Philly Shipyard ASA (OSE: PHLY) Q1 2021 Results

5 May 2021

Key Events and Highlights

Received order for two additional NSMVs with total contract value of approximately USD 600 million, bringing the order intake for the NSMV program to greater than USD 1.2 billion
Awarded industry design study contract for the U.S. Navy's Cable Ship T-ARC(X) replacement program
Selected for repair and maintenance work on the USNS Charlton, a large roll-on/roll-off ship for the U.S. Navy's Military Sealift Command (MSC)
Order backlog of USD 1,171.1 million on 31 March 2021 with last delivery in 2024
Total cash and cash equivalents of USD 216.5 million at 31 March 2021, excluding USD 34.4 million of restricted cash
First quarter 2021 operating revenues of USD 20.7 million, compared to USD 7.5 million in the same period in 2020
First quarter 2021 negative EBITDA of USD 4.8 million, compared to negative EBITDA of USD 5.8 million in the same period in 2020

Operations

Shipbuilding

Philly Shipyard and its team continue to advance the engineering, procurement and planning work on the National Security Multi-Mission Vessel (NSMV) program in accordance with plan. Following the steel cutting ceremony for NSMV 1 in December 2020, Philly Shipyard commenced production of pilot blocks for NSMV 1 in January 2021 and NSMV 2 in March 2021. Philly Shipyard started full production of NSMV 1 in April 2021 and targets to start full production of NSMV 2 in late 2021. Pre-production activities on NSMVs 3 and 4 are underway.

Recruiting efforts are ongoing to mobilize and ramp up the workforce in time to support this work. Related to this process, Philly Shipyard has restarted its apprenticeship program and reopened its training facility.

Maintenance, Repair, Overhaul and Conversion (MROC)

Philly Shipyard commenced repair and maintenance work on the USNS Charlton, its third drydocking contract for a U.S. Government ship, at the end of March 2021. It is expected this project will require approximately 150 workers and last for five months.

The Charlton contract was awarded by Patriot Contract Services as ship manager for the U.S. Navy's Military Sealift Command (MSC). Philly Shipyard will opportunistically pursue other drydocking contracts to follow the completion of work on the USNS Charlton to utilize any available capacity in its graving docks.

Industry Design Studies

Philly Shipyard continues to work on industry design studies supporting the U.S. Navy's Common Hull Auxiliary Multi-Mission Platform (CHAMP) program, the U.S. Coast Guard's Offshore Patrol Cutter (OPC) program, and the U.S. Navy's Auxiliary General Ocean Surveillance (T-AGOS(X)) program. This quarter, Philly Shipyard began work on industry design studies supporting a fourth government shipbuilding program, the U.S. Navy's Cable Ship T-ARC(X) replacement program.

Health, Safety, Security and Environment (HSSE)

Philly Shipyard's 12-month trailing average for its Lost Time Incident Frequency Rate (LTIFR), based on lost time incidents (LTI) per 200,000 hours as defined by the Occupational Safety and Health Administration (OSHA), was zero at the end of both Q1 2021 and Q1 2020. The most recent LTI occurred in Q4 2018 and since then the shipyard has performed more than one million consecutive work hours without a single LTI.

Philly Shipyard's 12-month trailing average for its Other Recordable Incident Frequency Rate (ORIFR), based on recordable incidents other than LTIs per 200,000 hours as defined by OSHA, was 0.89 at the end of Q1 2021 compared to 1.77 at the end of Q1 2020. Philly Shipyard continues to work proactively to further improve safety and reduce the number of incidents at the shipyard.

COVID-19

Notwithstanding the COVID-19 pandemic, operations are continuing and ongoing projects are moving forward. As the COVID-19 pandemic develops across the world, Philly Shipyard continues to take measures to mitigate the risk for operational disruptions.

Philly Shipyard strictly follows all applicable guidelines by federal, state and local authorities, including the Centers for Disease Control and Prevention (CDC), to minimize the risk of transmission of the coronavirus. Currently, the implementation of these guidelines includes, without limitation, the use of teleworking when possible, additional cleaning and sanitizing staff, limitations on the size of meetings, limitations on the number of visitors, restrictions on travel, training on proper hygiene and hand washing, requiring face coverings and social distancing, and monitoring the temperatures of everyone entering the shipyard.

