PELOTON INTERACTIVE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks, uncertainties, assumptions, and other important factors that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. A discussion of our results of operations for our fiscal year endedJune 30, 2021 compared to the year endedJune 30, 2020 is included our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , filed with theSEC onAugust 27, 2021 (File No. 001-39058) under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview Peloton is the largest interactive fitness platform in the world with a loyal community of 6.9 million Members as ofJune 30, 2022 . We pioneered connected, technology-enabled fitness, and the streaming of immersive, instructor-led boutique classes to our Members anytime, anywhere. We make fitness entertaining, approachable, effective, and convenient, while fostering social connections that encourage our Members to be the best versions of themselves. We define a Member as any individual who has a Peloton account through a paid All-Access Membership, or a paid Peloton App subscription. Our Connected Fitness Product portfolio includes the Peloton Bike, Bike+, Tread, Tread+, and our recently launched first connected strength product, Peloton Guide. Our revenue is generated primarily from the sale of ourConnected Fitness Products and associated recurring Subscription revenue. We have historically experienced significant growth in sales of our Connected Fitness Products, which, when combined with our low Average Net Monthly Connected Fitness Churn has led to significant growth in Connected Fitness Subscriptions. From fiscal 2021 to fiscal 2022, Total revenue decreased 11%, and ourConnected Fitness Subscription base grew 27%. Our financial profile has been characterized by strong retention, recurring revenue, and efficient customer acquisition. Our low Average Net Monthly Connected Fitness Churn, together with our high Subscription Contribution Margin, yields an attractive LTV for our Connected Fitness Subscriptions well in excess of our CAC. Maintaining an attractive LTV/CAC ratio is a primary goal of our customer acquisition strategy. Fourth Quarter Fiscal 2022 Update and Recent Developments As we have previously disclosed, forecasting for our business during and following the COVID-19 pandemic, particularly in its more recent stages, has proven to be very challenging. While we have been able to grow more than we anticipated just two years ago, fluctuations in demand and supply that we have been navigating during this time period led us to grow our operations beyond what we believe is currently best suited to our business. Although our belief in the positive long-term outlook forConnected Fitness remains unchanged, the long-term cost demands of our business require us to recalibrate our near-term expectations. Additionally, while demand for our Connected Fitness Products has continued to strongly outpace pre-pandemic levels, we have had significant difficulty in forecasting near-term consumer demand and, as a result, our expected near-term operating performance. See "Risk Factors-Risks Related to Our Business-Our operating results have been, and could in the future be, adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory." Restructuring Plan InFebruary 2022 , we announced and began implementing a restructuring plan to realign our operational focus to support our multi-year growth, scale the business, and improve costs (the "Restructuring Plan"). The Restructuring Plan includes: (i) reducing our headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for our previously plannedPeloton Output Park ; (iii) closing and consolidating several distribution facilities, and (iv) shifting to third-party logistics providers in certain locations. We expect the Restructuring Plan to be substantially implemented by the end of fiscal 2024. Total charges related to the Restructuring Plan were$611.3 million for the fiscal year endedJune 30, 2022 , consisting of cash charges of$109.1 million for severance and other personnel and$15.4 million for professional fees and other related charges, and non-cash charges of$373.8 million related to non-inventory asset write-downs and write-offs,$56.5 million for stock-based compensation expense and$56.4 million for inventory markdowns. In addition to the above charges, the Company has incurred approximately$86.6 million of capital expenditures related toPeloton Output Park since project inception. OnJuly 12, 2022 , we announced we are exiting all owned-manufacturing operations and our expansion of our current relationship with Taiwanese manufacturer Rexon Industrial Corp. Additionally, onAugust 12, 2022 , we announced our decision to perform the following additional restructuring activities: (i) eliminate our North AmericanField Ops warehouses, including the significant reduction of our delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit our real-estate footprints in our Plano and Tempe locations; and (iii) reduce ourNorth America retail showroom presence. In connection with the Restructuring Plan, we estimate that we will incur additional cash charges of approximately$95.0 million primarily composed of severance and other exit costs in fiscal year 2023 and beyond. Additionally, we expect to recognize approximately$75.0 million of asset impairment charges in fiscal year 2023 in connection with the Restructuring Plan. 47 -------------------------------------------------------------------------------- We may not be able to fully realize the cost savings and benefits initially anticipated from the Restructuring Plan, and the expected costs may be greater than expected. See "Risk Factors-Risks Related to Our Business-We may not successfully execute or achieve the expected benefits of our restructuring initiatives and other cost-saving measures we may take in the future, and our efforts may result in further actions and/or additional asset impairment charges and adversely affect our business." Product and Content Highlights InApril 2022 , we soft-launched Peloton Guide, our first connected strength offering. Guide is an AI-enabled device that uses machine learning and innovative camera technology to create an evolving strength training experience. To date, engagement trends among Guide subscribers have been strong, driving higher than average activity levels for both Guide-only subscribers as well as existing Bike and Tread owners who added Guide to their Peloton fitness program. We continue to invest in our new Guide Product with many member-focused software improvements, including responding to top member requests by adding Apple Watch support and the ability to stack consecutive classes for customized strength workouts. Delivering on our commitment to accessibility, in the fourth quarter of fiscal 2022, we welcomed our first adaptable athlete instructor,Logan Aldridge , and officially launched our Adaptive Training Content vertical. Off-air, Logan acts in a training specialist role working with all instructors in forwarding Peloton's commitment to content accessibility and inclusivity. Responding to Member requests, we added a Spanish user interface to enable Spanish-speaking members to navigate more easily. We celebrated the upcoming opening of Peloton Studios New York and Peloton Studios London with an all-new in-studio Member software experience featuring easier login and the ability to race and high-five other Members both in and out of class. Finally, we made many improvements to the Peloton App, including allowing Members to track every outdoor running, walking, and cycling workout with Peloton with our GPS-enabled Just Work Out feature. Product Recall Update OnMay 5, 2021 , we announced separate, voluntary recalls of each of our Tread+ and Tread products in collaboration with the CPSC and halted sales of these products to work on product enhancements. Members were notified that they could return their Tread or Tread+ for a full refund, or wait until a solution is available. Tread+ owners were also given the option to have Peloton move their Tread+ to a different location within their home. More recently, inAugust 2022 , we were notified by the CPSC that the agency staff believes we failed to meet our statutory obligations under the Consumer Product Safety Act and intends to seek civil monetary penalties. While we disagree with the agency staff, we are engaged in ongoing confidential discussions with the CPSC. For the recall-to-date period, the Company recognized a reduction toConnected Fitness Products revenue for actual and estimated future returns of$139.9 million , and a return reserve of$39.9 million and$40.8 million is included within Accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets related to the impacts of the recall as ofJune 30, 2022 andJune 30, 2021 , respectively. We may continue to incur additional costs which could include costs for which we have not accrued or established adequate reserves, including increases to the return reserves, inventory write-downs, logistics costs associated with Member requests to return or move their hardware, subscription waiver variable costs of service, anticipated recall-related hardware development and repair costs, and related legal and advisory fees. Recall charges are based upon estimates associated with our expected and historical consumer response rates. We announced a repair for the Tread inAugust 2021 , shortly before resuming sales. We continue to work on potential hardware enhancements for Tread+, which remains recalled. Our plan for the Tread+ recall is still being finalized and actual costs related to this matter may vary from the estimate, and may result in further impacts to our future results of operations and business. See "Risk Factors-Risks Related to Our Connected Fitness Products and Members-We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater product returns than expected, either of which could have an adverse effect on our business, financial condition, and operating results." 48 -------------------------------------------------------------------------------- Key Operational and Business Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.
