Sun ntry Airlines (US:SNCY)2022-08-10 20:17markdown [PART I. FINANCIAL INFORMATION](index=3&type=section&id=Part%20I.%20Financial%20Information) [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements of Sun Country Airlines Holdings, Inc., including balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant transactions, and financial impacts [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (Dollars in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Total Assets | **$1,506,738** | **$1,380,422** | | Total Liabilities | **$1,010,850** | **$889,833** | | Total Stockholders' Equity | **$495,888** | **$490,589** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (Dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Operating Revenue | **$219,067** | **$149,189** | **$445,591** | **$276,802** | | Operating Income | **$3,369** | **$49,789** | **$25,201** | **$80,387** | | Net Income (Loss) | **$(3,922)** | **$52,177** | **$(285)** | **$68,955** | | Basic EPS | **$(0.07)** | **$0.91** | **$0.00** | **$1.30** | | Diluted EPS | **$(0.07)** | **$0.84** | **$0.00** | **$1.20** | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Condensed Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | **$(3,922)** | **$52,177** | **$(285)** | **$68,955** | | Other Comprehensive Loss | **$(220)** | **$0** | **$(220)** | **$0** | | Comprehensive Income (Loss) | **$(4,142)** | **$52,177** | **$(505)** | **$68,955** | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Condensed Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Total Stockholders' Equity | **$495,888** | **$490,589** | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (Dollars in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | **$37,060** | **$96,804** | | Net Cash Used in Investing Activities | **$(198,961)** | **$(74,151)** | | Net Cash Provided by Financing Activities | **$61,106** | **$222,469** | | Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash | **$(100,795)** | **$245,122** | | Cash, Cash Equivalents and Restricted Cash—End of the Period | **$216,990** | **$315,485** | [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) [1. Company Background](index=10&type=section&id=1%20Company%20Background) Sun Country Airlines Holdings, Inc. operates scheduled passenger, air cargo, and charter services, with key equity transactions including its March 2021 IPO and a six-year cargo services contract with Amazon - **Initial Public Offering (IPO)** in **March 2021** generated net proceeds of **$225,329 thousand** from the issuance of **10,454,545 shares** at **$24.00 per share**[20](index=20&type=chunk) - **Amazon Agreement** for cargo services, signed **December 2019**, includes warrants for up to **9,482,606 common shares** at **~$15.17 per share**[24](index=24&type=chunk)[25](index=25&type=chunk) Amazon Warrants Vested | Period | Warrants Vested | | :-------------------------------- | :-------------- | | Six Months Ended June 30, 2022 | **379,304** | | Six Months Ended June 30, 2021 | **379,304** | | Cumulative Vested Warrants (as of June 30, 2022) | **2,022,963** | [2. Basis of Presentation](index=11&type=section&id=2%20Basis%20of%20Presentation) The financial statements are prepared under U.S. GAAP, consolidating Sun Country and its subsidiaries, with management making significant estimates and correcting an immaterial misstatement from 2021 related to lease accounting - An **immaterial misstatement** in 2021 financial statements was identified and corrected, related to improper application of **ASC Topic 842 (Leases)** where aircraft acquisition costs were incorrectly expensed instead of capitalized[29](index=29&type=chunk)[30](index=30&type=chunk) Impact of Revision on 2021 Financials (Dollars in thousands) | Metric (as of Dec 31, 2021) | As Previously Issued | Correction | As Revised | | :-------------------------------- | :------------------- | :--------- | :--------- | | Aircraft and Flight Equipment | **$440,356** | **$6,963** | **$447,319** | | Total Property & Equipment, net | **$573,611** | **$4,907** | **$578,518** | | Retained Earnings | **$594** | **$3,778** | **$4,372** | | Metric (Six Months Ended June 30, 2021) | As Previously Issued | Correction | As Revised | | :-------------------------------- | :------------------- | :--------- | :--------- | | Special Items, net | **$(65,392)** | **$(6,963)** | **$(72,355)** | | Net Income | **$64,169** | **$4,786** | **$68,955** | | Net Cash Provided by Operating Activities | **$89,841** | **$6,963** | **$96,804** | | Purchases of Property & Equipment | **$(66,736)** | **$(6,963)** | **$(73,699)** | - Adopted **ASU 2021-04** (Earnings Per Share, Debt, Compensation, Derivatives) and **ASU 