UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED ______________________
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
(Commission file number)
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (IRS employer identification number) | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Former fiscal year:
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol(s) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding at May 2, 2022 was
Index
2
Part I - Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
KYNDRYL HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Revenues * | $ | | $ | | ||
Cost of services ** | $ | | $ | | ||
Selling, general and administrative expenses | | | ||||
Workforce rebalancing charges | — | | ||||
Transaction-related costs | | | ||||
Interest expense | | | ||||
Other expenses | | | ||||
Total costs and expenses | $ | | $ | | ||
Income (loss) before income taxes | $ | ( | $ | ( | ||
Provision for income taxes | $ | | $ | | ||
Net income (loss) | $ | ( | $ | ( | ||
Basic earnings (loss) per share | $ | ( | $ | ( | ||
Diluted earnings (loss) per share | $ | ( | $ | ( | ||
Weighted-average basic shares outstanding | | | ||||
Weighted-average diluted shares outstanding | | | ||||
* Including related-party revenue of $
** Including related-party cost of services of $
The accompanying notes are an integral part of the financial statements.
3
KYNDRYL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
| Three Months Ended March 31, | |||||
| 2022 |
| 2021 | |||
Net income (loss) | $ | ( | $ | ( | ||
Other comprehensive income (loss), before tax: | ||||||
Foreign currency translation adjustments | ( | ( | ||||
Unrealized gains (losses) on cash flow hedges: | ||||||
Unrealized gains (losses) arising during the period | | — | ||||
Reclassification of (gains) losses to net income | ( | — | ||||
Total unrealized gains (losses) on cash flow hedges | — | — | ||||
Retirement-related benefit plans: | ||||||
Net gains (losses) arising during the period | | | ||||
Amortization of prior service (credits) costs | | — | ||||
Amortization of net (gains) losses | | | ||||
Total retirement-related benefit plans | | | ||||
Other comprehensive income (loss), before tax | | ( | ||||
Income tax (expense) benefit related to items of other comprehensive income (loss) | ( | ( | ||||
Other comprehensive income (loss), net of tax | | ( | ||||
Total comprehensive income (loss) | $ | ( | $ | ( | ||
The accompanying notes are an integral part of the financial statements.
4
KYNDRYL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(In millions, except per share amount)
(Unaudited)
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Assets: |
|
| ||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable (net of allowances of $ | | | ||||
Deferred costs (current portion) |
| |
| | ||
Prepaid expenses and other current assets | | | ||||
Total current assets | $ | | $ | | ||
Property and equipment, net | $ | | $ | | ||
Operating right-of-use assets, net | | | ||||
Deferred costs (noncurrent portion) | | | ||||
Deferred taxes | | | ||||
Goodwill | | | ||||
Intangible assets, net | | | ||||
Pension assets | | | ||||
Other noncurrent assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities: | ||||||
Current liabilities: | ||||||
Accounts payable** | $ | | $ | | ||
Value-added tax and income tax liabilities | | | ||||
Short-term debt | | | ||||
Accrued compensation and benefits |
| |
| | ||
Deferred income (current portion) |
| |
| | ||
Operating lease liabilities (current portion) |
| |
| | ||
Accrued contract costs | | | ||||
Other accrued expenses and liabilities | | | ||||
Total current liabilities | $ | | $ | | ||
Long-term debt | $ | | $ | | ||
Retirement and nonpension postretirement benefit obligations | | | ||||
Deferred income (noncurrent portion) | | | ||||
Operating lease liabilities (noncurrent portion) | | | ||||
Other noncurrent liabilities | | | ||||
Total liabilities | $ | | $ | | ||
Commitments and contingencies | ||||||
Equity: | ||||||
Stockholders’ equity | ||||||
Common stock, par value $ | $ | | $ | | ||
Accumulated deficit | ( | ( | ||||
Treasury stock, at cost (shares: 2022 – | ( | ( | ||||
Accumulated other comprehensive income (loss) | ( | ( | ||||
Total stockholders’ equity before non-controlling interests | $ | | $ | | ||
Non-controlling interests | | | ||||
Total equity | $ | | $ | | ||
Total liabilities and equity | $ | | $ | | ||
* Including related-party accounts receivable of $
** Including related-party accounts payable of $
The accompanying notes are an integral part of the financial statements.