Fiscal Year Ended June 30,
2022 2021 2020
Ending Connected Fitness Subscriptions 2,965,677 2,330,700 1,091,100
Average Net Monthly Connected Fitness Churn 0.96 % 0.61 % 0.62 %
Total Workouts (in millions) 540.0 459.7 164.5
Average Monthly Workouts per Connected Fitness
Subscription 16.4 22.0 17.9
Subscription Gross Profit (in millions) $ 944.7 $ 541.7 $ 208.0
Subscription Contribution (in millions)(1) $ 994.2 $ 586.5 $ 232.1
Subscription Gross Margin 67.7 % 62.1 % 57.2 %
Subscription Contribution Margin(1) 71.3 % 67.2 % 63.8 %
Net loss (in millions) $ (2,827.7) $ (189.0) $ (71.6)
Adjusted EBITDA (in millions)(2) $ (982.7) $ 253.7 $ 117.7
Adjusted EBITDA Margin(2) (27.4) % 6.3 % 6.4 %
Net Cash (Used in) Provided by Operating
Activities (in millions)(3) $ (2,020.0) $ (239.7) $ 376.4
Free Cash Flow (in millions)(3) $ (2,357.4) $
(491.9)
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(1) Please see the section titled "Non-GAAP Financial Measures-Subscription Contribution and Subscription Contribution Margin" for a reconciliation of Subscription Gross Profit to Subscription Contribution and an explanation of why we consider Subscription Contribution and Subscription Contribution Margin to be helpful metrics for investors. (2) Please see the section titled "Non-GAAP Financial Measures-Adjusted EBITDA and Adjusted EBITDA Margin" for a reconciliation of Net (loss) income to Adjusted EBITDA and an explanation of why we consider Adjusted EBITDA to be a helpful metric for investors. (3) Please see the section titled "Non-GAAP Financial Measures-Free Cash Flow" for a reconciliation of net cash provided by (used in) operating activities to Free Cash Flow and an explanation of why we consider Free Cash Flow to be a helpful metric for investors. Connected Fitness Subscriptions Our ability to expand the number of Connected Fitness Subscriptions is an indicator of our market penetration and growth. We define a "Connected Fitness Subscription" as a person, household, or commercial property, such as a hotel or residential building, who has either paid for a subscription to a Connected Fitness Product (a Connected Fitness Subscription with a successful credit card billing or with prepaid subscription credits or waivers) or requested a "pause" to their subscription for up to three months. We do not include canceled or unpaid Connected Fitness Subscriptions in the Connected Fitness Subscription count. Average Net Monthly Connected Fitness Churn We use Average Net Monthly Connected Fitness Churn to measure the retention of our Connected Fitness Subscriptions. We define "Average Net Monthly Connected Fitness Churn" as Connected Fitness Subscription cancellations, net of reactivations, in the quarter, divided by the average number of beginning Connected Fitness Subscriptions in each month, divided by three months. This metric does not include data related to our Peloton Digital subscriptions for Members who pay a monthly fee for access to our content library on their own devices. Total Workouts and Average Monthly Workouts per Connected Fitness Subscription We review Total Workouts and Average Monthly Workouts perConnected Fitness Subscription to measure engagement, which is the leading indicator of retention for our Connected Fitness Subscriptions. We define "Total Workouts" as all workouts completed during a given period. We define a "Workout" as the completion of at least 50% of an instructor-led class or scenic ride or run, or ten or more minutes of "Just Ride" or "Just Run" mode by a Member associated with a Connected Fitness Subscription. We define "Average Monthly Workouts per Connected Fitness Subscription" as the Total Workouts completed in the quarter divided by the average number of Connected Fitness Subscriptions in each month, divided by three months. Components of our Results of Operations
Revenue
Connected Fitness Products
Connected Fitness Product revenue consists of sales of our portfolio of
Connected Fitness Products and related accessories, delivery and installation
services, branded apparel, extended warranty agreements, and the sale, service,
installation, and delivery contracts of our commercial business. Connected
Fitness Product revenue is recognized at the time of delivery, except for
extended warranty revenue which is recognized over the warranty period and
service revenue which is recognized over the term, and is recorded net of
returns and discounts and third-party financing program fees, when applicable.
49
--------------------------------------------------------------------------------Subscription
Subscription revenue consists of revenue generated from our monthly Connected Fitness Subscription and Peloton Digital subscription.
As of
If a Connected Fitness Subscription owns a combination of a Bike, Tread or Guide product in the same household, the price of the Subscription remains$44.00 monthly (price increased from$39 to$44 USD effective as ofJune 1, 2022 ). As ofJune 30, 2022 , approximately 6% of our Connected Fitness Subscriptions owned both a Bike and Tread product. Cost of revenue Connected Fitness Products Connected Fitness Product cost of revenue consists of our portfolio of Connected Fitness Products and branded apparel product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty replacement and service costs, fulfillment costs, warehousing costs, depreciation of property and equipment, and certain costs related to management, facilities, and personnel-related expenses associated with supply chain logistics.
Subscription
Subscription cost of revenue includes costs associated with content creation and costs to stream content to our Members. These costs consist of both fixed costs, including studio rent and occupancy, other studio overhead, instructor and production personnel-related expenses, depreciation of property and equipment as well as variable costs, including music royalty fees, content costs for past use, third-party platform streaming costs, and payment processing fees for our monthly subscription billings. Operating expenses Sales and marketing Sales and marketing expense consists of performance marketing media spend, asset creation, and other brand creative, all showroom expenses and related lease payments, payment processing fees incurred in connection with the sale of our Connected Fitness Products, sales and marketing personnel-related expenses, expenses related to the Peloton App, and depreciation of property and equipment. General and administrative General and administrative expense includes personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal, human resources, IT functions and member support. General and administrative expense also includes fees for professional services principally comprised of legal, audit, tax and accounting services, depreciation of property and equipment, and insurance, as well as litigation settlement costs. Research and development Research and development expense primarily consists of personnel and facilities-related expenses, consulting and contractor expenses, tooling and prototype materials, software platform expenses, and depreciation of property and equipment. We capitalize certain qualified costs incurred in connection with the development of internal-use software which may also cause research and development expenses to vary from period to period.Goodwill impairmentGoodwill impairment consists of non-cash impairment charges relating to goodwill. We review goodwill for impairment annually onApril 1 and more frequently if events or changes in circumstances indicate that an impairment may exist. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit's goodwill is calculated and an impairment loss equal to the excess is recorded. Impairment expense Impairment expense consists of non-cash impairment charges relating to long-lived assets. Impairments are determined using management's judgment about our anticipated ability to continue to use fixed assets in-service and under development, current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. Management disposes of fixed assets during the regular course of business due to damage, obsolescence, strategic shifts, and loss. Additionally, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted net cash flows expected to be generated by the assets. If the carrying amount of an asset group exceeds its estimated undiscounted net future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. Restructuring expense Restructuring expense consists of severance and other personnel costs, including stock-based compensation expense, professional services, facility closures and other costs associated with exit and disposal activities. 50 -------------------------------------------------------------------------------- Supplier settlements Supplier settlements are payments made to third-party suppliers to terminate certain future inventory purchase commitments. Non-operating income and expenses Other (expense) income, net Other (expense) income, net consists of interest (expense) income, unrealized and realized gains (losses) on investments, and impacts from foreign exchange transactions. Income tax provision The provision for income taxes consists primarily of income taxes related to state and international taxes for jurisdictions in which we conduct business. We maintain a valuation allowance on the majority of our deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized. Results of Operations The following tables set forth our consolidated results of operations in dollars and as a percentage of total revenue for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. Fiscal Year Ended June 30, 2022 2021 2020 (in millions)