Philly Shipyard has partnered with a major pharmacy chain to offer its employees an on-site COVID-19 vaccination clinic during Q2 2021.

Financial Information

First Quarter 2021 Results

Operating revenues for Q1 2021 was USD 20.7 million compared to operating revenues of USD 7.5 million for Q1 2020. In Q1 2021, there was revenue from progress on the first four NSMV vessels (Hulls 033-036), ship repair and maintenance work on the USNS Charlton and two government design studies, whereas in Q1 2020 there was ship repair and maintenance work on the FSS Pollux and one government design study.

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is considered a relevant earnings indicator for Philly Shipyard as it measures the operational performance of the shipyard.

EBITDA for Q1 2021 was negative USD 4.8 million compared to EBITDA of negative USD 5.8 million for Q1 2020. Negative EBITDA for Q1 2021 was driven primarily by under-recovered overhead costs (i.e., overhead costs incurred and not allocated to projects) and SG&A costs, partially offset by the gross profit recognized on the NSMV vessels, the USNS Charlton project and the government design studies. Negative EBITDA for Q1 2020 was driven primarily by under-recovered overhead costs and SG&A costs partially offset by gross profit on the government design study. The under-recovery of overhead costs in both quarterly periods is attributable to operating at less than full capacity.

Net loss after tax for Q1 2021 was USD 5.1 million compared to net income after tax of USD 7.4 million for Q1 2020. Net loss after tax for Q1 2021 primarily consists of EBITDA of negative USD 4.8 million and depreciation expense of USD 1.4 million, partially offset by a tax benefit of USD 1.0 million and financial income of USD 0.1 million. Net income after tax for Q1 2020 consists primarily of EBITDA of negative USD 5.8 million, depreciation expense of USD 1.7 million and the CARES Act NOL carryback tax benefit provision of USD 15.0 million (please see note 6 for further details).

Statement of Financial Position

Total assets were USD 385.7 million at 31 March 2021 compared to USD 237.7 million at 31 December 2020, with the increase resulting mainly from an increase in cash and cash equivalents (unrestricted) of USD 119.1 million, USD 18.8 million of prepayments to suppliers for the NSMV program, and USD 8.0 million of cash deposited in an escrow account as collateral for the bonds required by the NSMV program.

Cash and cash equivalents (unrestricted) were USD 216.5 million at 31 March 2021 compared to USD 97.4 million at 31 December 2020. The increase of USD 119.1 million was due primarily to net customer advances on the four NSMV vessels of USD 146.6 million, partially offset by USD 26.8 million in prepayments and escrow deposits described above.

Total restricted cash as of 31 March 2021 amounted to USD 34.4 million, of which USD 33.0 million (long-term) represents the total cash deposited in the escrow account described above and USD 1.4 million (short-term) pertains to a holdback in escrow for claims related to the second Matson vessel (Hull 030). It is anticipated that the cash collateral for the bonds required by the NSMV program will be released in tranches following the delivery of each NSMV. The timing of the release of the Hull 030 holdback is uncertain and has been delayed

due to the impacts of the COVID-19 pandemic, including quarantine and travel restrictions, on closing-out the underlying claims.

Total equity decreased to USD 87.7 million at 31 March 2021 from USD 92.8 million at 31 December 2020 due to net loss of USD 5.1 million.

Shareholder Distributions

Philly Shipyard's goal is that its shareholders will, over time, receive competitive returns on their investments through a combination of dividends and share price growth. In line with this objective, PHLY has paid out significant dividends in the past. However, current priorities are to retain a strong balance sheet and, consequently, the PHLY Board does not foresee payment of shareholder distributions, including dividends and share buybacks, sooner than the delivery of the third NSMV.