2021-10** (Government Assistance) as of **January 1, 2022**. **ASU 2021-04** had no financial statement impact upon adoption[41](index=41&type=chunk)[42](index=42&type=chunk) [3. Impact of the COVID-19 Pandemic](index=15&type=section&id=3%20Impact%20of%20the%20COVID-19%20Pandemic) The **COVID-19 pandemic** caused a significant decline in passenger demand in 2021, negatively impacting financial results, though demand recovered in **Q2 2022** compared to 2021, with future impact remaining uncertain - Continued recovery in demand from the **COVID-19 pandemic** during **Q2 2022** relative to 2021, but future impact remains uncertain[44](index=44&type=chunk) - Received and recognized **$71,587 thousand** from **PSP2** and **PSP3**, and **$780 thousand** from **CARES Employee Retention Credit** during the six months ended **June 30, 2021**[46](index=46&type=chunk) - The **$45,000 thousand CARES Act Loan** was repaid in full on **March 24, 2021**, using **IPO** proceeds[46](index=46&type=chunk) - As of **June 30, 2022**, the Company was in compliance with all **CARES Act** provisions, including prohibitions on share repurchases and common stock dividends[48](index=48&type=chunk) [4. Revenue](index=16&type=section&id=4%20Revenue) Sun Country generates revenue from Scheduled, Charter, Ancillary, Cargo, and Other services, with total operating revenue seeing significant increases in **Q2** and **YTD 2022** due to passenger demand recovery, while cargo revenue slightly decreased due to maintenance events Total Operating Revenue (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$219,067** | **$149,189** | **47%** | | Six Months Ended June 30 | **$445,591** | **$276,802** | **61%** | Passenger Revenue (Scheduled, Charter, Ancillary) (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$195,362** | **$125,130** | **56%** | | Six Months Ended June 30 | **$397,394** | **$229,325** | **73%** | Cargo Revenue (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$21,190** | **$22,098** | **-4%** | | Six Months Ended June 30 | **$42,243** | **$43,684** | **-3%** | Contract Liabilities (Dollars in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Air Traffic Liabilities | **$123,958** | **$118,562** | | Loyalty Program Liabilities | **$16,604** | **$19,718** | | Amazon Deferred Up-front Payment | **$3,726** | **$4,200** | | Total Contract Liabilities | **$144,288** | **$142,480** | [5. Earnings per Share](index=18&type=section&id=5%20Earnings%20per%20Share) The company reported a **Net Loss** for both **Q2** and **YTD 2022**, resulting in negative basic and diluted earnings per share, with anti-dilutive securities excluded from diluted **EPS** calculations Net Income (Loss) and EPS | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Net Income (Loss) | **$(3,922)** | **$(285)** | | Basic EPS | **$(0.07)** | **$0.00** | | Diluted EPS | **$(0.07)** | **$0.00** | - Due to the **Net Loss**, **3,529,406** (**Q2 2022**) and **3,676,847** (**YTD 2022**) stock options, restricted stock units, and vested warrants were anti-dilutive and excluded from diluted **EPS** computation[61](index=61&type=chunk) [6. Aircraft](index=19&type=section&id=6%20Aircraft) As of **June 30, 2022**, Sun Country operated a fleet of **53 Boeing 737-NG aircraft**, including **41 passenger** and **12 cargo aircraft** for Amazon, with **six incremental aircraft** acquired and one owned aircraft retired due to damage - As of **June 30, 2022**, the fleet consisted of **53 Boeing 737-NG aircraft** (**41 passenger**, **12 cargo** for Amazon)[64](index=64&type=chunk) Aircraft Fleet Activity (Six Months Ended June 30, 2022) | Type | Dec 31, 2021 | Additions | Reclassifications | Removals | June 30, 2022 | | :-------------------------------- | :----------- | :-------- | :---------------- | :------- | :------------ | | Owned Passenger | **21** | **5** | **1** | **(1)** | **26** | | Finance Leases Passenger | **9** | **1** | **1** | — | **11** | | Operating Leases Passenger | **6** | — | **(2)** | — | **4** | | Cargo Aircraft for Amazon | **12** | — | — | — | **12** | | Total Aircraft Operated | **48** | **6** | — | **(1)** | **53** | - **Aircraft Rent expense** decreased by **42%** (**Q2**) and **43%** (**YTD**) due to the shift from operating leases to owned or finance-leased aircraft[166](index=166&type=chunk)[188](index=188&type=chunk) - One owned aircraft was retired due to damage beyond economic repair, with no financial impact on operations as of **June 30, 2022**[68](index=68&type=chunk)[107](index=107&type=chunk) [7. Debt](index=21&type=section&id=7%20Debt) The company's debt structure includes credit facilities and **EETC**, with the **$90,000 thousand Delayed Draw