Consolidated Statement of Operations Data:
Revenue
Connected Fitness Products $ 2,187.5 $ 3,149.6 $ 1,462.2
Subscription 1,394.7 872.2 363.7
Total revenue 3,582.1 4,021.8 1,825.9
Cost of revenue(1)(2)
Connected Fitness Products 2,433.8 2,236.9 832.5
Subscription 450.0 330.5 155.7
Total cost of revenue 2,883.8 2,567.4 988.2
Gross profit 698.4 1,454.4 837.7
Operating expenses
Sales and marketing(1)(2) 1,018.9 728.3 476.7
General and administrative(1)(2) 963.4 661.8 351.4
Research and development(1)(2) 359.5 247.6 89.1
Goodwill impairment 181.9 - -
Impairment expense 390.5 4.5 1.2
Restructuring expense(1) 180.7 - -
Supplier settlements 337.6 - -
Total operating expenses 3,432.4 1,642.2 918.4
Loss from operations (2,734.0) (187.8) (80.7)
Other (expense) income, net:
Interest expense (43.0) (14.8) (2.0)
Interest income 2.3 7.9 18.2
Foreign exchange losses (31.8) (3.5) (4.0)
Other (expense) income, net (1.5) 0.1 0.1
Total other (expense) income, net (74.1) (10.4) 12.3
Loss before provision for income taxes (2,808.1) (198.2) (68.4)
Income tax expense (benefit) 19.6 (9.2) 3.3
Net loss $ (2,827.7) $ (189.0) $ (71.6)
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(1) Includes stock-based compensation expense as follows:
Fiscal Year Ended June 30,
2022 2021 2020
(in millions)
Cost of revenue
Connected Fitness Products $ 20.2 $ 12.6 $ 3.2
Subscription 22.7 25.9 7.5
Total cost of revenue 42.9 38.5 10.7
Sales and marketing 30.5 26.2 15.3
General and administrative 152.4 102.1 52.4
Research and development 46.0 27.2 10.4
Restructuring 56.5 - -
Total stock-based compensation expense $ 328.4 $ 194.0 $ 88.8
____________________
(2) Includes depreciation and amortization expense as follows:
Fiscal Year Ended June 30,
2022 2021 2020
(in millions)
Cost of revenue
Connected Fitness Products $ 20.0 $ 7.7 $ 3.2
Subscription 26.8 19.0 16.6
Total cost of revenue 46.8 26.7 19.9
Sales and marketing 29.6 14.3 9.3
General and administrative 45.7 13.0 10.6
Research and development 20.7 9.9 0.3
Total depreciation and amortization expense $ 142.8 $ 63.8 $ 40.2
Comparison of the fiscal years ended June 30, 2022 and 2021
Revenue
Fiscal Year Ended June 30,
2022 2021 % Change
(dollars in millions)
Revenue:
Connected Fitness Products $ 2,187.5 $ 3,149.6 (30.5)%
Subscription 1,394.7 872.2 59.9
Total revenue $ 3,582.1 $ 4,021.8 (10.9)%
Percentage of revenue
Connected Fitness Products 61.1 % 78.3 %
Subscription 38.9 21.7
Total 100.0 % 100.0 %
Connected Fitness Products revenue decreased $962.2 million for the fiscal year
ended June 30, 2022 compared to the fiscal year ended June 30, 2021 . This
decrease was primarily attributable to fewer Bike and Tread+ deliveries, and
charges associated with the voluntary product recalls, partially offset by
increased Tread deliveries for the fiscal year ended June 30, 2022 . The decrease
in Bike deliveries was primarily due to a return to our historical seasonality
following the strong increase in demand for home fitness during the COVID-19
pandemic during the fiscal year ended June 30, 2021 . The decrease was partially
offset by revenues generated from Precor -branded commercial products of $186.6
million for the fiscal year ended June 30, 2022 .
Subscription revenue increased $522.5 million for the fiscal year ended June 30,
2022 compared to the fiscal year ended June 30, 2021 . This increase was
primarily attributable to the year-over-year growth in our Connected Fitness
Subscriptions. The growth of our Connected Fitness Subscriptions was primarily
driven by the number of Connected Fitness Products delivered during the fiscal
year ended June 30, 2022 under new Subscriptions and our low Average Net Monthly
Connected Fitness Churn of 0.96% for the fiscal year ended June 30, 2022 .
52
--------------------------------------------------------------------------------Cost of Revenue, Gross Profit, and Gross Margin
Fiscal Year Ended June 30,
2022 2021 % Change
(dollars in millions)
Cost of Revenue:
Connected Fitness Products $ 2,433.8 $ 2,236.9 8.8%
Subscription 450.0 330.5 36.1
Total cost of revenue $ 2,883.8 $ 2,567.4 12.3%
Gross Profit:
Connected Fitness Products $ (246.3) $ 912.7 (127.0)%
Subscription 944.7 541.7 74.4
Total Gross profit $ 698.4 $ 1,454.4 (52.0)%
Gross Margin:
Connected Fitness Products (11.3) % 29.0 %
Subscription 67.7 % 62.1 %
Fiscal Years Ended
Connected Fitness Products cost of revenue for the fiscal year endedJune 30, 2022 increased$196.9 million , or 8.8%, compared to the fiscal year endedJune 30, 2021 . This increase was primarily driven by increased inventory reserves in the amount of$222.1 million primarily related to excess inventory we do not expect to sell above cost and write-downs of raw materials that we estimate would have no future use as a result of our restructuring activities, costs of$169.0 million associated withPrecor -branded commercial products, and increased Tread costs of$137.7 million , primarily driven by the launch of Tread in the first quarter of fiscal 2022. These increases were partially offset by fewer deliveries for the fiscal year endedJune 30, 2022 compared to the fiscal year endedJune 30, 2021 . Our Connected Fitness Products Gross Margin decreased to (11.3)% from 29.0% for the fiscal year endedJune 30, 2022 compared to the fiscal year endedJune 30, 2021 , primarily driven by increased inventory reserves related to excess inventory we do not expect to sell above cost, higher logistics expenses per delivery, increased port and storage costs, fixed logistics cost deleveraging, theAugust 2021 Peloton Bike price reduction, and charges associated with the voluntary recall of our Tread+ product. Subscription cost of revenue for the fiscal year endedJune 30, 2022 increased$119.5 million , or 36.1%, compared to the fiscal year endedJune 30, 2021 . This increase was primarily driven by an increase of$83.6 million in music royalties and platform streaming costs and an increase of$17.0 million in personnel-related expenses, excluding stock-based compensation expense, due to increased average headcount. Subscription Gross Margin increased by 563 basis points for the fiscal year endedJune 30, 2022 compared to the fiscal year endedJune 30, 2021 , primarily driven by fixed cost leverage with more Connected Fitness Subscriptions as well as modest efficiencies associated with certain variable costs. Operating Expenses Sales and Marketing Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Sales and marketing$ 1,018.9 $ 728.3 39.9% As a percentage of total revenue 28.4 % 18.1 % Sales and marketing expense increased$290.6 million in the fiscal year endedJune 30, 2022 compared to the fiscal year endedJune 30, 2021 . The increase was primarily due to an increase in spending on advertising and marketing programs of$223.9 million and personnel-related 53 -------------------------------------------------------------------------------- expenses which increased$45.1 million , primarily due to increased average headcount as we expanded our operations rapidly throughout fiscal 2021 during the COVID-19 pandemic. General and Administrative Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) General and administrative$ 963.4 $ 661.8 45.6% As a percentage of total revenue 26.9 % 16.5 % General and administrative expense increased$301.6 million when comparing the fiscal year endedJune 30, 2022 with the fiscal year endedJune 30, 2021 . This increase was primarily due to an increase in personnel-related expenses of$128.2 million , including stock-based compensation expense, due to increased average headcount and employee stock grants. This increase was also due to an increase in professional services fees and IT costs associated with ongoing systems implementations of$113.3 million , which related primarily to the upgrading of our back-office systems and infrastructure as well as integration costs related to our acquisitions, and an increase of$32.7 million in depreciation and amortization expense primarily due to ourNew York City headquarters that was placed in service in fiscal 2022. Research and Development Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Research and development$ 359.5 $ 247.6 45.2% As a percentage of total revenue 10.0 % 6.2 % Research and development expense increased$111.8 million , or 45.2% when comparing the fiscal year endedJune 30, 2022 with the fiscal year endedJune 30, 2021 . The increase was primarily due to an increase in personnel-related expenses which, including stock-based compensation expense, increased$79.9 million . This increase was due to increased