Philly Shipyard : Q4 2022 Report

Building the Future

Philly Shipyard ASA (XOAX: PHLY)

Q4 2022 and Full Year 2022 Results

13 February 2023

Key Events and Highlights

• Awarded contract by Matson to build three 3,600 TEU Aloha Class LNG-fueled containerships with a total contract value of approximately USD 1.0 billion; the series will follow NSMV 5 with contractual delivery dates in 2026 and 2027
• Continued progress on the National Security Multi-Mission Vessel (NSMV) and Subsea Rock Installation Vessel (SRIV) newbuild programs
• Record high order backlog of USD 2,143.8 million on 31 December 2022 with last contractual delivery date in 2027 for the third Matson containership vessel
• Total cash and cash equivalents of USD 137.6 million at 31 December 2022, excluding USD 55.4 million of restricted cash
• Fourth quarter and full year 2022 operating revenues and other income of USD 109.7 million and USD 393.8 million, respectively, compared to USD 90.2 million and USD 214.1 million in the same periods in 2021
• Fourth quarter and full year 2022 net losses of USD 8.3 million and USD 11.7 million, respectively, compared to fourth quarter net income of USD 3.1 million and full year net loss of USD 7.3 million in the same periods in 2021

Subsequent Events and Highlights

• On 8 February 2023, a new four-year collective bargaining agreement was ratified by the Philadelphia Metal Trades Council (PMTC)

Operations

Shipbuilding

On 1 November 2022, Philly Shipyard was awarded a contract by Matson Navigation Company, Inc. (Matson) to build three 3,600 TEU Aloha Class LNG-fueled containership vessels (CVs). The award is valued at approximately USD 1.0 billion. These vessels are contracted for delivery in 2026 and 2027 and will not require external financing by Philly Shipyard. Philly Shipyard has commenced pre-production activities on these vessels.

Final outfitting continues on NSMV 1 with an expected Q2 2023 delivery. Production activities on NSMV 2 continue with activity mainly in the dock and paint shop. NSMV 3 production activities are still mainly in the fabrication shops. Philly Shipyard cut steel on NSMV 4 on 18 January 2023. Pre-production activities on NSMV 5 continue to progress.

Pre-production activities on the SRIV continue to progress and long lead equipment has been ordered for this ship. As of 31 December 2022, Philly Shipyard has firm commitments for approximately 40% of the total budgeted third party costs for the SRIV.

As of 31 December 2022, Philly Shipyard's workforce consisted of 1,406 employees and subcontractors. Philly Shipyard continues to increase the size and breadth of its apprenticeship program as more cohorts are added to this program, with the latest cohort starting at the end of January 2023.

On 1 February 2023, Avalotis Industrial Services (AIS) assumed full operational control of PSI's plate priming facility. AIS will service all of PSI's plate priming requirements for its shipbuilding projects at this facility.

On 8 February 2023, a new four-year collective bargaining agreement (CBA) was ratified by the Philadelphia Metal Trades Council (PMTC), which represents the nine unions at the shipyard. This new labor contract will extend until 31 January 2027.

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Philly Shipyard continues to take mitigating actions and seek relief for operational disruptions arising from the COVID-19 pandemic and the federal contractor vaccine mandate. Despite aggressive recruiting efforts, the pandemic and mandate prevented Philly Shipyard from ramping-up its workforce in accordance with plan. These conditions continue to impede Philly Shipyard's efforts to efficiently maintain its workforce. The pandemic also continues to disrupt Philly Shipyard's global supply chain. Notwithstanding ongoing mitigation efforts, these factors are contributing to significant delays, productivity loss and increased costs.

Industry Design Studies

Philly Shipyard continues its participation in an industry design study as a subcontractor to L3Harris Technologies for the U.S. Navy's T-AS(X) submarine tender program.

Health, Safety, Security and Environment (HSSE)

Philly Shipyard's 12-month trailing average for its Lost Time Incident Frequency Rate (LTIFR) was 0.39 at the end of Q4 2022 compared to 0.00 at the end of Q4 2021. LTIFR is based on lost time incidents (LTI) per 200,000 hours as defined by the Occupational Safety and Health Administration (OSHA).

Philly Shipyard's 12-month trailing average for its Other Recordable Incident Frequency Rate (ORIFR) was 2.16 at the end of Q4 2022 compared to 2.73 at the end of Q4 2021. ORIFR is based on recordable incidents other than LTIs per 200,000 hours as defined by OSHA. Philly Shipyard continues to work proactively to further improve safety and reduce the number of incidents at the shipyard.

