capital expenditures, repayment of debt and strategic business development transactions.

On April 25, 2023, Knife River issued $425.0 million of 7.75 percent senior notes due May 1, 2031, pursuant to an indenture. On May 31, 2023, Knife River entered into a senior secured credit agreement consisting of a $275.0 million term loan and a $350.0 million revolving credit facility, of which $190.0 million was drawn down and $35.0 million was repaid during the period, each with a SOFR-based interest rate and a maturity date of May 31, 2028. For more information on the debt agreements and covenant restrictions, see Note 12.

Capital expenditures

Capital expenditures for the six months ended June 30, 2023 and 2022, were $56.0 million and $70.7 million, respectively. Knife River currently estimates total 2023 capital expenditures to be $125.0 million, which will primarily be used for routine replacement and maintenance of vehicles and equipment, building improvements, aggregate reserves and storage facilities updates.

The Company continues to evaluate the potential for future acquisitions and other growth opportunities that would be incremental to the outlined capital program; however, these opportunities are dependent upon the availability of economic opportunities. It is anticipated that all of the funds required for capital expenditures for 2023 will be funded by various sources, including internally generated funds; credit facilities; and issuance of debt and equity securities if necessary.

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Cash flows


	Six Months Ended
	June 30,
	2023		2022
	(In millions)
Net cash provided by (used in)
Operating activities	$	(70.4)	$	(147.8)
Investing activities	(64.1)		(78.1)
Financing activities	192.9		224.8
Increase (decrease) in cash, cash equivalents and restricted cash	58.4		(1.1)
Cash, cash equivalents and restricted cash -- beginning of year	10.1		13.8
Cash, cash equivalents and restricted cash -- end of period	$	68.5	$	12.7

Operating activities


	Six Months Ended
	June 30,
	2023		2022		Variance
	(In millions)
Components of net cash used in operating activities:
Earnings (loss)	$	15.5	$	(1.5)	$	17.0
Adjustments to reconcile earnings (loss) to net cash used in operating activities	55.1		58.6		(3.5)
Changes in current assets and liabilities, net of acquisitions:
Receivables	(236.4)		(215.2)		(21.2)
Due from related-party	16.1		1.0		15.1
Inventories	(51.1)		(66.3)		15.2
Other current assets	(20.9)		(16.8)		(4.1)
Accounts payable	102.6		73.1		29.5
Due to related-party	(7.3)		9.8		(17.1)
Other current liabilities	25.6		8.9		16.7
Pension and postretirement benefit plan contributions	(.3)		(.2)		(.1)
Other noncurrent charges	30.7		.8		29.9
Net cash used in operating activities:	$	(70.4)	$	(147.8)	$	77.4

Cash used in operating activities totaled $70.4 million for the six months ended June 30, 2023, compared to $147.8 million for the six months ended June 30, 2022. The decreased cash used in operating activities was largely the result of lower working capital needs. Cash used by working capital components totaled $171.4 million for the six months ended June 30, 2023, compared to $205.5 million for the six months ended June 30, 2022. This decreased usage of cash was driven largely by the lower payments on operating expenses at the end of the period, lower payments on taxes payable, higher deferred interest payments on long-term debt, and decreased liquid asphalt inventory balances, partially offset by increased accounts receivable balances associated with higher revenues during the quarter. In addition, the timing of insurance costs associated with the captive insurer had a positive impact on cash used in operating activities.

Investing activities


	Six Months Ended
	June 30,
	2023		2022		Variance
	(In millions)
Capital expenditures	$	(66.6)	$	(80.3)	$	13.7
Acquisitions, net of cash acquired	—		(.5)		.5
Net proceeds from sale or disposition of property and other	4.1		4.3		(.2)
Investments	(1.6)		(1.6)		—
Net cash used in investing activities	$	(64.1)	$	(78.1)	$	14.0

The decrease in cash used in investing activities for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily due to a reduction in capital expenditures for the prestress facility in Washington that is nearing completion.

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Financing activities


	Six Months Ended
	June 30,
	2023		2022		Variance
	(In millions)
Issuance of current related-party notes, net	$	—	$	100.0	$	(100.0)
Issuance of long-term related-party notes, net	205.3		154.9		50.4
Issuance of long-term debt	855.0		—		855.0
Repayment of long-term debt	(.1)		(.1)		—
Debt issuance costs	(16.7)		(.7)		(16.0)
Net transfers to Centennial	(850.6)		(29.3)		(821.3)
Net cash provided by financing activities	$	192.9	$	224.8	$	(31.9)

The decrease in cash flows provided by financing activities for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was largely related to decreased issuance of short-term related-party notes being offset somewhat by increased issuance of long-term related-party notes in 2023. The net transfer to Centennial for the payment of dividends at the time of the Separation were mostly offset by the issuance of third-party debt at the time of the Separation reduced by the associated debt issuance costs.