Term Loan Facility (DDTL)** fully repaid in **YTD 2022** using proceeds from the new **2022-1 EETC**, while the **$25,000 thousand Revolving Credit Facility** remains undrawn - The **$90,000 thousand Delayed Draw Term Loan Facility (DDTL)** was fully repaid in **YTD 2022** using proceeds from the **2022-1 EETC**, resulting in a **$1,557 thousand** loss on extinguishment of debt[76](index=76&type=chunk) - The **$25,000 thousand Revolving Credit Facility** remained undrawn and available as of **June 30, 2022**[76](index=76&type=chunk) - Issued **2022-1 EETC** in **March 2022** for **$188,277 thousand** to finance/refinance **13 aircraft**. Received **$172,507 thousand** for **12 aircraft**, with the remaining **$15,770 thousand** expected by **September 15, 2022**[78](index=78&type=chunk) Long-term Debt (Dollars in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | 2019-1 EETC Notes Payable | **$194,884** | **$202,984** | | 2022-1 EETC Notes Payable | **$172,507** | **$0** | | Delayed Draw Term Loan Facility | **$0** | **$77,481** | | Other Notes Payable | **$0** | **$466** | | Total Debt | **$367,391** | **$280,931** | | Total Long-term Debt | **$319,733** | **$248,014** | [8. Fuel Derivatives and Risk Management](index=23&type=section&id=8%20Fuel%20Derivatives%20and%20Risk%20Management) Sun Country periodically uses fuel option and swap contracts to manage economic risks from volatile aircraft fuel prices, but as of **June 30, 2022**, there were no outstanding fuel derivative contracts, and the company does not apply hedge accounting - No outstanding fuel derivative contracts as of **June 30, 2022**, or **December 31, 2021**[85](index=85&type=chunk) - **Fuel derivative gains** (non-cash) were **$3,599 thousand** for the six months ended **June 30, 2021**, with none in 2022[87](index=87&type=chunk) [9. Investments](index=24&type=section&id=9%20Investments) The company's investments primarily consist of debt securities and Certificates of Deposit, with **$70,391 thousand** in debt securities purchased in **Q2 2022** and classified as current assets, and unrealized losses considered temporary due to market interest rate increases Investments (June 30, 2022) (Dollars in thousands) | Security Type | Amortized Cost | Fair Value | | :-------------------------------- | :------------- | :--------- | | Municipal Debt Securities | **$26,263** | **$26,180** | | Corporate Debt Securities | **$44,161** | **$43,958** | | Total Available-for-Sale Securities | **$70,424** | **$70,138** | | Certificates of Deposit | **$6,586** | **$6,586** | | Total Investments | **$77,010** | **$76,724** | - Purchased **$70,391 thousand** of debt securities during the quarter ended **June 30, 2022**, classified as current assets due to high liquidity[37](index=37&type=chunk) - Unrealized losses on **Available-for-Sale securities** are considered temporary, resulting from market interest rate increases, not credit quality, and the company intends to hold them to maturity[91](index=91&type=chunk) [10. Fair Value Measurements](index=24&type=section&id=10.%20Fair%20Value%20Measurements) The company measures financial instruments at fair value, classifying cash equivalents, available-for-sale securities, and derivative instruments primarily within Level 2, while non-financial assets are measured at fair value on a nonrecurring basis for impairment assessments using Level 3 inputs Assets Measured at Fair Value on a Recurring Basis (June 30, 2022) (Dollars in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :------ | | Cash & Cash Equivalents | **$96,096** | **$116,762** | **$0** | **$212,858** | | Available-for-Sale Securities | **$0** | **$70,138** | **$0** | **$70,138** | | Total | **$96,096** | **$186,900** | **$0** | **$282,996** | - Non-financial assets (**Property & Equipment**, Goodwill, Other Intangible Assets) are measured at fair value on a nonrecurring basis for impairment assessments, using Level 3 inputs[96](index=96&type=chunk)[97](index=97&type=chunk) [11. Income Taxes](index=25&type=section&id=11.%20Income%20Taxes) The effective tax rate for **Q2 2022** was **19.0%** (up from **15.5%** in **Q2 2021**) and for **YTD 2022** was **118.1%** (up from **19.1%** in **YTD 2021**), primarily due to a non-deductible expense related to the **Tax Receivable Agreement (TRA)** liability adjustment Effective Tax Rate | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30 | **19.0%** | **15.5%** | | Six Months Ended June 30 | **118.1%** | **19.1%** | - Increase in effective tax rate primarily due to a non-deductible expense related to the **Tax Receivable Agreement (TRA)** liability adjustment, partially offset by stock compensation benefits[99](index=99&type=chunk) - **TRA liability balance** as of **June 30, 2022**, was **$107,300 thousand**, up from **$98,800 thousand** at **December 31, 2021**[101](index=101&type=chunk) - An **$8,500 thousand** adjustment to the estimated **TRA liability** was recorded in **YTD June 30, 2022**, impacting **Other, net Non-Operating Income (Expense)**[103](index=103&type=chunk) [12. Special Items, net](index=26&type=section&id=12.