average headcount and employee stock grants. The increase was also driven by$19.0 million in product development and research costs associated with development of new software features and products. Goodwill impairment Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Goodwill impairment $ 181.9 $ - NM During the fiscal year endedJune 30, 2022 , we recognized aGoodwill impairment charge of$181.9 million representing the entire amount of goodwill related to the Connected Fitness Products reporting unit in the Connected Fitness Products Segment. Impairment expense Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Impairment expense $ 390.5$ 4.5 NM Impairment expense was comprised primarily of$373.8 million of asset write-downs and write-offs related to our previously announced restructuring initiatives, including$165.6 million in write-offs of certain acquired developed technology, brand, distributor and customer relationships, and assembled workforce,$86.1 million related toConnected Fitness assets, primarily related to manufacturing and supply chain assets at several of our to-be-closed locations,$70.0 million related to software under development, and$40.3 million related to Peloton Output 54 -------------------------------------------------------------------------------- Park and related manufacturing assets. Additionally, we recognized impairment expense of$7.7 million driven by the disposal of lease build out costs for the fiscal year endedJune 30, 2022 . Restructuring expense Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Restructuring expense $ 180.7 $ - NM Restructuring expense was$180.7 million in the fiscal year endedJune 30, 2022 . The restructuring expenses consisted of$109.1 million of severance and other personnel costs,$56.5 million of stock-based compensation expense driven by the acceleration of certain vesting schedules and incremental stock-based compensation expense pursuant to severance arrangements, and$15.1 million of professional fees and other costs associated with exit and disposal activities. There were no restructuring expenses for the fiscal year endedJune 30, 2021 . Supplier settlements Fiscal Year Ended June 30, 2022 2021 % Change (dollars in millions) Supplier settlements $ 337.6 $ - NM Supplier settlements were$337.6 million in the fiscal year endedJune 30, 2022 , which consist of settlement and related costs paid to third-party suppliers to terminate certain future inventory purchase commitments.
Other Expense, Net and Income Tax Expense
Fiscal Year Ended June 30,
2022 2021 % Change
(dollars in millions)
Other expense, net $ (74.1) $ (10.4) NM
Income tax expense (benefit) $ 19.6 $ (9.2) NM
___________________________
*NM - not meaningful
Other expense, net, was comprised of the following for the fiscal year ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$(43.0) million ; •Interest income from cash, cash equivalents, and short-term investments of$2.3 million ; •Foreign exchange losses of$(31.8) million ; and •Unrealized losses on short-term investments partially offset by gain on lease termination of$(1.5) million .
Other expense, net, was comprised of the following for the fiscal year ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$(14.8) million ; •Interest income from cash, cash equivalents, and short-term investments of$7.9 million ; and •Foreign exchange losses of$(3.5) million .
Income tax expense for the fiscal year ended
Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles
generally accepted in
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net (loss) income adjusted to exclude: other
expense (income), net; income tax expense (benefit); depreciation and
amortization expense; stock-based compensation expense; impairment expense;
product recall costs; litigation and settlement expenses; transaction and
integration costs; reorganization, severance, exit, disposal and other costs
associated with restructuring plans; supplier
55
--------------------------------------------------------------------------------settlements; and other adjustment items that arise outside the ordinary course of our business. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenue.
We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operating performance and the operating leverage in our business. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons: •Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company's operating performance without regard to items such as stock-based compensation expense, depreciation and amortization expense, other expense (income), net, and provision for income taxes that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired; •Our management uses Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and •Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, facilitate period-to-period comparisons of our core operating results, and may also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Our use of Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider these measures in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are, or may in the future be, as follows: •Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; •Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; •Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; •Adjusted EBITDA and Adjusted EBITDA Margin do not reflect certain litigation expenses, consisting of legal settlements and related fees for specific proceedings that we have determined arise outside of the ordinary course of business based on the following considerations which we assess regularly: (1) the frequency of similar cases that have been brought to date, or are expected to be brought within two years; (2) the complexity of the case; (3) the nature of the remedy(ies) sought, including the size of any monetary damages sought; (4) offensive versus defensive posture of us; (5) the counterparty involved; and (6) our overall litigation strategy;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect transaction and integration costs related to acquisitions;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect incremental costs associated with the COVID-19 pandemic, which consist of hazard pay for field operations employees;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect impairment charges for goodwill and fixed assets, and gains (losses) on disposals for fixed assets;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the impact of
purchase accounting adjustments to inventory related to the
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect costs associated with Tread and Tread+ product recalls including increases to the return reserves, Tread+ inventory write-downs, logistics costs associated with Member requests on Tread and Tread+, the cost to move the Tread+ for those that elect the option, subscription waiver costs of service, and recall-related hardware development and repair costs;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect reorganization, severance, exit, disposal and other costs associated with restructuring plans;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect non-recurring supplier settlements; and
•The expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results and we may, in the future, exclude other significant, unusual expenses or other items from these financial measures. Because companies in our industry may calculate such measures differently than we do, their usefulness as comparative measures can be limited.
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.
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The following table presents a reconciliation of Adjusted EBITDA to Net (loss)
income, the most directly comparable financial measure prepared in accordance
with GAAP, for each of the periods indicated:
Adjusted EBITDA and Adjusted EBITDA Margin
Fiscal Year Ended June 30,
2022 2021
(dollars in millions)
Net loss $ (2,827.7) $ (189.0)
Adjusted to exclude the following:
Other expense (income), net 74.1 10.4
Income tax expense (benefit) 19.6
(9.2)
Depreciation and amortization expense 142.8
63.8
Stock-based compensation expense 271.8 194.0 Goodwill impairment 181.9 - Impairment expense 390.5 4.5 Restructuring expense 237.5 - Supplier settlements 337.6 - Product recalls(1) 62.3 100.0 Litigation and settlement expenses(2) 118.6
35.8
Transaction and integration costs(3) 5.5 28.9 Other adjustment items (4) 2.9 14.5 Adjusted EBITDA$ (982.7) $ 253.7 Adjusted EBITDA margin (27.4) % 6.3 % ______________________ (1) Represents adjustments and charges associated with the Tread and Tread+ product recall, as well as accrual adjustments. These include a reduction to Connected Fitness Products revenue for actual and estimated future returns of$48.9 million and$81.1 million , recorded costs in Connected Fitness Products cost of revenue associated with inventory write-downs and logistic costs of$8.1 million and$15.7 million , and operating expenses of$5.4 million and$3.2 million associated with recall-related hardware development costs, in each case for the fiscal years endedJune 30, 2022 and 2021, respectively.
