Knife River's aggregate margins rose. Its profit forecast fell.

Knife River made its stone, sand and gravel business more profitable in the September quarter. Its construction contracting business lost enough ground to absorb most of the broader materials improvement.

Research by Ticker Byline shows that gross profit from construction materials rose $15.9 million from a year earlier, while contracting gross profit fell $12.6 million. That decline absorbed about 79% of the materials gain, leaving total gross profit just $3.3 million higher despite a 6% increase in sales.

The company now expects less annual profit than it forecast in August. The comparison explains why a record third-quarter aggregate margin could coexist with a lower outlook.

The materials improvement was real

Aggregate volumes rose about 10%, supported by both internal use on construction jobs and sales to outside customers. Higher prices and lower variable production costs helped lift that product line's gross margin to 29.6%, from 27.2%.

The broader materials business also includes ready-mix concrete and asphalt products. Gross profit measures sales left after production costs, before company overhead, interest and taxes.

Third quarter ended September 30. USD millions.

Contracting moved the other way. Revenue rose, but gross profit fell to $51.2 million from $63.8 million. Its margin shrank to 8.5% from 11.5% as competitive bidding, delayed projects and higher fuel costs weighed on the work.

The forecast cut is larger than the sales reset

Knife River lowered its full-year adjusted EBITDA range to $475 million to $505 million, from $520 million to $560 million. This profit measure removes interest, taxes, depreciation, depletion, amortization and selected other items.

The midpoint fell $50 million, or about 9%. The revenue forecast's midpoint fell about 3%, to $3.4 billion. Quarterly adjusted EBITDA was nearly flat at $271.7 million, while net income slipped to $137.9 million from $143.2 million.

Contracting backlog also gives the next results a harder starting point. At September 30 it was $857.2 million, down from $994.6 million a year earlier, with expected margins lower. Most of that work is publicly funded.

The balance sheet moved in the other direction

Net debt fell from about $1.59 billion in June to $1.45 billion in September. Net debt fell to 2.9 times trailing-12-month adjusted EBITDA, from 3.2 times. Its summer cash generation helped reduce debt even as operating conditions remained difficult.

Management is introducing a further improvement program called Sharper EDGE, with details still to come at an investor day. For now, the immediate test is whether stronger materials economics can reach group profit as contracting work comes through. The Knife River company profile tracks the forecast, backlog, acquisitions and funding.