%20Special%20Items,%20net) **Special Items, net, were $0** for both **Q2** and **YTD 2022**, contrasting with significant net benefits in **Q2** and **YTD 2021** primarily from **CARES Act** grant recognition and employee retention credits Special Items, net (Dollars in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | CARES Act grant recognition | **$0** | **$(39,378)** | **$0** | **$(71,587)** | | CARES Act employee retention credit | **$0** | **$(446)** | **$0** | **$(780)** | | Total Special Items, net | **$0** | **$(39,819)** | **$0** | **$(72,355)** | [13. Commitments and Contingencies](index=26&type=section&id=13.%20Commitments%20and%20Contingencies) The company has various contractual obligations, including lease arrangements, debt repayments, **TRA** payments, and future aircraft purchases, with an owned aircraft retired due to damage and new commitments for a **flight simulator** and an aircraft expected in **Q3 2022** - An owned aircraft was retired due to damage beyond economic repair during the six months ended **June 30, 2022**, with no financial impact on operations as of that date[107](index=107&type=chunk) - Executed an agreement to purchase a **flight simulator** for **$9,745 thousand**, with installments paid in **H1 2022** and **July 2022**[108](index=108&type=chunk) - Gave irrevocable notice to purchase a **finance-leased aircraft** for approximately **$12,000 thousand**, expected to be complete in **September 2022**, financed by **2022-1 EETC** proceeds[109](index=109&type=chunk) [14. Operating Segments](index=27&type=section&id=14.%20Operating%20Segments) Sun Country operates **two segments**: **Passenger and Cargo**, with **Passenger operating income decreased significantly** in **Q2** and **YTD 2022** due to higher aircraft fuel expense, and **Cargo operating income decreased** to a loss in **Q2 2022** and significantly reduced income in **YTD 2022** due to the absence of **CARES Act** payroll support and increased pilot salaries Operating Income (Loss) by Segment (Dollars in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Passenger Operating Income | **$3,633** | **$34,408** | **$23,751** | **$52,846** | | Cargo Operating Income (Loss) | **$(264)** | **$15,381** | **$1,450** | **$27,541** | - **Passenger operating income decreased significantly** primarily due to increased Aircraft Fuel Expense[201](index=201&type=chunk)[205](index=205&type=chunk) - **Cargo operating income decreased** due to the absence of **CARES Act** payroll support (a benefit in 2021), increased Salaries, Wages, and Benefits (new **CBA**), and decreased block hours from heavy maintenance events[203](index=203&type=chunk)[206](index=206&type=chunk) [15. Subsequent Events](index=27&type=section&id=15.%20Subsequent%20Events) The company evaluated subsequent events from the balance sheet date through **August 10, 2022**, with further details provided in Notes 6 (Aircraft) and 13 (Commitments and Contingencies) - Subsequent events were evaluated through **August 10, 2022**[113](index=113&type=chunk) - Refer to Note 6 and Note 13 for additional information on subsequent events[113](index=113&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, including critical accounting policies, business overview, operational review, and detailed analysis of operating results for **Q2** and **YTD 2022** compared to 2021, along with non-GAAP financial measures and a discussion of liquidity and capital resources [Critical Accounting Policies and Estimates](index=28&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Management identifies key accounting policies requiring significant judgment and estimates, including revenue recognition, asset impairment analysis, and valuation of the **Tax Receivable Agreement (TRA)** liability, noting revisions to previously issued financial statements for an **immaterial misstatement** - Identified critical accounting policies include Revenue Recognition (Scheduled passenger service, Loyalty Program), Asset Impairment Analysis, and Valuation of the **TRA Liability**[116](index=116&type=chunk) - Estimated travel credit breakage of **$5,617 thousand** was recorded in Passenger Revenue for the six months ended **June 30, 2022**. A **10%** change in this rate would impact Passenger