Outlook

To date, Philly Shipyard has received orders for the first four ships in the NSMV program, with a total order intake in excess of USD 1.2 billion. These ships are destined for the state maritime academies in New York, Massachusetts, Maine and Texas. TOTE Services retains an option for the fifth vessel for the state maritime academy in California. If all five NSMVs are ordered, then the contract value would total approximately USD 1.5 billion with the final delivery in 2025.

As the U.S. Congress' appropriations process for fiscal year 2022 begins, the White House's Office of Management and Budget has submitted a preliminary request for discretionary funding. This proposal previews some of the items to be included in the Biden administration's full budget request. The preliminary request for the U.S. Department of Transportation includes full funding for the fifth NSMV. This is a positive signal in the budget process, but the timing and amount of these appropriations remain uncertain.

The NSMV contract model is an innovative approach to government shipbuilding, making it one of America's most high-profile programs. This approach enables Philly Shipyard to utilize its commercial best practices for design and construction. U.S. Government fleet plans are supportive of cost-effective acquisition strategies, increasing the potential for some future programs to adopt a similar approach. As a leader in the Jones Act market, Philly Shipyard is well-positioned to benefit from this trend.

Securing the NSMV award marked a major milestone in the Philly Shipyard's strategy to reposition it for government and commercial projects. Philly Shipyard continues to explore a variety of opportunities in both markets and is presently targeting new shipbuilding programs with building slots following the last NSMV built in series.

In the government sector, Philly Shipyard is focused on opportunities for commercial-like and auxiliary ships. In the commercial sector, among other endeavors, Philly Shipyard is exploring interest from owners in building various types of vessels to support the expanding offshore wind industry. Philly Shipyard sees variants based on existing ship designs as potential cost-effective solutions for its government and commercial customers.

Philly Shipyard is now participating in industry design studies for four government shipbuilding programs, including three for the U.S. Navy and one for the U.S. Coast Guard. These industry studies are the precursors for the future detail design and construction (DD&C) contracts for these programs. Participating in the design phase is key if Philly Shipyard chooses to compete for the DD&C contract when requests for proposals (RFPs) are issued.

Philly Shipyard's objective remains to secure a mix of government and commercial new build contracts, while also opportunistically pursuing ship repair and maintenance contracts that allow it to utilize its drydocks until needed for the NSMV program, as well as steel fabrication jobs that enable it to take advantage of periodic excess capacity in its fabrication shops while the NSMV program is ongoing. A substantial capital investment would be required in order for the Company to dedicate a drydock for future maintenance, repair, overhaul and conversion (MROC) projects or significantly increase throughput.

This quarter, Philly Shipyard was awarded a ship repair and maintenance contract by Patriot Contract Services (Patriot) – the ship manager on behalf of the U.S. Navy's Military Sealift Command (MSC) – for the USNS Charlton. This is another positive step in the Company's ambition to establish a mixed platform of ship MROC, along with ship construction, for the commercial and government markets. It also marks the third government ship repair and maintenance contract that Philly Shipyard has been awarded since the middle of 2019 and its first contract with Patriot as ship manager.

Philly Shipyard expects it will continue to incur operating losses in 2021 due to the shipyard operating at less than full capacity during the ramp-up of production for the NSMV program. The Charlton project is expected to help reduce under-recovered overhead costs during 2021. It is expected that operations at Philly Shipyard will reach full capacity in early 2022.

Risks

Market risks

Philly Shipyard's revenue is derived primarily from contracts awarded on a project-by-project basis. It is difficult to predict whether or when Philly Shipyard will be awarded a new contract due to, among other things, changes in existing or forecast market or political conditions, uncertainty regarding the timing and amount of budget appropriations, the complex bidding and selection processes, potential for contract award protests and challenges, and governmental regulations.

While Philly Shipyard now has an order backlog for ship newbuilds, it faces future risks if it is unable to secure new orders and/or financing for major commercial or government shipbuilding programs to follow the NSMV program. There can be no assurance that Philly Shipyard will obtain such new orders or financing for vessels.