Financial Information

Fourth Quarter 2022 Results

Operating revenue and other income for Q4 2022 was USD 109.7 million compared to operating revenue and other income of USD 90.2 million for Q4 2021. In Q4 2022, there was revenue from progress on the five NSMVs (NSMVs 1-5), the SRIV (SRIV 1), and the three CVs (CVs 1-3) and profit in equity-accounted investment for Philly Shipyard's proportionate share of the final distribution from the Philly Tankers escrow account, whereas in Q4 2021 there was revenue from progress on NSMVs 1-4 and ship repair and maintenance work.

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 Q4 2022 was negative USD 5.3 million compared to EBITDA of USD 1.3 million for Q4 2021. EBITDA for Q4 2022 was driven primarily by increased costs on NSMVs 1-2 and selling, general and administrative (SG&A) costs, partially offset by the gross profit recognized on NSMVs 3-4 and the profit in equity- accounted investment described above. EBITDA for Q4 2021 was driven primarily by the gross profit recognized on NSMVs 1-4 and ship repair and maintenance work, partially offset by under-recovered overhead costs (i.e., overhead expenses incurred and not allocated to projects), one-timestart-up costs and SG&A costs.

Net loss for Q4 2022 was USD 8.3 million compared to net income of USD 3.1 million for Q4 2021. Net loss for Q4 2022 primarily consists of EBITDA of negative USD 5.3 million, depreciation expense of USD 1.6 million and tax expense of USD 2.7 million, partially offset by net financial income of USD 1.3 million. Net income for Q4 2021 primarily consists of an income tax benefit of USD 3.1 million.

Full Year 2022 Results

Operating revenue and other income in 2022 ended at USD 393.8 million compared to operating revenues and other income of USD 214.1 million in 2021. Operating revenues and other income in 2022 were primarily driven by revenues from progress on NSMVs 1-5, SRIV 1, CVs 1-3 and two government design studies as well as the profit in equity-accounted investment described above, whereas operating revenues and other income in 2021 were primarily driven by revenues from progress on NSMVs 1-4, ship repair and maintenance work and four government design studies.

EBITDA for 2022 was negative USD 18.1 million compared to EBITDA of negative USD 7.0 million for 2021. The variance is primarily driven by increased costs on the NSMV project.

Net loss for 2022 was USD 11.7 million compared to net loss of USD 7.3 million for 2021. Net loss for 2022 primarily consists of EBITDA of negative USD 18.1 million and depreciation expense of USD 6.2 million, partially offset by an income tax benefit of USD 10.6 million and net financial income of USD 2.0 million. Net loss for 2021 primarily consists of EBITDA of negative USD 7.0 million and depreciation expense of USD 5.4 million, partially offset by an income tax benefit of USD 4.9 million and net financial income of USD 0.2 million.

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Statement of Financial Position

Total assets were USD 350.5 million at 31 December 2022 compared to USD 437.0 million at 31 December 2021, with the decrease resulting primarily from a decrease of USD 117.4 million in cash and cash equivalents (unrestricted).

Cash and cash equivalents (unrestricted) was USD 137.6 million at 31 December 2022 compared to USD 255.0 million at 31 December 2021. The decrease of USD 117.4 million was due primarily to spending on materials and services related to the vessel projects underway, timing of customer milestone payments, and investment in property, plant and equipment (PP&E).

Total restricted cash as of 31 December 2022 amounted to USD 55.4 million, of which USD 45.4 million (long- term) represents the total cash deposited in an escrow account for the bonds required for NSMVs 1-5 and a reserve account required for NSMV 3, and USD 10.0 million (short-term) pertains to reserve accounts required for NSMVs 1-2. It is anticipated that the cash collateral for the bonds and the reserve account funds will be released in tranches following the delivery of each NSMV vessel.

Total equity decreased to USD 73.8 million at 31 December 2022 from USD 85.5 million at 31 December 2021 due to net loss of USD 11.7 million.

Outlook

On 31 December 2022, Philly Shipyard had a record high order backlog of USD 2,143.8 million. With the award of the Matson contract, Philly Shipyard has nine vessels, consisting of five NSMVs, one SRIV and three CVs, in its order book. Philly Shipyard's current order book is the largest in its 25-year history, providing pipeline visibility and stability into 2027.

Philly Shipyard continues to pursue prospects in the government and commercial newbuild markets and is presently targeting shipbuilding programs with building slots following the third CV. In the government sector, Philly Shipyard remains focused on opportunities for commercial-like and auxiliary ships. In the commercial sector, Philly Shipyard is exploring a variety of potential new construction projects for U.S.-built vessels. Philly Shipyard continues to promote variants based on existing ship designs as potential cost-effective solutions for both government and commercial customers.