Revenue by approximately **$445 thousand**[118](index=118&type=chunk)[120](index=120&type=chunk) - Estimated loyalty points breakage of **$780 thousand** was recognized within Passenger Revenue for the six months ended **June 30, 2022**. A **10%** change in this rate would impact Passenger Revenue by approximately **$99 thousand**[126](index=126&type=chunk) - No impairment was recorded on long-lived assets for any periods presented, and no triggering events were identified during the six months ended **June 30, 2022**, or for the year ended **December 31, 2021**[130](index=130&type=chunk) - A **$10,000 thousand** increase in forecasted taxable income would decrease the **TRA Liability** by approximately **$1,200 thousand**[133](index=133&type=chunk) [Business Overview](index=31&type=section&id=Business%20Overview) Sun Country operates as a hybrid low-cost carrier, strategically deploying resources across its scheduled service, charter, and cargo businesses to achieve high growth, margins, and cash flows, focusing on leisure and VFR passengers, charter customers, and providing **CMI** services to Amazon - Operates as a hybrid low-cost air carrier, dynamically deploying shared resources across scheduled service, charter, and cargo businesses[136](index=136&type=chunk)[137](index=137&type=chunk) - Focuses on leisure and visiting friends and relatives (**VFR**) passengers, charter customers, and providing crew, maintenance, and insurance (**CMI**) services to Amazon[137](index=137&type=chunk) - Maintains a single-family fleet of **Boeing 737-NG aircraft**[138](index=138&type=chunk) - Charter business provides diversification and downside protection with stable demand and pass-through fuel costs, serving customers like the U.S. Department of Defense and sports teams[139](index=139&type=chunk) - Cargo business involves flying **12 Boeing 737-800 cargo aircraft** for Amazon under a **CMI** service model, where Amazon supplies aircraft and covers many operating expenses[140](index=140&type=chunk) [Operations in Review](index=32&type=section&id=Operations%20in%20Review) The company experienced a recovery in demand in **Q2 2022** from the **COVID-19 pandemic**, but operational challenges, including training throughput issues and pilot staffing, along with higher fuel prices, continue to impact the business, though its flexible model allows for service adjustments - Continued recovery in demand from the **COVID-19 pandemic** during **Q2 2022** relative to 2021, but future impact remains uncertain[143](index=143&type=chunk) - Operational challenges, driven by training throughput issues and uncertainties in pilot staffing, along with higher fuel prices, have impacted the Company and the industry[143](index=143&type=chunk)[144](index=144&type=chunk) - The flexible business model allows the company to adjust services in response to market conditions to produce the highest possible returns[144](index=144&type=chunk) [Operating Statistics](index=34&type=section&id=Operating%20Statistics) Operating statistics for **Q2** and **YTD 2022** reflect a strong recovery in scheduled service, with significant increases in departures, passengers, **RPMs**, **ASMs**, and **TRASM** compared to 2021, alongside increased charter block hours and revenue per block hour, despite sharply rising fuel costs and decreased cargo block hours Key Operating Statistics (Three Months Ended June 30) | Metric | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Scheduled Service Departures | **5,674** | **4,921** | **15%** | | Scheduled Service Passengers | **884,088** | **700,019** | **26%** | | Scheduled Service TRASM (cents) | **11.55** | **8.19** | **41%** | | Charter Revenue per Block Hour | **$9,349** | **$7,904** | **18%** | | Fuel Cost per Gallon | **$4.39** | **$2.07** | **112%** | | Total Aircraft Operated (end of period) | **53** | **45** | **18%** | Key Operating Statistics (Six Months Ended June 30) | Metric | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Scheduled Service Departures | **11,901** | **9,244** | **29%** | | Scheduled Service Passengers | **1,806,740** | **1,253,051** | **44%** | | Scheduled Service TRASM (cents) | **10.82** | **7.57** | **43%** | | Charter Revenue per Block Hour | **$9,028** | **$7,829** | **15%** | | Fuel Cost per Gallon | **$3.76** | **$1.99** | **89%** | | Adjusted CASM (cents) | **6.64** | **6.28** | **6%** | | Total Aircraft Operated (end of period) | **53** | **45** | **18%** | [Results of Operations](index=36&type=section&id=Results%20of%20Operations) For **Q2** and **YTD 2022**, **total operating revenues increased significantly** due to passenger demand recovery, but **operating income and net income decreased