Operational risks

Philly Shipyard faces risks related to construction of vessels. Philly Shipyard's ability to meet budgets and schedules may be adversely affected by many factors, including changes in productivity, shortages of materials, equipment and labor, and changes in the cost of goods and services, both Philly Shipyard's own and those charged by its suppliers. Philly Shipyard's operations also depend on stable supplier networks and the availability of key vendors for design and procurement services. Philly Shipyard has fixed-price subcontracts in U.S. dollars for the detailed design and major equipment for the NSMV program.

As is common in the shipbuilding industry, Philly Shipyard's projects are typically performed on a fixed-price basis. Under fixed-price contracts, Philly Shipyard receives the price fixed in the contract, subject to adjustment only for change-orders. In many cases, these vessels involve complex design and engineering, significant procurement of equipment and supplies and extensive construction management. Management uses its best efforts to properly estimate the costs to complete Philly Shipyard's project awards; however, Philly Shipyard's actual costs incurred to complete these projects could exceed its estimates. The NSMV contract is a fixed-price contract.

The delay Philly Shipyard experienced in securing new orders following Hull 030 interrupted its building program, resulting in a decrease of more than 80% of its workforce. The decrease in Philly Shipyard's workforce may make it more difficult for Philly Shipyard to increase its workforce to desirable levels as production ramps up on the NSMV program. Philly Shipyard's productivity and profitability depends substantially on its ability to attract and retain skilled workers. Philly Shipyard will not fully cover its overhead costs until operations ramp up to full capacity for the NSMV program.

Given the NSMVs are prototype vessels, there is a higher technical design risk and a higher project execution risk compared to the construction of vessels based on a proven design, such as the series of product tankers built by Philly Shipyard. This prototype risk increases the current construction cost estimation uncertainty and the likelihood of occurrence of contract contingencies. In particular, failure to meet Philly Shipyard's performance obligations to deliver vessels on time and within the contract specifications can potentially lead to penalties and ultimately contract termination. The NSMV contract imposes liquidated damages for late delivery.

Philly Shipyard is continuing to adjust its estimating and planning methods and operating processes in order to be cost competitive and profitable in the ship repair and maintenance (R&M) market. These adjustments are based on the lessons learned and experience gained by Philly Shipyard from its first two R&M contracts and are being implemented on the R&M contract for the USNS Charlton. However, there is no guarantee these adjustments will result in performance improvements and there is risk that Philly Shipyard will face additional challenges as it performs R&M work on this ship. Additionally, Philly Shipyard will depend on fixed-price and time and material (T&M) subcontractors to perform certain types of skilled work on the USNS Charlton. The failure of these subcontractors to meet their contractual obligations could negatively impact the level of profitability on this project. The USNS Charlton contract is a fixed-price contract with penalties for late delivery.

The Company faces risk of significant financial, business and intelligence loss if there are cyber security breaches. Philly Shipyard has invested significant resources to provide a more secure computing environment over the last several years, resulting in improved security and business resiliency. Philly Shipyard maintains a continued high awareness of its risk profile regarding cyber security because new threats can emerge quickly.

Philly Shipyard's operations historically focused primarily on construction of new vessels for the U.S. Jones Act market. Philly Shipyard is continuing to develop and implement the policies and procedures required to be a fully compliant U.S. Government contractor. Philly Shipyard is aggressively pursuing U.S. Government opportunities for future ship design and construction programs, as well as vessel maintenance, repair, overhaul and conversion (MROC) projects. Entry into, or further development of, lines of business in which the Company has not historically operated may expose Philly Shipyard to business and operational risks that are different from those it has experienced historically. For example, U.S. Government projects generally are subject to suspension, termination or a reduction in scope at the option of the customer, although the customer is typically required to pay for work performed and materials purchased through the date of termination. The NSMV contract has a termination for convenience clause at the option of the U.S. Government.

Financial risks

Philly Shipyard is dependent upon having access to construction financing facilities and other loans and debt facilities to the extent its own cash flow from operations and milestone payments from customers are insufficient to fund its operations and capital expenditures. In turn, Philly Shipyard must secure and maintain sufficient equity capital to support debt facilities. Additionally, Philly Shipyard may be required to obtain bonding capacity in case there is need for payment or performance bonds, or to furnish letters of credit, refund guarantees or other forms of security, to support major commercial or government shipbuilding programs. Philly Shipyard may not be able to obtain sufficient debt facilities or bonding capacity or furnish sufficient security if and when needed with favorable terms, if at all. No third party financing is needed for the NSMV program and Philly Shipyard has furnished the bonds required to support NSMVs 1-4.

