Executive Summary / Key Takeaways

• Knife River Corporation (KNF) achieved record Q3 2025 revenue of $1.2 billion and adjusted EBITDA of $273 million, demonstrating the fundamental strength of its vertically integrated, aggregates-led business model.
• The company's "Competitive EDGE" strategy, focusing on M&A, dynamic pricing, and operational excellence through "PIT Crews," is driving significant margin expansion across product lines, with a long-term target of exceeding 20% adjusted EBITDA margin.
• Strategic acquisitions, notably Strata Corporation, are expanding KNF's footprint and contributing substantially to revenue and EBITDA, while organic growth projects enhance production capabilities and market reach.
• Despite regional headwinds like adverse weather and a sluggish Oregon market, KNF's diversified operations and robust public infrastructure funding backdrop provide resilience and a strong backlog, with 87% tied to public projects.
• KNF has narrowed its full-year 2025 adjusted EBITDA guidance to between $475 million and $500 million, reflecting confidence in its strategic initiatives and anticipated stabilization in challenging markets.

Setting the Foundation: Knife River's Integrated Model and Strategic Evolution

Founded in 1917, Knife River Corporation has a rich history as a construction materials and contracting services provider, evolving through distinct phases of building scale and enhancing vertical integration. This journey culminated in its spin-off from MDU Resources Group, Inc. (MDU) on May 31, 2023, establishing KNF as an independent, publicly traded entity. This pivotal moment ushered in the "Competitive EDGE" strategy, a comprehensive framework designed to drive long-term profitable growth and shareholder value through EBITDA margin improvement, disciplined growth, and operational excellence.

KNF operates as an aggregates-led, vertically integrated company across 14 U.S. states, primarily serving public-sector infrastructure projects. Its business model is built on owning 1.20 billion tons of aggregate reserves, with approximately 37% supporting internal production of value-added products like ready-mix concrete and asphalt. This vertical integration provides a significant competitive advantage, allowing KNF to control costs, ensure material quality, and maximize efficiency across its operations. The company strategically targets mid-size, high-growth markets, leveraging its local expertise and established relationships, particularly with government entities for public infrastructure projects.

The industry landscape in which KNF operates is characterized by regional competition and cyclical demand. Direct competitors such as Vulcan Materials Company (VMC), Martin Marietta Materials (MLM), CRH plc (CRH), and Summit Materials (SUM) vie for market share. While larger players like VMC and CRH benefit from broader geographic reach and scale, KNF differentiates itself through its deep regional knowledge and specialized expertise in government contracting. This localized approach fosters stronger customer loyalty and enables more tailored solutions, particularly in its West, Mountain, Central, and Energy Services segments. KNF's long history and proven playbook for integrating over 90 acquisitions further solidify its position as an acquirer of choice in its target markets.

Broad industry trends, particularly the robust and bipartisan support for infrastructure spending, serve as a powerful tailwind for KNF. The Infrastructure Investment and Jobs Act (IIJA) continues to provide substantial funding, with approximately 52% of its formula funding yet to be spent in KNF's operating states as of August 2025. State Department of Transportation (DOT) budgets are also strong, with 10 of KNF's 14 states forecasting record budgets for fiscal year 2026. This dedicated public funding forms the backbone of KNF's business, providing stability through economic cycles and a consistent demand for its materials and services.

The EDGE Advantage: Technology and Operational Excellence

KNF's "Competitive EDGE" strategy is not merely a slogan; it is a meticulously implemented framework underpinned by technological adoption and a relentless pursuit of operational excellence. The company's technological differentiation lies in its strategic implementation of advanced software and process improvement methodologies across its traditional construction materials business.

Central to this is the deployment of dynamic pricing and analytics software for its materials operations. This technology allows KNF to optimize pricing based on real-time costs and job proximity, moving beyond traditional annual price adjustments. This approach has yielded tangible benefits, with aggregates seeing an 8% price increase and ready-mix a 6% increase in Q3 2025 alone. For the full year 2024, aggregates prices rose 7% and ready-mix by 10%. Management anticipates sustainable mid-single-digit price increases for aggregates, which are expected to outpace input costs and drive margin expansion. The "so what" for investors is clear: dynamic pricing enhances KNF's competitive moat by improving pricing power and directly contributing to higher average selling prices (ASPs) and better margins.

Another critical component of the EDGE strategy is the expansion of Process Improvement Teams (PIT Crews). These internal teams are tasked with rolling out new technologies and training programs to boost productivity and provide real-time visibility into daily operations across KNF's aggregate, asphalt, and ready-mix concrete plants. The Materials PIT Crew has already visited 27 locations, encompassing 178 plants (representing approximately 70% of materials sales volumes), identifying opportunities to increase throughput and reduce production costs in states like Hawaii, Oregon, Texas, and Wyoming. The creation of a Chief Excellence Officer position in January 2025 and a Senior Vice President of Aggregate and Rail in June 2025 underscores KNF's commitment to expanding these initiatives and leading standardization efforts.