substantially**, turning into losses, primarily driven by a sharp increase in aircraft fuel expense and higher salaries and wages, with **Special Items, net, were $0** Total Operating Revenues (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$219,067** | **$149,189** | **47%** | | Six Months Ended June 30 | **$445,591** | **$276,802** | **61%** | Net Income (Loss) (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$(3,922)** | **$52,177** | **-108%** | | Six Months Ended June 30 | **$(285)** | **$68,955** | **-100%** | Aircraft Fuel Expense (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$76,947** | **$29,709** | **159%** | | Six Months Ended June 30 | **$141,492** | **$53,984** | **162%** | Salaries, Wages, and Benefits (Dollars in thousands) | Period | 2022 | 2021 | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | **$60,298** | **$42,316** | **42%** | | Six Months Ended June 30 | **$119,915** | **$86,392** | **39%** | - **Special Items, net, were $0** for **Q2** and **YTD 2022**, compared to a net benefit of **$39,819 thousand** (**Q2 2021**) and **$72,355 thousand** (**YTD 2021**) primarily from **CARES Act** payroll support[172](index=172&type=chunk)[195](index=195&type=chunk) [Segments](index=46&type=section&id=Segments) **Passenger operating income decreased significantly** in **Q2** and **YTD 2022** due to increased aircraft fuel expense, while **Cargo operating income decreased** to a loss in **Q2 2022** and significantly reduced income in **YTD 2022**, mainly due to the absence of **CARES Act** payroll support and higher pilot salaries from a new **CBA** Operating Income (Loss) by Segment (Dollars in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Passenger Operating Income | **$3,633** | **$34,408** | **$23,751** | **$52,846** | | Cargo Operating Income (Loss) | **$(264)** | **$15,381** | **$1,450** | **$27,541** | - **Passenger segment's operating income decrease** was mainly driven by the increase in Aircraft Fuel Expense[201](index=201&type=chunk)[205](index=205&type=chunk) - **Cargo segment's operating income decrease** was primarily due to the absence of **CARES Act** payroll support (a benefit in 2021), increased Salaries, Wages, and Benefits from a new pilot **CBA**, and decreased block hours due to heavy maintenance events[203](index=203&type=chunk)[206](index=206&type=chunk) [Non-GAAP Financial Measures](index=49&type=section&id=Non-GAAP%20Financial%20Measures) The company utilizes non-GAAP financial measures such as **Adjusted Operating Income**, **Adjusted Net Income (Loss)**, **Adjusted EBITDA**, and **Adjusted CASM** to provide a more comparable view of its operating performance, excluding certain non-recurring or volatile items to enhance comparability Adjusted Operating Income (Dollars in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30 | **$3,944** | **$10,765** | | Six Months Ended June 30 | **$26,696** | **$11,960** | Adjusted Net Income (Loss) (Dollars in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30 | **$(1,838)** | **$3,921** | | Six Months Ended June 30 | **$10,504** | **$(998)** | Adjusted EBITDA (Dollars in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30 | **$20,719** | **$24,967** | | Six Months Ended June 30 | **$58,722** | **$38,772** | Adjusted CASM (cents) | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30 | **7.14** | **6.40** | | Six Months Ended June 30 | **6.64** | **6.28** | - **Adjusted CASM** excludes fuel costs, costs related to cargo operations, special items, stock compensation expense, and Sun Country Vacations costs to improve comparability[221](index=221&type=chunk)[224](index=224&type=chunk) [Liquidity and Capital Resources](index=53&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity sources include cash, short-term investments, and its **Revolving Credit Facility**, while primary uses are operating expenses, capital expenditures, and debt repayments, with **Total Liquidity decreased** from **December 31, 2021**, to **June 30, 2022**, and **Operating cash flow decreased significantly** in **YTD 2022** Financial Condition and Liquidity (Dollars in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Cash and Cash Equivalents | **$212,858** | **$309,338** | | Available-for-Sale Securities | **$70,138** | **$0** | | Amount Available Under Revolving Credit Facility | **$25,000** | **$25,000** | | Total Liquidity | **$307,996** | **$334,338** | | Long-term Debt | **$363,543** | **$277,426** | | Finance Lease Obligations | **$249,621** | **$192,155** | | Operating Lease Obligations | **$31,582** | **$76,041** | | Total Debt and Lease obligations | **$644,746** | **$545,622** | | Debt-to-Capital | **0.57** | **0.53** | Sources