Additionally, Philly Shipyard continues to seek opportunities to replicate the NSMV contract model for other government shipbuilding programs. This innovative approach enables Philly Shipyard to apply commercial best practices for design and construction to government vessels. There is growing interest in Congress in the NSMV contract model and its potential applicability to government shipbuilding programs to reduce costs and build more vessels.

Philly Shipyard does not foresee excess capacity in its drydocks or fabrication shops for ship maintenance, repair, overhaul and conversion (MROC) projects in the foreseeable future. A substantial capital investment would be required in order for the Company to opportunistically pursue future MROC projects before the Matson contract is completed.

The forecast continues to be negatively impacted by significant delays, productivity loss and increased costs, including costs of labor, materials and logistics issues. These impacts are mainly attributable to the tight labor pool and supply chain disruptions resulting from the COVID-19 pandemic and federal contractor vaccine mandate. However, Philly Shipyard still forecasts to be profitable on the five-ship NSMV series taken as a whole. While it remains too soon to quantify the extent of these impacts, Philly Shipyard is pursuing all options available to recoup unforeseen costs related to the pandemic and mandate.

Risks

Market risks

While Philly Shipyard now has an order backlog for ship newbuilds with contractual delivery dates into 2027, it faces future risks if it is unable to secure new orders and/or financing for major commercial or government shipbuilding programs to follow its existing backlog.

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

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availability of key vendors for design and procurement services. Philly Shipyard has entered into fixed-price subcontracts for a significant portion of its scope of work on its active shipbuilding programs, including the design and major equipment for the NSMV and SRIV programs and the design for the CV program. Philly Shipyard intends to enter into fixed-price subcontracts for the major equipment for the CV 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 accurately 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, SRIV and CV vessel contracts are fixed-price contracts.

Philly Shipyard's productivity and profitability depends substantially on its ability to attract and retain skilled workers at forecasted rates. The COVID-19 pandemic and the federal contractor vaccine mandate have adversely impacted, and could continue to adversely impact, the Company's ability to attract and retain skilled workers at forecasted rates.

There is a higher technical design risk and a higher project execution risk for the NSMV and SRIV compared to the construction of vessels based on a proven design, such as the series of product tankers or Aloha Class containership vessels previously built by Philly Shipyard. These risks increase 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, SRIV and CV vessel contracts include liquidated damage clauses for late delivery exclusive of excusable delays. The CV vessel contract includes performance guarantee clauses similar to those included in the vessel contracts for the prior series of Aloha Class containership vessels.

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.

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, and Philly Shipyard has furnished all bonds and security that are required, to support its active shipbuilding programs.

The Company is exposed to changes in prices of materials and duties, tariffs and other taxes imposed on goods imported from foreign (non-U.S.) countries. PSI attempts to mitigate its exposure with respect to steel cost escalation and increased taxes on imported goods by passing these risks on to its end customers. The NSMV, SRIV and CV vessel contracts include price adjustment clauses for steel as defined in the respective contracts.

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 pass this risk on to its end customers or suppliers or secure foreign exchange forward contracts for its known requirements for foreign currency. The subcontracts for the detailed design and major equipment for the NSMV and SRIV programs are payable in U.S. dollars. The subcontract for the detailed design for the CV program is payable in U.S. dollars. The SRIV contract

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includes an exchange rate adjustment clause for material and equipment purchases made in certain foreign currencies.

Other risks

The 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.

COVID-19 related risks include risks to human capital resources arising from vaccine mandates, supply chain constraints, labor and raw materials shortages, and inflation. These risks have caused, and could continue to cause, delays, productivity loss and increased costs with respect to the Company's shipbuilding projects. While the COVID-19 pandemic may be viewed as in retreat in some areas of the world, the legacy of these risks is expected to continue into the future.

The Russia-Ukraine military conflict, as well as the economic sanctions targeting Russia, continues to exacerbate the inflationary environment and supply-chain disruptions resulting from the COVID-19 pandemic. These conditions further increase the risk of rising commodity prices, material shortages and transportation delays that could adversely impact Philly Shipyard's business.

Philly Shipyard is seeing substantial uncertainty in the macroeconomic environment throughout the world due to the above contributing factors as well as rising interest rates, market volatility and recession concerns.

For a further analysis of risks, please refer to the Company's 2021 annual report.

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