The Company is exposed to changes in prices of steel and other materials and duties, tariffs and other taxes imposed on goods imported from foreign (non-U.S.) countries. The Company attempts to mitigate its exposure with respect to steel and other material price escalation and increased taxes on imported goods by attempting to pass these risks on to its end customers. The NSMV contract includes a steel cost adjustment clause for steel plates.

The Company is subject to exchange rate risk for purchases made in currencies other than the U.S. dollar. In order to mitigate exposure to this risk, Philly Shipyard will look to secure foreign exchange forward contracts for its known requirements for foreign currency. Philly Shipyard has fixed-price subcontracts in U.S. dollars for the detailed design and major equipment for the NSMV program.

COVID-19 risks

The ongoing COVID-19 pandemic inherently increases many of the aforementioned risk factors. Markets become more uncertain, operations become more vulnerable to interruptions and policy makers around the world may gravitate towards stricter regulations impacting international trade. The world continues to face new and emerging COVID-19 related risks and the ultimate severity of the pandemic, and its effect on the Company's business in the future, is uncertain.

Due to the COVID-19 crisis, there is a risk for delays in the delivery of the NSMVs. However, shipbuilding activities required to meet national security commitments to the federal government have been deemed essential services and, therefore, work on the NSMVs is expected to continue without interruption. Likewise, subcontractors involved in ship repair and maintenance activities for U.S. Government-owned vessels should similarly qualify as performing essential services.

For a further analysis of risks, please refer to the Company's 2020 annual report.

CONDENSED CONSOLIDATED INCOME STATEMENT

	3 Months Ended 31 Mar.
Amounts in USD millions	Unaudited		Full Year
(except number of shares and earnings per share)	2021	2020	2020 *
Operating revenues	20.7	7.5	54.1
Operating expenses	(25.5)	(13.3)	(75.6)
Operating loss before depreciation - EBITDA	(4.8)	(5.8)	(21.5)
Depreciation	(1.4)	(1.7)	(6.2)
Operating loss - EBIT	(6.2)	(7.5)	(27.7)
Net financial items	0.1	(0.1)	0.1
Loss before tax	(6.1)	(7.6)	(27.6)
Tax benefit	1.0	15.0	29.2
(Loss)/income after tax **	(5.1)	7.4	1.6
Weighted average number of shares	12,107,901	12,107,901	12,107,901
Basic and diluted (loss)/income per share (USD)	(0.43)	0.61	0.13

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	3 Months Ended 31 Mar.
	Unaudited		Full Year
Amounts in USD millions	2021	2020	2020 *
(Loss)/income after tax	(5.1)	7.4	1.6
Other comprehensive income, net of income tax	-	-	-
Total comprehensive (loss)/income for the period **	(5.1)	7.4	1.6

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Unaudited
	31 Mar.	31 Dec.
Amounts in USD millions	2021	2020 *
Assets
Non-current assets
Property, plant and equipment	26.4	25.4
Right-of-use assets	13.7	14.0
Restricted cash - TOTE Services	33.0	25.0
Deferred tax asset long-term	9.4	8.4
Income tax receivable long-term	5.2	5.2
Other non-current assets	0.5	0.5
Total non-current assets	88.2	78.5
Current assets
Cash and cash equivalents (unrestricted)	216.5	97.4
Prepayments and other receivables	64.2	45.4
Restricted cash - Matson	1.4	1.4
Income tax receivable short-term	15.0	15.0
Contract assets	0.4	-
Total current assets	297.5	159.2
Total assets	385.7	237.7

Equity and liabilities
Total equity	87.7	92.8
Non-current liabilities
Lease liability long-term	1.8	1.9
Income tax payable long-term	1.2	1.2
Other non-current liabilities	0.2	-
Total non-current liabilities	3.2	3.1
Current liabilities
Customer advances, net	279.0	130.9
Trade payables, accrued liabilities and provisions	14.2	9.7
Lease liability short-term	0.3	0.3
Income tax payable short-term	0.8	0.7
Other contract liabilities	0.5	0.2
Total current liabilities	294.8	141.8
Total liabilities	298.0	144.9

Total equity and liabilities	385.7	237.7

* Annual 2020 financial information is derived from audited financial statements.