Material cash requirements

There were no material changes in the Company's contractual obligations from those reported in the Company's Registration Statement on Form 10 other than as set forth below. For more information on the Company's contractual obligations for related-party notes payable, operating leases and purchase commitments, see the Material Cash Requirements section in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in the Company's Registration Statement on Form 10.

Material short-term and long-term cash requirements of the Company include repayment of third-party long-term debt and related interest payments, related-party notes payable and related interest payments, payments on operating lease agreements, payments of obligations on purchase commitments and asset retirement obligations.

At June 30, 2023, the Company's purchase commitments reflected an increase of approximately 95 percent from the balance at December 31, 2022. This increase is primarily due to the Company committing to a three-year cement contract, as well as, the Company still having locked-in commitments from first quarter for the construction season. The Company expects purchase commitments to decrease throughout 2023 as obligations are satisfied during the construction season.

At June 30, 2023, the Company's long-term debt reflected an increase of approximately $378.4 million from the balance at December 31, 2022. This increase is primarily due to the Company paying off the short-term debt, and replacing it with long-term debt in preparation of the Separation. Overall, borrowings have decreased as of June 30, 2023, and are expected to decrease as construction season continues.

At June 30, 2023, the Company's total estimated interest payments over the life of its debt reflected an increase of approximately $277.4 million from the total estimated interest payments at December 31, 2022. This increase is due to the rising interest rate environment in 2023 and higher rate debt incurred by the Company in preparation of the Separation. The Company's average interest rate has increased from 3.62% on December 31, 2022 to 6.55% on June 30, 2023. Estimated interest payments outstanding over the life of the loans was as follows:


	Remainder of 2023		1-3 years		3-5 years		More than 5 years		Total
	(In millions)
Estimated interest payments*	$	33.0	$	128.4	$	125.0	$	121.5	$	407.9

*Represents the estimated interest payments associated with the Company's long-term outstanding debt at June 30, 2023, assuming current interest rates and consistent amounts outstanding until their respective maturity dates over the periods indicated above.

At June 30, 2023, the Company expects to contribute approximately $1.2 million to its qualified noncontributory defined benefit pension plans in 2023 to maintain a desired funded status. At December 31, 2022, the Company did not expect to make contributions.

Defined benefit pension plans

The Company has noncontributory qualified defined benefit pension plans for certain employees. Various assumptions are used in calculating the benefit expense (income) and liability (asset) related to these plans, as such costs of providing these benefits bear the risk of changes as they are dependent upon assumptions of future conditions.

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There were no other material changes to the Company's qualified noncontributory defined benefit pension plans from those reported in the Company's Registration Statement on Form 10 other than the Company expects to contribute approximately $1.2 million in pension plan contributions in 2023, largely resulting from the decline in asset values in 2022 decreasing the funded status of the plans. For more information, see Note 17 of the Audited Annual Consolidated Financial Statements in the Company's Registration Statement on Form 10.

Non-GAAP Financial Measures

The Business Segment Financial and Operating Data includes financial information prepared in accordance with GAAP, as well as EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA Margin financial measures. Knife River defines EBITDA as net income before interest expense, taxes and depreciation, depletion and amortization, and EBITDA margin as EBITDA as a percentage of revenues. Knife River defines Adjusted EBITDA as EBITDA, further adjusted to exclude unrealized gains and losses on benefit plan investments, stock-based compensation and one-time Separation costs, and Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenues.

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 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. Knife River's 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 by segment and consolidated 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.

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


Three Months Ended June 30, 2023	Pacific			Northwest			Mountain			North Central			All Other and Intersegment Eliminations			Consolidated
	(In millions)
Net income (loss)	$	16.5		$	31.0		$	26.4		$	18.3		$	(35.4)		$	56.8
Depreciation, depletion and amortization	5.5			9.7			6.2			6.1			3.6			31.1
Interest expense, net	—			—			—			—			17.1			17.1
Income taxes	—			—			—			—			20.1			20.1
EBITDA	$	22.0		$	40.7		$	32.6		$	24.4		$	5.4		$	125.1
Unrealized (gains) losses on benefit plan investments													(.4)			(.4)
Stock-based compensation expense													(.1)			(.1)
One-time separation costs													1.7			1.7
Adjusted EBITDA													$	6.6		$	126.3

Revenue	$	142.2		$	179.0		$	175.8		$	187.6		$	100.6		$	785.2
Net income margin	11.6		%	17.3		%	15.0		%	9.8		%	(35.2)		%	7.2		%
EBITDA margin	15.5		%	22.7		%	18.5		%	13.0		%	5.3		%	15.9		%
Adjusted EBITDA margin													6.6		%	16.1		%