Specific operational achievements tied to these improvements include the Spokane, Washington prestress plant, which became operational in February 2024 and generated $2 million in labor and raw material savings, improving gross profit by over 40% in 2024. Furthermore, a new polymer-modified asphalt (PMA) production facility in South Dakota, fully operational in Q2 2025, is expected to offer transportation savings and additional market capacity. These operational enhancements, driven by the PIT Crews, directly translate into lower costs, improved efficiency, and higher profitability, strengthening KNF's competitive position against rivals who may not have such integrated and data-driven operational oversight.

KNF also invests in workforce development through its "I Choose Safety" program and the Knife River Training Center, a 230-acre facility offering CDL, equipment operator, and leadership training. This focus on human capital ensures a skilled and safe workforce, a critical asset in an industry facing labor shortages. The Chief People Officer, appointed in April 2025, further emphasizes the company's commitment to recruitment, retention, and career development.

Financial Strength Amidst Headwinds: Performance and Profitability

Knife River's financial performance in 2025 demonstrates the resilience of its business model and the effectiveness of its EDGE strategy, even when confronted with significant headwinds. For the third quarter ended September 30, 2025, KNF reported record revenue of $1.20 billion, a 9% increase year-over-year, and a record adjusted EBITDA of $273 million, up 11% from the prior year. This translated into an adjusted EBITDA margin of 22.7% for the quarter. Even excluding the impact of the Strata acquisition, Q3 2025 revenue and adjusted EBITDA would have been records, underscoring the underlying organic strength.

Across its product lines, KNF showcased impressive profitability. Aggregates experienced an 8% price increase and a 50 basis point margin improvement in Q3 2025. Ready-mix concrete had one of its best quarters ever, with a 6% price increase, 16% volume growth, and a 160 basis point margin improvement. While asphalt volumes declined by approximately 7% due to less paving work and lower liquid asphalt input costs, margins still saw a slight improvement due to effective cost management. The Central segment, bolstered by the Strata integration, achieved an all-time record EBITDA margin of 23% in Q3 2025.

For the nine months ended September 30, 2025, revenue increased by $149.1 million, primarily driven by acquired companies and mid-single-digit price increases on aggregates and ready-mix. However, gross profit for the nine-month period decreased by $23.7 million, largely due to less work performed, higher per-unit fixed costs from decreased aggregate volumes, and competitive market conditions in Energy Services. Selling, general, and administrative (SG&A) expenses increased in Q3 2025 due to acquisition-related overhead and IT costs for EDGE initiatives, though partially offset by higher gains on asset sales.

KNF's liquidity and capital resources remain robust. As of September 30, 2025, the company held $30.7 million in unrestricted cash and cash equivalents, $660.9 million in working capital, and $456.6 million in borrowing capacity on its revolving credit facility. This strong position ensures KNF can meet its financial commitments, debt obligations, and anticipated capital expenditures for at least the next 12 months. The company's net leverage stood at 2.6x at the end of Q3 2025, which is at the peak of its seasonal borrowing needs. Management anticipates the revolver will be fully repaid by year-end, bringing net leverage below its long-term target of 2.5x, thus preserving capacity for future strategic investments.

A significant financing event occurred on March 7, 2025, when KNF amended its senior secured credit agreement, increasing its revolving credit facility to $500 million and extending its maturity. It also refinanced its existing Term Loan A and secured a new $500 million Term Loan B, with proceeds primarily funding the Strata acquisition. This strategic debt restructuring supports KNF's growth ambitions while maintaining financial flexibility.

Growth Trajectory: Strategic Acquisitions and Organic Expansion

Growth is a cornerstone of KNF's EDGE strategy, pursued through both strategic acquisitions and targeted organic expansion. The company's proven playbook for M&A, honed over 90 acquisitions, focuses on aggregates-led, vertically integrated businesses in mid-sized, high-growth markets that are accretive to KNF's margins.

The acquisition of Strata Corporation on March 7, 2025, for $454 million, stands as KNF's largest to date. Strata, a leading construction materials and contracting services provider in North Dakota and northwestern Minnesota, significantly expands KNF's aggregates, ready-mix, and asphalt operations, adding over 30 years of aggregate reserves and a substantial fleet. The integration of Strata is progressing well, contributing to volume and margin improvement in the Central segment, and is expected to contribute approximately $45 million to 2025 EBITDA. Goodwill from this acquisition is attributed to potential synergies, including market opportunities and economies of scale. As part of the Strata acquisition, KNF strategically divested four ready-mix plant operations for $14.5 million to maintain financial alignment.