** All attributed to the equity holders of PHLY.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	3 Months Ended 31 Mar.
	Unaudited
Amounts in USD millions	2021	2020 *
As of beginning of period	92.8	91.3
Total comprehensive (loss)/income for the period *	(5.1)	7.4
As of end of period	87.7	98.7

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

	3 Months Ended 31 Mar.
	Unaudited
Amounts in USD millions	2021	2020 *

Net cash from/(used in) operating activities	121.3	(7.0)

Investment in property, plant and equipment	(2.1)	(0.1)
Net cash used in investing activities	(2.1)	(0.1)

Welcome Fund loan escrow received back	-	60.9
Repayment of the Welcome Fund loan	-	(60.0)
Repayment of lease liability	(0.1)	-
Net cash (used in)/from financing activities	(0.1)	0.9

Net change in cash and cash equivalents	119.1	(6.2)
Cash and cash equivalents at beginning of period	97.4	50.7
Cash and cash equivalents at end of period	216.5	44.5

* All attributed to the equity holders of PHLY.

Notes to the condensed interim consolidated financial statements for the first quarter 2021

1. Introduction – Philly Shipyard ASA

Philly Shipyard ASA (PHLY) is a company domiciled in Norway. These condensed interim consolidated financial statements for the three-month periods ended 31 March 2021 and 31 March 2020 are comprised of PHLY and its direct and indirect wholly-owned subsidiaries (collectively referred to herein as the Group), including Philly Shipyard, Inc. (PSI).

This interim report has not been subject to audit or review by independent auditors.

The audited consolidated financial statements of PHLY as of and for the year ended 31 December 2020, which include a detailed description of accounting policies and significant estimates, are available at www.phillyshipyard.com.

2. Basis of preparation

These condensed interim consolidated financial statements reflect all adjustments, in the opinion of PHLY's management, that are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the three-month period are not necessarily indicative of the results that may be expected for any subsequent quarter or period.

The going concern assumption

These condensed interim consolidated financial statements have been prepared on a going concern basis which contemplates continuity of normal business activities and realization of assets and settlement of liabilities in the normal course of business.

The world is currently in the middle of the COVID-19 pandemic, and how it will unfold is uncertain. Philly Shipyard is taking measures to mitigate substantial negative impact for the Company. However, in a worstcase scenario, the COVID-19 pandemic may have devastating effects for the world economy, including Philly Shipyard.

3. Statement of compliance

These condensed interim consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the audited consolidated financial statements of PHLY as of and for the year ended 31 December 2020.

4. Significant accounting principles

The accounting policies applied by PHLY in these condensed interim consolidated financial statements are substantially the same as those applied by PHLY in its audited consolidated financial statements as of and for the year ended 31 December 2020.

There have not been any new IFRS standards or interpretations which were effective 1 January 2021 that have had a significant impact for the period ending 31 March 2021.

5. Use of estimates

The preparation of these condensed interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

The most significant judgments made by management in preparing these condensed interim consolidated financial statements in applying PHLY's accounting policies, and the key sources of estimation uncertainty, are the same as those that are applied to the audited consolidated financial statements as of and for the year ended 31 December 2020 unless described elsewhere in this report.

6. Tax estimates

Income tax benefit/(expense) is recognized in each interim period based on the best estimate of the expected annual income tax rates.

Enacted by the U.S. Congress on 27 March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed for the carryback of net operating losses (NOL) arising in taxable years beginning

after 31 December 2017, and before 1 January 2021, to the five taxable years preceding the loss year. As the Company had qualifying taxable losses in 2018, 2019 and 2020, these losses were carried back to previous tax years and resulted in an income tax benefit of approximately USD 19.0 million. The 2018 refund claim is currently under examination by the IRS. The 2018 and 2019 refunds are expected in 2021 and the 2020 refund is expected in 2022.