Three Months Ended June 30, 2022	Pacific			Northwest			Mountain			North Central			All Other and Intersegment Eliminations			Consolidated
	(In millions)
Net income (loss)	$	9.9		$	14.3		$	22.8		$	9.9		$	(18.3)		$	38.6
Depreciation, depletion and amortization	5.3			8.9			5.8			6.2			3.5			29.7
Interest expense, net	—			—			—			—			7.4			7.4
Income taxes	—			—			—			—			11.6			11.6
EBITDA	$	15.2		$	23.2		$	28.6		$	16.1		$	4.2		$	87.3
Unrealized (gains) losses on benefit plan investments													2.4			2.4
Stock-based compensation expense													.7			.7
Adjusted EBITDA													$	7.3		$	90.4

Revenue	$	128.4		$	151.0		$	170.4		$	167.2		$	94.8		$	711.8
Net income margin	7.7		%	9.5		%	13.4		%	5.9		%	(19.3)		%	5.4		%
EBITDA margin	11.8		%	15.4		%	16.8		%	9.6		%	4.4		%	12.3		%
Adjusted EBITDA margin													7.7		%	12.7		%

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Six Months Ended June 30, 2023	Pacific			Northwest			Mountain			North Central			All Other and Intersegment Eliminations			Consolidated
	(In millions)
Net income (loss)	$	7.9		$	35.2		$	13.8		$	(10.9)		$	(30.5)		$	15.5
Depreciation, depletion and amortization	11.0			18.6			12.1			11.8			7.2			60.7
Interest expense, net	—			—			.1			—			26.6			26.7
Income taxes	—			—			—			—			8.1			8.1
EBITDA	$	18.9		$	53.8		$	26.0		$	.9		$	11.4		$	111.0
Unrealized (gains) losses on benefit plan investments													(1.7)			(1.7)
Stock-based compensation expense													.8			.8
One-time separation costs													2.4			2.4
Adjusted EBITDA													$	12.9		$	112.5

Revenue	$	209.9		$	294.9		$	236.4		$	208.6		$	143.3		$	1,093.1
Net income margin	3.8		%	11.9		%	5.8		%	(5.2)		%	(21.3)		%	1.4		%
EBITDA margin	9.0		%	18.3		%	11.0		%	.4		%	7.9		%	10.2		%
Adjusted EBITDA margin													9.0		%	10.3		%


Six months ended June 30, 2022	Pacific			Northwest			Mountain			North Central			All Other and Intersegment Eliminations			Consolidated
	(In millions)
Net income (loss)	$	10.1		$	18.8		$	9.2		$	(20.0)		$	(19.6)		$	(1.5)
Depreciation, depletion and amortization	10.5			17.2			11.3			11.8			7.3			58.1
Interest expense, net	—			—			.1			—			12.6			12.7
Income taxes	—			—			—			—			(.2)			(.2)
EBITDA	$	20.6		$	36.0		$	20.6		$	(8.2)		$	.1		$	69.1
Unrealized (gains) losses on benefit plan investments													4.0			4.0
Stock-based compensation expense													1.4			1.4
Adjusted EBITDA													$	5.5		$	74.5

Revenue	$	213.8		$	256.5		$	228.9		$	190.1		$	132.5		$	1,021.8
Net income margin	4.7		%	7.3		%	4.0		%	(10.5)		%	(14.8)		%	(.1)		%
EBITDA margin	9.7		%	14.0		%	9.0		%	(4.3)		%	.1		%	6.8		%
Adjusted EBITDA margin													4.2		%	7.3		%

New Accounting Standards

For information regarding new accounting standards, see Note 2.

Critical Accounting Estimates

Knife River's critical accounting estimates include impairment testing of goodwill; fair values of acquired assets and liabilities under the acquisition method of accounting; revenue recognized using the cost-to-cost measure of progress for contracts; actuarially determined benefit costs; and tax provisions. There were no material changes in the Company's critical accounting estimates from those that were previously reported in the Company's Registration Statement on Form 10.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of market fluctuations associated with interest rates and commodity prices. The Company has policies and procedures to assist in controlling these market risks and from time to time has utilized derivatives to manage a portion of its risk.

Interest rate risk

Rising interest rates have resulted in, and will likely continue to result in, higher borrowing costs on new debt and existing variable interest rate debt. Knife River entered into a senior secured credit agreement with variable rate debt arrangements at the time of

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the Separation, which could impact the interest expense recognized in future periods. For additional information on the debt agreements the Company has entered into, see the section entitled "Liquidity and Capital Resources". At June 30, 2023, the Company had $430.0 million in term loan and revolving credit borrowings under the credit agreement. The rate in effect at this time was 7.36% and 7.53%, respectively, for the term loan and revolving credit facilities. A hypothetical increase of 1 percent on the interest rate of these facilities would increase interest expense by $4.3 million over the next 12 months.