(2) Includes litigation-related expenses for certain non-recurring patent
infringement litigation, consumer arbitration, and product recalls for the
fiscal years ended
(3) Includes transaction and integration costs primarily associated with the acquisition and integration ofPrecor Fitness for the fiscal years endedJune 30, 2022 and 2021. (4) Includes short-term non-cash purchase accounting adjustment amortization of$1.9 million for the fiscal year endedJune 30, 2022 . Includes incremental costs associated with the COVID-19 pandemic of$5.9 million and short-term purchase accounting adjustments of$4.6 million for the fiscal year endedJune 30, 2021 . Subscription Contribution and Subscription Contribution Margin We define "Subscription Contribution" as Subscription revenue less cost of Subscription revenue, adjusted to exclude from cost of Subscription revenue, depreciation and amortization expense, and stock-based compensation expense. Subscription Contribution Margin is calculated by dividing Subscription Contribution by Subscription revenue. We use Subscription Contribution and Subscription Contribution Margin to measure our ability to scale and leverage the costs of ourConnected Fitness Subscriptions. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results because our management uses Subscription Contribution and Subscription Contribution Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. The use of Subscription Contribution and Subscription Contribution Margin as analytical tools has limitations, and you should not consider these in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are as follows: •Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Subscription Contribution and Subscription Contribution Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and •Subscription Contribution and Subscription Contribution Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy.
Because of these limitations, Subscription Contribution and Subscription Contribution Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.
57
--------------------------------------------------------------------------------The following table presents a reconciliation of Subscription Contribution to Subscription Gross Profit, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
Fiscal Year Ended June 30,
2022 2021
(dollars in millions)
Subscription Revenue $ 1,394.7 $ 872.2
Less: Cost of Subscription 450.0 330.5
Subscription Gross Profit$ 944.7 $
541.7
Subscription Gross Margin 67.7 % 62.1 % Add back: Depreciation and amortization expense $ 26.8 $
19.0
Stock-based compensation expense 22.7
25.9
Subscription Contribution$ 994.2 $
586.5
Subscription Contribution Margin 71.3 %
67.2 %
The continued growth of our Connected Fitness Subscription base will allow us to
improve our Subscription Contribution Margin. While there are variable costs,
including music royalties, associated with our Connected Fitness Subscriptions,
a significant portion of our content creation costs are fixed given that we
operate with a limited number of production studios and instructors. We expect
the fixed nature of those expenses to scale over time as we grow our Connected
Fitness Subscription base.
Free Cash Flow
We define Free Cash Flow as Net cash provided by (used in) operating activities
less capital expenditures and capitalized internal-use software development
costs. Free cash flow reflects an additional way of viewing our liquidity that,
we believe, when viewed with our GAAP results, provides management, investors
and other users of our financial information with a more complete understanding
of factors and trends affecting our cash flows.
The use of Free Cash Flow as an analytical tool has limitations due to the fact
that it does not represent the residual cash flow available for discretionary
expenditures. For example, Free Cash Flow does not incorporate payments made for
purchases of marketable securities, business combinations and asset
acquisitions. Because of these limitations, Free Cash Flow should be considered
along with other operating and financial performance measures presented in
accordance with GAAP.
The following table presents a reconciliation of Free Cash Flow to Net cash
provided by (used in) operating activities, the most directly comparable
financial measure prepared in accordance with GAAP, for each of the periods
indicated:
Fiscal Year Ended June 30,
2022 2021 2020
(in millions)
Net cash (used in) provided by operating activities
(337.3) (252.2) (156.4)
Free Cash Flow $ (2,357.4) $ (491.9) $ 220.0
Liquidity and Capital Resources
Our operations have been funded primarily through net proceeds from the sales of
our equity and convertible debt securities, and term loan, as well as cash flows
from operating activities. As of June 30, 2022 , we had Cash and cash equivalents
of approximately $1,253.9 million .
We anticipate approximately $90 million to $100 million of capital expenditures
over the next 12 months, which includes amounts related to capitalized labor,
investments in content and our studios, product development, systems
implementation, and the impact of expenditures before any proceeds from the
expected eventual sale of Peloton Output Park .
We believe our existing cash and cash equivalent balances and cash flow from
operations will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. Our future capital
requirements may vary materially from those currently planned and will depend on
many factors, including our rate of revenue growth, timing to adjust our supply
chain and cost structures in response to material fluctuations in product
demand, timing and amount of spending related to acquisitions, the timing and
amount of spending on research and development and manufacturing initiatives,
the timing and financial impact of product recalls, sales and marketing
activities, the timing of new
58
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product introductions, market acceptance of our Connected Fitness Products,
timing and investments needed for international expansion, and overall economic
conditions. To the extent that current and anticipated future sources of
liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in additional dilution to our
stockholders. The incurrence of debt financing would result in debt service
obligations and the instruments governing such debt could provide for operating
and financing covenants that would restrict our operations. There can be no
assurances that we will be able to raise additional capital. The inability to
raise capital would adversely affect our ability to achieve our business
objectives.
Restructuring Plan
In February 2022 , we announced and began implementing a restructuring plan to
realign our operational focus to support our multi-year growth, scale the
business, and improve costs (the "Restructuring Plan"). The Restructuring Plan
includes: (i) reducing our headcount; (ii) closing several assembly and
manufacturing plants, including the completion and subsequent sale of the shell
facility for our previously planned Peloton Output Park ; (iii) closing and
consolidating several distribution facilities, and (iv) shifting to third-party
logistics providers in certain locations. We expect the Restructuring Plan to be
substantially implemented by the end of fiscal 2024.
Total charges related to the Restructuring Plan were $611.3 million for fiscal
year ended June 30, 2022 consisting of cash charges of $124.5 million for
severance and other personnel costs and $15.4 million for professional fees and
other related charges, and non-cash charges of $373.8 million related to
non-inventory asset write-downs and write-offs, $56.5 million for stock-based
compensation expense and $56.4 million for inventory markdowns.