7. Share capital and equity

At 31 March 2021 and 31 March 2020, PHLY had 12,107,901 ordinary shares (excluding 466,865 own shares) at a par value of NOK 10 per share. There were no share issuances or repurchases for the quarters ended 31 March 2021 and 31 March 2020. Accordingly, 12,107,901 ordinary shares were used in the calculation of earnings per share for the quarters ended 31 March 2021 and 31 March 2020.

8. Interest-bearing debt

At 31 March 2021 and 31 March 2020, Philly Shipyard had no external debt.

9. Related party transactions

Aker Capital AS, a wholly-owned subsidiary of Aker ASA, is the majority shareholder of PHLY, owning 57.6% of its total outstanding shares as of 31 March 2021. Kristian Røkke, the Chairman of the Board of Directors of PHLY, is a board member of TRG Holding AS, which owns 66.7% of the total outstanding shares of Aker ASA as of 31 March 2021. TRG Holding AS is controlled by Kjell Inge Røkke through The Resource Group TRG AS.

Philly Shipyard has service agreements with Aker ASA and certain of its affiliates which provide specified consulting, tax, financial and administrative services. All payables under these agreements are paid within the normal course of business. Philly Shipyard believes that related party transactions are made on terms equivalent to those that prevail in arm's length transactions.

Related administrative costs and financial statement amounts for the three-month period ending 31 March 2021 were USD 30 thousand (USD 30 thousand for the same period in 2020).

10. Capitalized interest

	3 Months Ended 31 Mar.
Amounts in USD millions	2021	2020
Interest expense	-	(0.3)
Interest capitalized on construction contracts	-	-
Net interest expense	-	(0.3)

11. Construction contracts

The order backlog is USD 1,171.1 million at 31 March 2021 and represents a contractual shipbuilding obligation to deliver newly built vessels (Hulls 033-036) that have not yet been produced for the Company's customer: TOTE Services. Order backlog consists of future construction contract revenues and is subject to adjustment based on change orders as defined in the construction contract(s). Vessels under contract for ship repair and maintenance work are not included in the order backlog. The order backlog on long-term construction contracts is as follows:

	Order	Order intake	Order
	backlog	3 months to	backlog
Amounts in USD millions	31 Mar. 2021	31 Mar. 2021	31 Dec. 2020
	1,171.1	588.9	601.9

The recognized profit on long-term construction contracts in process (Hulls 033-036) as of 31 March 2021 is as follows:

Amounts in USD millions	31 Mar. 2021
Contract revenue recognized to date	48.8
Less: contract expenses recognized to date	(45.7)
Recognized profit to date (Hulls 033-036)	3.1
Contract costs incurred to date (Hulls 033-036)	45.7

As of 31 March 2021, the Company also has USD 60.4 million as prepayments to suppliers for materials and equipment for the construction of Hulls 033-036, included in prepayments and other receivables on the statement of financial position.

Typical variable consideration elements identified in the Company's contracts with customers include liquidated damages, performance guarantees and warranties.

As of 31 March 2021, Philly Shipyard has one shipbuilding contract in place for the NSMV program but two separate projects in progress that are being accounted for using the percentage-of-completion method per IFRS 15 Revenue from Contracts with Customers. PSI is building four NSMVs (Hulls 033-036) for TOTE Services, the first two vessels scheduled for delivery in 2023 and the last two vessels scheduled for delivery in 2024. PSI is recognizing contract revenues and expenses for the first two-vessel order (Hulls 033-034) as one project and the second two-vessel order (Hulls 035-036) as a separate project. The principle of series of distinct goods has been applied where Hulls 033-034 are treated as one series separately from Hulls 035-036.

As of 31 March 2021, the NSMV projects for Hulls 033-034 and Hulls 035-036 are 7.0% and 0.8% complete, respectively.