At June 30, 2023, the Company had no outstanding interest rate hedges.

Commodity price risk

There were no material changes to commodity price risk faced by the Company from those reported in the Company's Registration Statement on Form 10.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's disclosure controls and other procedures are designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and other procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the end of the period covered by this report, such controls and procedures were effective at a reasonable assurance level.

Changes in internal controls

No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II -- Other Information

Item 1. Legal Proceedings

There were no material changes to the Company's legal proceedings that were previously reported in the Company's Registration Statement on Form 10.

Item 1A. Risk Factors

Refer to the Company's risk factors that are disclosed within its Registration Statement on Form 10 that could be materially harmful to the Company's business, prospects, financial condition or financial results if they occur. At June 30, 2023, there were no material changes to the Company's risk factors provided in the Company's Form 10.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

For information regarding mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, see Exhibit 95 to this Form 10-Q, which is incorporated herein by reference.

Item 5. Other Information

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits

See the index to exhibits immediately preceding the signature page to this report.

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Exhibits Index

Incorporated by Reference

Exhibit Number

Exhibit Description

Filed
Herewith

Form

Period
Ended

Exhibit

Filing
Date

File Number

*2(a)

Separation and Distribution Agreement, dated as of May 30, 2023, by and between Knife River Corporation and MDU Resources Group, Inc.

8-K

2.1

6/01/23

1-41642

3(a)

Amended and Restated Certificate of Incorporation of Knife River Corporation

8-K

3.1

6/01/23

1-41642

3(b)

Amended and Restated Bylaws of Knife River Corporation

8-K

3.2

6/01/23

1-41642

**4(a)

Stockholder and Registration Rights Agreement, dated as of May 30, 2023, by and between Knife River Corporation and MDU Resources Group, Inc.

8-K

4.1

6/01/23

1-41642

4(b)

Indenture, dated as of April 25, 2023, among Knife River Holding Company, as issuer, and U.S. Bank Trust Company, National Association, as trustee

10-
12B/A

4.2

4/28/23

1-41642

4(c)

Supplemental Indenture, dated as of May 31, 2023, by and among the parties that are signatories thereto as Guarantors, Knife River Corporation and U.S. Bank Trust Company, National Association

8-K

4.2

6/01/23

1-41642

**10(a)

Transition Services Agreement, dated as of May 30, 2023, by and between Knife River Corporation and MDU Resources Group, Inc

8-K

10.1

6/01/23

1-41642

10(b)

Tax Matters Agreement, dated as of May 30, 2023, by and between Knife River Corporation and MDU Resources Group, Inc

8-K

10.2

6/01/23

1-41642

10(c)

Employee Matters Agreement, dated as of May 30, 2023, by and between Knife River Corporation and MDU Resources Group, Inc

8-K

10.3

6/01/23

1-41642

**10(d)

Credit Agreement, dated as of May 31, 2023, by and among Knife River Corporation, JPMorgan Chase Bank, N.A. and Lenders and L/C Issuers party thereto

8-K

10.4

6/01/23

1-41642

+10(e)

Knife River Corporation Long Term Performance-Based Incentive Plan

8-K

10.5

6/01/23

1-41642

+10(f)

Knife River Corporation Executive Incentive Compensation Plan, including Rules and Regulations

8-K

10.6

6/01/23

1-41642

+10(g)

Knife River Corporation Deferred Compensation Plan—Plan Document and Adoption Agreement

8-K

10.7

6/01/23

1-41642

**+10(h)

Knife River Corporation Supplemental Income Security Plan

8-K

10.8

6/01/23

1-41642

**+10(i)

Knife River Corporation Nonqualified Defined Contribution Plan

8-K

10.9

6/01/23

1-41642

+10(j)

Knife River Corporation Director Compensation Policy

8-K

10.10

6/01/23

1-41642

+10(k)

Knife River Corporation Deferred Compensation Plan for Directors

8-K

10.11

6/01/23

1-41642

+10(l)

Knife River Corporation, 401(k) Retirement Plan, effective May 1, 2023

+10(m)

Form of Knife River Corporation Director and/or Executive Officer Indemnification Agreement

10-
12B/A

10.16

4/28/23

1-41642

31(a)

Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31(b)

Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Mine Safety Disclosures

Index

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

+ Management contract, compensatory plan or arrangement.

** Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish
supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.

Index

Signatures

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Knife River Corporation

DATE:	August 8, 2023	BY:	/s/ Nathan W. Ring
			Nathan W. Ring
			Vice President and Chief Financial Officer


		BY:	/s/ Marney L. Kadrmas
			Marney L. Kadrmas
			Chief Accounting Officer