Other notable acquisitions in 2025 include the Kalama Quarry in Washington, adding 50 million tons of strategically located reserves, Kraemer Trucking and Excavating in Minnesota, providing infill growth with 97 gravel sites, and High Desert Aggregate and Paving in central Oregon, adding aggregate reserves, asphalt production, and paving capabilities. These acquisitions align perfectly with KNF's strategy to infill existing markets and enhance its vertically integrated capabilities. The company's business development team maintains a robust pipeline of additional materials-led acquisition targets.

Beyond M&A, KNF is actively investing in organic growth projects. These include an aggregates expansion project in South Dakota, aimed at significantly increasing production capabilities in the rapidly growing Sioux Falls market and adding rail services for distribution, with partial returns expected before its 2027 completion. KNF is also greenfielding new ready-mix operations in Twin Falls, Idaho, a new market, expected to be operational in Q1 2026. Furthermore, a new polymer-modified asphalt (PMA) production facility in South Dakota, fully operational in Q2 2025, is enhancing liquid asphalt storage, offering transportation savings, and increasing market capacity. These organic initiatives are designed to drive margin growth by expanding production capabilities and market reach. For the nine months ended September 30, 2025, KNF spent $663.5 million on growth initiatives, including $528 million on acquisitions and $135.5 million on aggregate expansion and greenfield projects, with an additional $32 million planned for organic growth for the remainder of 2025.

Outlook and Risks: Unlocking Future Value

Knife River's outlook for 2025 reflects confidence in its strategic initiatives and the underlying strength of its markets, despite acknowledging persistent challenges. The company has narrowed its full-year 2025 financial guidance, projecting consolidated revenue between $3.1 billion and $3.15 billion, and adjusted EBITDA between $475 million and $500 million. This guidance is predicated on "normal weather, economic and operating conditions" for the remainder of the year, following adjustments made in Q2 and Q3 to account for earlier headwinds.

Management anticipates continued organic growth driven by the full implementation of dynamic pricing and operational improvements. The record third-quarter backlog of $994.6 million, up 32% year-over-year, with approximately 87% tied to publicly funded projects, provides strong visibility into future revenue. While expected margins on this backlog are slightly lower year-over-year, management believes this will be "more than offset by the anticipated benefit of additional volumes of upstream higher-margin materials," particularly from increased asphalt paving work.

Regionally, KNF expects Oregon's 2026 results to be similar to 2025, following stabilization efforts and the positive impact of a new $4.3 billion transportation funding package, which, while a "stop gap" at the state level, is expected to benefit local projects. The Mountain segment boasts a record backlog and strong DOT budgets, with more paving tonnage secured for the next year. The Central segment's backlog is up 83% year-over-year, significantly driven by Texas, and North Dakota's state DOT plans to bid $750 million in construction work in 2026, more than double the prior year.

Product-line specific guidance for 2025 includes flat aggregate volumes due to earlier rainfall and less paving work, but high single-digit pricing increases. Ready-mix volumes are expected to be up by low double-digits with mid-single-digit pricing increases, while asphalt volumes and pricing are projected to be down by low single-digits. Management's confidence in "prices exceeding costs" for ready-mix and sustainable mid-single-digit aggregate pricing underscores the effectiveness of its dynamic pricing strategy.

Despite this positive outlook, KNF faces several pertinent risks. Adverse weather conditions, as experienced in Q2 and Q3 2025, can significantly impact operational efficiency and project timelines, affecting volumes and profitability. The sluggish Oregon market, characterized by delayed public and private projects and macroeconomic factors like tariffs, remains a regional headwind. Competitive bid dynamics, particularly in the Mountain segment, can pressure margins. Furthermore, the company faces ongoing risks related to commodity price fluctuations, litigation (with $3.3 million in contingent liabilities as of September 30, 2025), and the broader cyclical nature of the construction industry. The need for continuous innovation and operational efficiency is paramount to maintain market position against larger, diversified competitors.

Conclusion

Knife River Corporation is executing a compelling transformation, leveraging its "Competitive EDGE" strategy to drive profitable growth and margin expansion. Its aggregates-led, vertically integrated model, combined with strategic M&A and a steadfast commitment to operational excellence through technological adoption, positions the company strongly within a robust public infrastructure market. Despite facing regional and weather-related headwinds, KNF's record financial performance, strong backlog, and disciplined capital allocation underscore the fundamental resilience of its business.

The company's focus on dynamic pricing and process improvement, supported by a skilled workforce and strategic acquisitions like Strata, is not merely enhancing current performance but is building a sustainable competitive moat. While KNF operates in a competitive landscape, its localized expertise and strong government relationships provide a distinct advantage. The path to achieving its long-term adjusted EBITDA margin target of 20% appears well-defined, driven by continued strategic execution and the favorable tailwinds of sustained infrastructure investment. For discerning investors, KNF presents a compelling narrative of a company effectively converting strategic vision into tangible financial results, poised for continued value creation.