and Uses of Liquidity (Six Months Ended June 30) (Dollars in thousands) | Activity | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Total Operating Activities | **$37,060** | **$96,804** | | Total Investing Activities | **$(198,961)** | **$(74,151)** | | Total Financing Activities | **$61,106** | **$222,469** | | Net (Decrease) Increase in Cash | **$(100,795)** | **$245,122** | - **Operating cash flow decreased significantly** in **YTD 2022**, impacted by the absence of **CARES Act** grants (a benefit in 2021) and higher fuel costs[246](index=246&type=chunk)[249](index=249&type=chunk) - **Capital expenditures** were **$137,647 thousand** for **YTD 2022**, primarily for aircraft and spare engines, and a **flight simulator**[250](index=250&type=chunk) [Off Balance Sheet Arrangements](index=57&type=section&id=Off%20Balance%20Sheet%20Arrangements) The company's **Off Balance Sheet Arrangements** primarily include indemnities in aircraft and equipment leases, and participation in fuel consortia, with **Pass-through trusts** for **EETC financings** not being direct obligations of Sun Country - Aircraft, equipment, and other leases typically contain **indemnification provisions**[255](index=255&type=chunk) - **Pass-through trusts** for **EETC financings** are not direct obligations of Sun Country, but the underlying equipment notes are[256](index=256&type=chunk)[257](index=257&type=chunk) - Participation in **fuel consortia** at various airports, which are not **variable interest entities (VIEs)** or where the company is not the primary beneficiary, are not reflected on the balance sheet[258](index=258&type=chunk) [Commitments and Contractual Obligations](index=58&type=section&id=Commitments%20and%20Contractual%20Obligations) The company's **Commitments and Contractual Obligations** include aircraft leases, debt repayment, payments under the **TRA**, and **probable future purchases of aircraft**, with recent commitments for a **flight simulator** and an aircraft expected to finalize in **Q3 2022** - **Contractual obligations** include aircraft leases, debt repayment, payments under the **TRA**, and **probable future purchases of aircraft**[260](index=260&type=chunk) - Agreement to purchase a **flight simulator** for **$9,745 thousand**, with initial installments paid in **H1 2022** and **July 2022**[262](index=262&type=chunk) - Irrevocable notice to purchase an aircraft currently under finance lease for approximately **$12,000 thousand**, expected to be completed in **September 2022**[263](index=263&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=59&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from aircraft fuel prices and interest rates, with no fuel derivatives in place as of **June 30, 2022**, and a **1-cent per gallon** increase in fuel price would raise aircraft fuel expense by **$172 thousand** per quarter, while a **100 basis point** increase in interest rates would increase annual interest expense by **$250 thousand** if the **Revolving Credit Facility** is fully drawn - No fuel derivative contracts were in place as of **June 30, 2022**[266](index=266&type=chunk) - A **one cent per gallon** increase in the average aircraft fuel price would increase aircraft fuel expense by approximately **$172 thousand** per quarter (excluding reimbursed cargo fuel)[266](index=266&type=chunk) - Exposure to interest rate risk from variable-rate debt (**Revolving Credit Facility**) and short-term investment securities[267](index=267&type=chunk) - Assuming the **$25,000 thousand Revolving Credit Facility** is fully drawn, a **100 basis point** increase in interest rates would result in a corresponding increase in interest expense of approximately **$250 thousand** annually[267](index=267&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=59&type=section&id=Item%204.%20Controls%20and%20Procedures) The **CEO** and **CFO** concluded that **disclosure controls and procedures were not effective** as of **June 30, 2022**, due to a **material weakness** in internal control over financial reporting related to accounting for complex non-routine transactions, specifically the application of **ASC Topic 842 (Leases)** to aircraft purchases, though management has performed additional analyses and is implementing a remediation plan - **Disclosure controls and procedures were not effective** as of **June 30, 2022**, due to a **material weakness** in internal control over financial reporting[270](index=270&type=chunk) - The **material weakness** is specifically related to controls over the accounting for complex non-routine transactions, including the application of **ASC Topic 842, Leases**, to the purchase of aircraft subject to an existing operating lease[273](index=273&type=chunk) - Despite the **material weakness**, management concluded that the consolidated financial statements present fairly the company's financial position, results of operations, and cash flows[271](index=271&type=chunk) - Remediation plan includes engaging third-party experts, providing additional internal training, enhancing risk assessment for complex transactions, strengthening review/approval controls, and establishing a technical accounting checklist for lease-related transactions[275](index=275&type=chunk) [PART II. OTHER INFORMATION](index=58&type=section&id=Part%20II.