In addition to the above charges, we incurred approximately
OnJuly 12, 2022 we announced we are exiting all owned-manufacturing operations and our expansion of our current relationship with Taiwanese manufacturer Rexon Industrial Corp. Additionally, onAugust 12, 2022 we announced the decision to perform the following additional restructuring activities: (i) eliminate our North AmericanField Ops warehouses, including the significant reduction of our delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit our real-estate footprints in our Plano and Tempe locations; and (iii) reduce ourNorth America retail showroom presence. In connection with the Restructuring Plan, we estimate that we will incur additional cash charges of approximately$95.0 million primarily composed of severance and other exit costs in fiscal year 2023 and beyond. Additionally, we expect to recognize approximately$75.0 million of asset impairment charges in fiscal year 2023 in connection with the Restructuring Plan. We may not be able to realize the cost savings and benefits initially anticipated as a result of the Restructuring Plan, and the costs may be greater than expected. See "Risk Factors-Risks Related to Our Business-We may not successfully execute or achieve the expected benefits of our restructuring initiatives and other cost-saving measures we may take in the future, and our efforts may result in further actions and/or additional asset impairment charges and adversely affect our business." Convertible Notes InFebruary 2021 , we issued$1.0 billion aggregate principal amount of 0% Convertible Senior Notes due 2026 (the "Notes") in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of$125.0 million . The Notes were issued pursuant to an Indenture (the "Indenture") between us andU.S. Bank National Association , as trustee. The Notes are our senior unsecured obligations and do not bear regular interest, and the principal amount of the Notes does not accrete. The net proceeds from the offering were approximately$977.2 million , after deducting the initial purchasers' discounts and commissions and our offering expenses. Capped Call Transactions In connection with the offering of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped Call Transactions"). The Capped Call Transactions have an initial strike price of approximately$239.23 per share, subject to adjustments, which corresponds to the approximate initial conversion price of the Notes. The cap price of the Capped Call Transactions will initially be approximately$362.48 per share. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, 6.9 million shares of Class A Common Stock. The Capped Call Transactions are expected generally to reduce potential dilution to the Class A Common Stock upon any conversion of Notes and/or offset any potential cash payments we would be required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. If, however, the market price per share of Class A Common Stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the Class A Common Stock exceeds the cap price of the Capped Call Transactions. Class A Common Stock Offering OnNovember 16, 2021 , we entered into an underwriting agreement (the "Underwriting Agreement") withGoldman Sachs & Co. LLC andJ.P. Morgan Securities LLC as representatives of the several underwriters named therein (collectively, the "Representatives") relating to the offer and sale by the Company (the "Offering") of 27,173,912 shares (the "Shares") of the Company's Class A common stock, par value$0.000025 per share, which includes 3,260,869 shares of Class A common stock issued and sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A common stock pursuant to the Underwriting Agreement. We sold the Shares to the underwriters at the public offering price of$46.00 per share less underwriting discounts. The net proceeds from the Offering were approximately$1.2 billion , after deducting the underwriters' discounts and commissions and our offering expenses. 59 -------------------------------------------------------------------------------- Second Amended and Restated Credit Agreement In 2019, the Company entered into an amended and restated revolving credit agreement (as amended, modified or supplemented prior to entrance into the Second Amended and Restated Credit Agreement (as defined below), the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provided for a$500.0 million secured revolving credit facility, including up to the lesser of$250.0 million and the aggregate unused amount of the facility for the issuance of letters of credit.
The Amended and Restated Credit Agreement also permitted the incurrence of indebtedness to permit the Capped Call Transactions and issuance of the Notes.
OnMay 25, 2022 , the Company entered into an Amendment and Restatement Agreement to which the Second Amended and Restated Credit Agreement is attached (as amended, restated or otherwise modified from time to time, the "Second Amended and Restated Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent, and certain banks and financial institutions party thereto as lenders and issuing banks. Pursuant to the Second Amended and Restated Credit Agreement, the Company amended and restated the Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement provides for a$750.0 million term loan facility (the "Term Loan"), which will be due and payable onMay 25, 2027 or, if greater than$200.0 million of our 0% convertible senior notes are outstanding onNovember 16, 2025 (the "Springing Maturity Condition"),November 16, 2025 (the "Springing Maturity Date"). The Term Loan amortizes in quarterly installments of 0.25%, payable at the end of each fiscal quarter and on the maturity date. The Second Amended and Restated Credit Agreement also provides for a$500.0 million revolving credit facility (the "Revolving Facility"),$35.0 million of which will mature onJune 20, 2024 (the "Non-Consenting Commitments"), with the rest ($465.0 million ) maturing onDecember 10, 2026 (the "Consenting Commitments") or if the Springing Maturity Condition is met and the Term Loan is outstanding on such date, the Springing Maturity Date. The key terms of the Revolving Facility remain substantially unchanged from those set forth in the Amended and Restated Credit Agreement, including requiring compliance with a total level of liquidity of not less than$250.0 million and maintaining a minimum total four-quarter revenue level of$3.0 billion (which are replaced with a covenant to maintain a minimum debt to adjusted EBITDA ratio upon our meeting a specified adjusted EBITDA threshold). The Revolving Facility bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 2.25% per annum or the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 1.25% per annum for the Consenting Commitments, and bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate plus 2.75% per annum or the Alternate Base Rate plus 1.75% per annum for the Non-Consenting Commitments. The Company is required to pay an annual commitment fee of 0.325% per annum and 0.375% per annum on a quarterly basis based on the unused portion of the Revolving Facility for the Consenting Commitments and the Non-Consenting Commitments, respectively. The Term Loan bears interest at a rate equal to, at our option, either at the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 5.50% per annum or the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 6.50% per annum. Each such margin will increase one time by 0.50% per annum if the Company chooses not to obtain a public rating for the Term Loan fromS&P Global Ratings or Moody's Investors Services, Inc. on or prior toNovember 25, 2022 . Any borrowing at the Alternate Base Rate is subject to a 1.00% floor and a term loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.50% floor and any revolving loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.00% floor. The Second Amended and Restated Credit Agreement contains customary affirmative covenants as well as customary covenants that restrict our ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Second Amended and Restated Credit Agreement also contains certain customary events of default. Certain baskets and covenant levels have been decreased and will apply equally to both the Term Loan and Revolving Facility for so long as the Term Loan is outstanding. After the repayment in full of the Term Loan, such baskets and levels will revert to those previously disclosed in connection with the Amended and Restated Credit Agreement. The obligations under the Second Amended and Restated Credit Agreement with respect to the Term Loan and the Revolving Facility are secured by substantially all of our assets, with certain exceptions set forth in the Second Amended and Restated Credit Agreement, and are required to be guaranteed by certain material subsidiaries of the Company if, at the end of future financial quarters, certain conditions are not met. As ofJune 30, 2022 , we were in compliance with the covenants under the Second Amended and Restated Credit Agreement. As ofJune 30, 2022 , we had drawn the full amount of the Term Loan and we had not drawn on the Revolving Facility, and we therefore had$750.0 million total outstanding borrowings under the Second Amended and Restated Credit Agreement. As ofJune 30, 2022 , we had outstanding letters of credit totaling$77.6 million , of which$69.9 million was secured against the Revolver. 60 --------------------------------------------------------------------------------
Cash Flows
Fiscal Year Ended June 30,
2022 2021 2020
(in millions)
Net cash (used in) provided by operating activities $ (2,020.0) $ (239.7) $ 376.4
Net cash provided by (used in) investing activities 153.3 (585.1) (741.3)
Net cash provided by financing activities 2,015.1 916.8 1,240.2
Operating Activities Net cash used in operating activities of$2,020.0 million for the fiscal year endedJune 30, 2022 was primarily due to a net loss of$2,827.7 million and a net increase in operating assets and liabilities of$623.6 million , partially offset by an increase in non-cash adjustments of$1,431.2 million . The increase in cash used in operating activities was primarily due to a$398.6 million increase in inventory levels as we ramped up supply to support anticipated demand ahead of the 2021 holiday season that did not materialize and prepared for the relaunch of Tread inthe United States ,Canada ,U.K. andGermany , a$168.6 million decrease in accounts payable and accrued expenses as a result of a decrease in payables due to decreased inventory spending in the latter half of fiscal 2022, as well as increased efficiency in our accounts payable process, and$36.8 million increase in customer deposits and deferred revenue driven by timing of sales and deliveries in the period. Non-cash adjustments primarily consisted of goodwill and long lived asset impairment expense, stock-based compensation expense, excess and obsolete inventory reserves, depreciation and amortization, and non-cash operating lease expense. Investing activities Net cash provided by investing activities for the fiscal year endedJune 30, 2022 of$153.3 million was primarily related to sales and maturities of marketable securities of$517.7 million , partially offset by$337.3 million used for capital expenditures primarily related to construction ofPeloton Output Park inTroy Township, Ohio , the continued build out of our showrooms and offices, and software placed into service throughout the year. Financing activities Net cash provided by financing activities of$2,015.1 million for the fiscal year endedJune 30, 2022 was primarily related to proceeds of$1,218.8 million from the Offering, proceeds from issuance of the Term Loan of$696.4 million , exercises of stock options of$84.3 million , and$17.3 million in net proceeds from withholdings under the 2019 Employee Stock Purchase Plan.