Contract assets as of 31 March 2021 and 31 December 2020 totaled USD 0.4 million and USD 0, respectively. Contract assets represent revenue recognized on a ship repair and maintenance contract and design study that was not yet billed.

Customer advances, net as of 31 March 2021 and 31 December 2020 totaled USD 279.0 million and USD 130.9 million, respectively. Customer advances, net represents the difference between cash advances received from the customer (TOTE Services) and revenue recognized for the NSMV shipbuilding projects (Hulls 033-036).

Other contract liabilities as of 31 March 2021 and 31 December 2020 totaled USD 0.5 million and USD 0.2 million, respectively. Other contract liabilities represent the difference between cash advances received from customers and revenue recognized for design studies.

As of 31 March 2021, Philly Shipyard has USD 407.3 million in non-cancellable purchase commitments for materials, equipment and design fees for the construction of Hulls 033-036.

12. Operating revenues

	3 Months Ended 31 Mar.
Amounts in USD millions	2021	2020
Shipbuilding	19.7	-
Ship repair and maintenance	0.4	7.4
Government design studies	0.6	0.1
Operating revenues	20.7	7.5

13. Financial instruments

As of 31 March 2021, the Company had no forward exchange contracts or other financial instruments.

14. Commitments and contingencies

Pursuant to the shipyard lease between PSI and Philadelphia Shipyard Development Corporation (PSDC), if PSI fails to maintain an average of at least 200 full-time employees at the shipyard for 90 consecutive days, then the lease term (i.e., a 99-year lease with approximately 76 years remaining including options) is automatically converted to month-to-month and PSDC has the right to terminate the lease, subject to the right of PSI to complete work-in-process projects and a one-time, limited cure right which allows PSI to restore the lease to a five-year term under certain circumstances.

15. Subsequent events

There are no events after 31 March 2021.

Contact information:

Philly Shipyard ASA Vika Atrium Munkedamsveien 45 NO-0250 Oslo, Norway

President and CEO Chief Financial Officer Vice President Tel: +1 215 875 2600 Tel: +1 215 875 2600 Tel: +47 23 11 91 00 [email protected] [email protected] [email protected]

Steinar Nerbøvik Jeffrey Theisen Nicolai Haugland

Disclaimer

This report includes and is based, inter alia, on forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ. Such forward-looking information and statements are based on current expectations, estimates and projections about global economic conditions, the economic conditions of the regions and industries that are major markets for Philly Shipyard ASA and its subsidiaries and affiliates (the "Philly Shipyard Group") lines of business. These expectations, estimates, and projections are generally identifiable by statements containing words such as "expects", "believes", "estimates," "anticipates," "intends" or similar expressions. Important factors that could cause actual results to differ materially from those expectations include, among others, economic, market and political conditions in the geographic areas and industries that are or will be major markets for the Philly Shipyard Group's businesses, oil prices, market acceptance of new products and services, changes in governmental regulations, interest rates, fluctuations in currency exchange rates, the COVID-19 pandemic and subsequent economic effects, and such other factors as may be discussed from time to time. Although Philly Shipyard ASA believes that its expectations and the information in this report were based upon reasonable assumptions at the time when they were made, it can give no assurance that those expectations will be achieved or that the actual results will be as set out in this report. Neither Philly Shipyard ASA nor any other company within the Philly Shipyard Group is making any representation or warranty, expressed or implied, as to the accuracy, reliability or completeness of the information in this report, and neither Philly Shipyard ASA, any other company within the Philly Shipyard Group nor any of their directors, officers or employees will have any liability to you or any other persons resulting from your use of the information in this report.

Philly Shipyard ASA undertakes no obligation to publicly update or revise any forward-looking information or statements in this report, other than what is required by law.

The Philly Shipyard Group consists of various legally independent entities, constituting their own separate identities. Philly Shipyard is used as the common brand or trademark for most of these entities. In this report we may sometimes use the "Company," "Philly Shipyard", "Group", "we" or "us" when we refer to Philly Shipyard companies in general or where no useful purpose is served by identifying any particular Philly Shipyard company.

This report does not constitute an offer of any securities for sale.