%20Other%20Information) [ITEM 1. LEGAL PROCEEDINGS](index=61&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various commercial litigation claims and administrative/regulatory proceedings in the normal course of business, with management believing the ultimate outcome will not have a **material adverse effect** on its financial position, liquidity, or results of operations - Subject to commercial litigation claims and administrative and regulatory proceedings in the normal course of business[277](index=277&type=chunk) - Management believes the ultimate outcome of these proceedings will not have a **material adverse effect** on financial position, liquidity, or results of operations[277](index=277&type=chunk) [ITEM 1A. RISK FACTORS](index=61&type=section&id=Item%201A.%20Risk%20Factors) The company highlights an updated risk factor concerning the identified **material weakness** in internal control over financial reporting, where failure to remediate this weakness could impair accurate and timely financial reporting, adversely affecting investor confidence, business decisions, and potentially leading to regulatory actions or stock delisting - Identified a **material weakness** in internal control over financial reporting, specifically regarding controls over accounting for complex non-routine transactions (e.g., **ASC Topic 842** for aircraft leases)[279](index=279&type=chunk)[280](index=280&type=chunk) - Failure to remediate this **material weakness** could impair the ability to produce accurate financial statements, adversely affect business decisions, harm results of operations, and lead to loss of investor confidence[281](index=281&type=chunk) - Potential consequences include investigations or sanctions by regulatory authorities, delisting actions by Nasdaq, and stockholder lawsuits[281](index=281&type=chunk)[284](index=284&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) For the quarter ended **June 30, 2022**, the company **repurchased 1,823 shares** of common stock at an **average price of $28.74 per share**, reflecting shares withheld from employees to satisfy exercise price and taxes due in connection with stock option exercises Common Stock Repurchases (Quarter Ended June 30, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------- | :------------------------------- | :--------------------------- | | May 1-31, 2022 | **1,823** | **$28.74** | | Total (Quarter Ended June 30, 2022) | **1,823** | **$28.74** | - Shares were **repurchased** as shares withheld from employees to satisfy the exercise price and taxes due in connection with exercises of stock options[285](index=285&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=62&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were **no defaults upon senior securities** reported for the period [ITEM 4. MINE SAFETY DISCLOSURES](index=62&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is **not applicable** to the company [ITEM 5. OTHER INFORMATION](index=62&type=section&id=Item%205.%20Other%20Information) **No other information was reported** under this item [ITEM 6. EXHIBITS](index=62&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including **certifications by the Chief Executive Officer and Chief Financial Officer**, and various **Inline XBRL Instance Document** for financial data - Includes **certifications by Sun Country's Chief Executive Officer and President and Chief Financial Officer** (Exhibits 31.1, 31.2, 32)[290](index=290&type=chunk)[291](index=291&type=chunk)[292](index=292&type=chunk) - Includes **Inline XBRL Instance Document** and Taxonomy Extension Documents (Schema, Calculation, Definition, Labels, Presentation Linkbase Documents, and Cover Page Interactive Data Files)[292](index=292&type=chunk) [SIGNATURES](index=64&type=section&id=Signatures) The report is officially **signed by Dave Davis**, **President and Chief Financial Officer**, on **August 10, 2022** - The report was **signed by Dave Davis**, **President and Chief Financial Officer**, on **August 10, 2022**[294](index=294&type=chunk)