Commitments
As of
Payments due by period
Total Less than 1-3 years 3-5 years More than
Contractual obligations: 1 year 5 years
(in millions)
Lease obligations (1) $ 1,091.1 $ 138.4 $ 246.9 $ 208.3 $ 497.5
Minimum guarantees (2) 298.7 129.8 168.9 - -
Unused credit facility fee
payments (3) 7.0 1.6 3.2 2.2 -
Other purchase obligations (4) 101.9 60.0 35.7 6.2 -
Convertible senior notes (5) 1,000.0 - - 1,000.0 -
Supplier settlements (6) 148.8 148.8 - - -
Term loan $ 750.0 $ 7.5 $ 15.0 $ 727.5 $ -
Total $ 3,397.5 $ 486.1 $ 469.7 $ 1,944.2 $ 497.5
(1) Lease obligations relate to our office space, warehouses, production
studios, equipment, and retail showrooms and microstores. As of June 30, 2022 ,
the Company had additional operating leases for real estate that have not yet
commenced of $15.2 million which has been included above. The original lease
terms are between one and twenty-one years, and the majority of the lease
agreements are renewable at the end of the lease period. The Company has finance
lease obligations of $3.1 million , also included above.
(2) We are subject to minimum royalty payments associated with our license
agreements for the use of licensed content. See "Risk Factors - Risks Related to
Our Business- We are a party to many music license agreements that are complex
and impose numerous obligations upon us that may make it difficult to operate
our business, and a breach of such agreements could adversely affect our
business, operating results, and financial condition."
(3) Pursuant to the Second Amended and Restated Credit Agreement, we are
required to pay a commitment fee of 0.325% and 0.375% on a quarterly basis based
on the unused portion of the Revolving Facility for the revolving loans maturing
on December 10, 2026 and June 20, 2024 , respectively. As of June 30, 2022 , we
had outstanding letters of credit totaling $77.6 million , of which $69.9 million
was secured against the Revolver.
(4) Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to cloud computing costs.
(5) Refer to Note 12 - Debt in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further details regarding our convertible senior notes obligations. (6) Supplier settlements relate to payments to third-party suppliers to exit purchase commitments. Subsequent toJune 30, 2022 the Company entered into an additional$97.3 million to be paid through fiscal 2023. 61 -------------------------------------------------------------------------------- The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. We utilize contract manufacturers to build our products and accessories. These contract manufacturers acquire components and build products based on demand forecast information we supply, which typically covers a rolling 12-month period. Consistent with industry practice, we acquire inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover our forecasted product and manufacturing requirements for periods that range a number of months. In certain instances, these agreements allow us the option to cancel, reschedule, and/or adjust our requirements based on our business needs for a period of time before the order is due to be fulfilled. While our purchase orders are legally cancellable in many situations, some purchase orders are not cancellable in the event of a demand plan change or other circumstances, such as where the supplier has procured unique, Peloton-specific designs, and/or specific non-cancellable, non-returnable components based on our provided forecasts. As ofJune 30, 2022 , our commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of our products were estimated to be approximately$334.7 million . See "Risk Factors-Risks Related to Our Business-Our operating results could be adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory." Off-Balance Sheet Arrangements We did not have any undisclosed off-balance sheet arrangements as ofJune 30, 2022 . Recent Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K under the heading "Recently Issued Accounting Pronouncements" for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this Annual Report on Form 10-K. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders' equity, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those noted below. Revenue Recognition Our primary source of revenue is from sales of our Connected Fitness Products and related accessories and associated recurring Subscription revenue, as well asPrecor branded fitness products, delivery and installation services.
We determine revenue recognition through the following steps in accordance with ASC 606:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the
contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is recognized when control of the promised goods or services is
transferred to our customers, in an amount that reflects the consideration that
we expect to be entitled to in exchange for those goods or services. Our revenue
is reported net of sales returns, discounts, incentives, and rebates to
commercial distributors as a reduction of the transaction price. Certain
contracts include consideration payable that is accounted for as a payment for
distinct goods or services. Our transaction price estimate includes our estimate
for product returns and concessions based on the terms and conditions of home
trial programs, historical return trends by product category, impact of
seasonality, an evaluation of current economic and market conditions, and
current business practices, and record the expected customer refund liability as
a reduction to revenue, and the expected inventory right of recovery as a
reduction of cost of revenue. If actual return costs differ from previous
estimates, the amount of the liability and corresponding revenue are adjusted in
the period in which such costs occur.
There is not significant judgement required in the determination of performance
obligations, allocation of our transaction price, or the recognition of revenue.
See further discussion in Note 3 to the consolidated financial statements.
As described in Note 13 of the consolidated financial statements, the Company
announced voluntary recalls of the Company's Tread+ and Tread products,
permitting customers to return the products for a refund. The amount of a refund
customers are eligible to receive may differ based on the status of an approved
remediation of the issue driving the recall, and the age of the CFU being
returned. We estimate a returns reserve
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primarily based on historical and expected product returns, product warranty and
service call trends. We also consider current trends in consumer behavior in
order to identify correlations to current trends in returns. However, with
current uncertainty in the global economy, negative press and general sentiment
surrounding Peloton's post-pandemic business and financial performance, absence
of a remediation plan with the Consumer Product Safety Commission , predicting
expected product returns based on historical returns becomes less relevant,
requiring reliance on highly subjective estimates based on our interpretation of
how current conditions and factors will drive consumer behavior. Since the
inception of the product recall, we have recorded return provisions as a
reduction to Connected Fitness Products revenue of approximately $139.9 million .
As of June 30, 2022 and June 30, 2021 , our returns reserve related to the
impacts of the recalls was $39.9 million and $40.8 million , respectively.
Inventory Valuation
We review our inventory to ensure that its carrying value does not exceed its
net realizable value ("NRV"), with NRV based on the estimated selling price of
inventory in the ordinary course of business, less estimated costs of
completion, disposal and transportation. When our expectations indicate that the
carrying value of inventory may exceed its NRV, we perform an exercise to
calculate the approximate amount by which carrying value is greater than NRV and
record additional cost of revenue for the difference. Once a write-off occurs, a
new, lower cost basis is established. Should our estimates used in these
calculations change in the future, such as estimated selling prices or disposal
costs, additional write-downs may occur.
We also regularly monitor inventory quantities on hand and in transit and
reserve for excess and obsolete inventories using estimates based on historical
experience, historical and projected sales trends, specific categories of
inventory, and age of on-hand inventory. Inventories presented in the
Consolidated Balance Sheets are net of reserves for excess and obsolete
inventory. If actual conditions or product demands are less favorable than our
assumptions, additional inventory reserves may be required.
Product Warranty
We offer a standard product warranty that our Connected Fitness Products and
Precor branded fitness products will operate under normal, non-commercial use
for a period of one year covering the touchscreen and most original Bike, Bike+,
Tread, Tread+, and Guide components from the date of original delivery. We have
the obligation, at our option, to either repair or replace the defective
product. At the time revenue is recognized, an estimate of future warranty
costs, including costs associated with service of Connected Fitness Products
outside of the warranty period, is recorded as a component of cost of revenue.
Factors that affect the warranty obligation include historical as well as
current product failure rates, service delivery costs incurred in correcting
product failures, including the expected utilization of our logistics network,
and warranty policies and business practices. Our products are manufactured both
in-house and by contract manufacturers, and in certain cases, we may have
recourse to such contract and component manufacturers.
We also offer the option for customers in some markets to purchase a third-party
extended warranty and service contract that extends or enhances the technical
support, parts, and labor coverage offered as part of the base warranty included
with the Connected Fitness Product for an additional period of 12 to 36 months.
Revenue and related fees paid to the third-party provider are recognized on a
gross basis as we have a continuing obligation to perform over the service
period. Extended warranty revenue is recognized ratably over the extended
warranty coverage period and is included in Connected Fitness Products revenue
in the Consolidated Statements of Operations and Comprehensive Loss.
Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate of the consideration transferred
and the amount recognized for non-controlling interest, if any, over the fair
value of identifiable assets acquired and liabilities assumed in a business
combination. The Company has no intangible assets with indefinite useful lives.
Intangible assets other than goodwill are comprised of acquired developed
technology, brand name, customer relationships, distributor relationships, and
other finite-lived intangible assets. At initial recognition, intangible assets
acquired in a business combination or asset acquisition are recognized at their
fair value as of the date of acquisition. Following initial recognition,
intangible assets are carried at acquisition date fair value less accumulated
amortization and impairment losses, if any, and are amortized on a straight-line
basis over the estimated useful life of the asset.
We review goodwill for impairment annually on April 1 of each fiscal year or
whenever events or changes in circumstances indicate that an impairment may
exist. The process of evaluating the potential impairment of goodwill is highly
subjective and requires significant judgment. In conducting our annual
impairment test, we first review qualitative factors to determine whether it is
more likely than not that the fair value of the reporting unit is less than its
carrying amount. If factors indicate that the fair value of the reporting unit
is less than its carrying amount, we perform a quantitative assessment and the
fair value of the reporting unit is estimated by analyzing the expected present
value of future cash flows. If the carrying value of the reporting unit
continues to exceed its fair value, the fair value of the reporting unit's
goodwill is calculated and an impairment loss equal to the excess is recorded.
We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Impairment of Long-Lived Assets
We test our long-lived asset groups when changes in circumstances indicate their
carrying value may not be recoverable. Events that trigger a test for
recoverability include material adverse changes in projected revenues and
expenses, present cash flow losses combined with a history
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of cash flow losses and a forecast that demonstrates significant continuing
losses, significant negative industry or economic trends, a current expectation
that a long-lived asset group will be disposed of significantly before the end
of its useful life, a significant adverse change in the manner in which an asset
group is used or in its physical condition, or when there is a change in the
asset grouping. When a triggering event occurs, a test for recoverability is
performed, comparing projected undiscounted future cash flows to the carrying
value of the asset group. If the test for recoverability identifies a possible
impairment, the asset group's fair value is measured relying primarily on a
discounted cash flow method. To the extent available, we will also consider
third-party valuations of our long-lived assets that were prepared for other
business purposes. An impairment charge is recognized for the amount by which
the carrying value of the asset group exceeds its estimated fair value. When an
impairment loss is recognized for assets to be held and used, the adjusted
carrying amounts of those assets are depreciated over their remaining useful
life.
For our Connected Fitness segment and Subscription segment, we evaluate
long-lived tangible assets at the lowest level at which independent cash flows
can be identified, which is dependent on the strategy and expected future use of
our long-lived assets. We evaluate corporate assets or other long-lived assets
that are not segment-specific at the consolidated level.
We measure the fair value of an asset group based on market prices (i.e., the
amount for which the asset could be sold to a third party) when available. When
market prices are not available, we generally estimate the fair value of the
asset group using the income approach and/or the market approach. The income
approach uses cash flow projections. Inherent in our development of cash flow
projections are assumptions and estimates derived from a review of our operating
results, business plan forecasts, expected growth rates, and cost of capital,
similar to those a market participant would use to assess fair value. We also
make certain assumptions about future economic conditions and other data. Many
of the factors used in assessing fair value are outside the control of
management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates can materially affect the fair value
measurement of an asset group and, therefore, can affect the test results. Since
there is typically no active market for our long-lived tangible assets, we
estimate fair values based on the expected future cash flows. We estimate future
cash flows based on historical results, current trends, and operating and cash
flow projections. Our estimates are subject to uncertainty and may be affected
by a number of factors outside our control, including general economic
conditions and the competitive environment. While we believe our estimates and
judgments about future cash flows are reasonable, future impairment charges may
be required if the expected cash flow estimates, as projected, do not occur or
if events change requiring us to revise our estimates.
During fiscal 2022, we identified various qualitative factors that collectively
indicated that the Company had triggering events, including (i) realignment of
cost structure in connection with the Restructuring Plan, (ii) softening demand
and (iii) a sustained decrease in stock price.
Business Combination
To determine whether transactions should be accounted for as acquisitions of
assets or business combinations, we make certain judgments, which include
assessment of the inputs, processes, and outputs associated with the acquired
set of activities. If we determine that substantially all of the fair value of
gross assets included in a transaction is concentrated in a single asset (or a
group of similar assets), the assets would not represent a business. To be
considered a business, the assets in a transaction need to include an input and
a substantive process that together significantly contribute to the ability to
create outputs.
We allocate the fair value of the purchase consideration to the assets acquired
and liabilities assumed based on their estimated fair values at the acquisition
date. The fair values of intangible assets are determined utilizing information
available near the acquisition date based on expectations and assumptions that
are deemed reasonable by management. Given the considerable judgment involved in
determining fair values, we typically obtain assistance from third-party
valuation specialists for significant items. Any excess of the purchase price
(consideration transferred) over the estimated fair values of net assets
acquired is recorded as goodwill. Transaction costs are expensed as incurred.
Amounts recorded in a business combination may change during the measurement
period, which is a period not to exceed one year from the date of acquisition,
as additional information about conditions that existed at the acquisition date
becomes available.
Loss Contingencies
We are involved in legal proceedings, claims, and regulatory, tax, and
government inquiries and investigations that arise in the ordinary course of
business. Certain of these matters include claims for substantial or
indeterminate amounts of damages. We record a liability when we believe that it
is both probable that a loss has been incurred and the amount can be reasonably
estimated. If we determine that a loss is reasonably possible and the loss or
range of loss can be reasonably estimated, we disclose the possible loss in the
accompanying notes to the consolidated financial statements. If we determine
that a loss is reasonably possible but the loss or range of loss cannot be
reasonably estimated, we state that such an estimate cannot be made.
We review the developments in our contingencies that could affect the amount of
the provisions that have been previously recorded, and the matters and related
reasonably possible losses disclosed. We make adjustments to our provisions and
changes to our disclosures accordingly to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, and updated information.
Significant judgment is required to determine both the probability and the
estimated amount of loss. These estimates have been based on our assessment of
the facts and circumstances at each balance sheet date and are subject to change
based on new information and future events.
The outcome of legal proceedings, claims, and regulatory, tax, and government
inquiries and investigations is inherently uncertain. Therefore, if one or more
of these matters were resolved against us for amounts in excess of management's
expectations, our results of operations and financial condition, including in a
particular reporting period in which any such outcome becomes probable and
estimable, could be materially adversely affected.
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