5
KYNDRYL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: |
|
|
| |||
Net income (loss) | $ | ( | $ | ( | ||
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
| ||||
Depreciation and amortization |
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| ||||
Depreciation of property and equipment | | | ||||
Depreciation of right-of-use assets | | | ||||
Amortization of transition costs and prepaid software |
| |
| | ||
Amortization of capitalized contract costs | | | ||||
Amortization of intangible assets |
| |
| | ||
Stock-based compensation | | | ||||
Deferred taxes | ( | | ||||
Net (gain) loss on asset sales and other | | ( | ||||
Change in operating assets and liabilities: | ||||||
Deferred costs (excluding amortization) | ( | ( | ||||
Right-of-use assets and liabilities (excluding depreciation) | ( | ( | ||||
Workforce rebalancing liabilities | ( | ( | ||||
Receivables |
| ( |
| ( | ||
Accounts payable | | ( | ||||
Taxes (including items settled with former Parent in prior-year period) | ( | | ||||
Other assets and other liabilities |
| |
| | ||
Net cash provided by (used in) operating activities | $ | | $ | ( | ||
Cash flows from investing activities: |
|
| ||||
Payments for property and equipment | $ | ( | $ | ( | ||
Proceeds from disposition of property and equipment |
| |
| | ||
Other investing activities, net | ( | ( | ||||
Net cash used in investing activities | $ | ( | $ | ( | ||
Cash flows from financing activities: |
|
| ||||
Debt repayments | $ | ( | $ | ( | ||
Net transfers from Parent | — | | ||||
Short-term borrowings (repayments), net | ( | — | ||||
Common stock repurchases for tax withholdings |
| ( |
| — | ||
Other financing activities, net | ( | — | ||||
Net cash provided by (used in) financing activities | $ | ( | $ | | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | $ | ( | $ | ( | ||
Net change in cash, cash equivalents and restricted cash | $ | ( | $ | | ||
Cash, cash equivalents and restricted cash at January 1 | $ | | $ | | ||
Cash, cash equivalents and restricted cash at March 31 | $ | | $ | | ||
Supplemental data | ||||||
Income taxes paid, net of refunds received | $ | | $ | — | ||
Interest paid on debt | $ | | $ | — | ||
The accompanying notes are an integral part of the financial statements.
6
KYNDRYL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF EQUITY
(In millions)
(Unaudited)
Common Stock and | Accumulated | |||||||||||||||||||||||
Additional | Net | Other | Non- | |||||||||||||||||||||
Paid-In Capital | Parent | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||||
Shares | Amount | Investment | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||||
Equity - January 1, 2022 | | $ | | $ | — | $ | ( | $ | ( | $ | ( | $ | | $ | | |||||||||
Net income (loss) | ( | ( | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | | | ||||||||||||||||||||||
Common stock issued under employee plans | | | ||||||||||||||||||||||
Purchases of treasury stock | ( | ( | ( | |||||||||||||||||||||
Changes in non-controlling interests | | | ||||||||||||||||||||||
Equity - March 31, 2022 | | $ | | $ | — | $ | ( | $ | ( | $ | ( | $ | | $ | | |||||||||
Common Stock and | Accumulated | |||||||||||||||||||||||
Additional | Net | Other | Non- | |||||||||||||||||||||
Paid-In Capital | Parent | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||||
Shares | Amount | Investment | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||||
Equity – January 1, 2021 | — | $ | — | $ | | $ | ( | $ | — | $ | — | $ | | $ | | |||||||||
Net income (loss) | ( | ( | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | ( | ( | ||||||||||||||||||||||
Net transfers from Parent | ||||||||||||||||||||||||
Changes in non-controlling interests | ( | ( | ||||||||||||||||||||||
Equity – March 31, 2021 | — | $ | — | $ | $ | ( | $ | — | $ | — | $ | | $ | | ||||||||||
The accompanying notes are an integral part of the financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Kyndryl Holdings, Inc. (“we”, “the Company” or “Kyndryl”) is a leading technology services company and the largest infrastructure services provider in the world, serving as a partner to more than
In October 2021, the Board of Directors of IBM approved the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit (the “Kyndryl Businesses”) of its Global Technology Services (“GTS”) segment through the distribution of shares of Kyndryl’s common stock to IBM stockholders. In conjunction with the Distribution, Kyndryl underwent an internal reorganization following which it became the holder, directly or through its subsidiaries, of the Kyndryl Businesses. On November 3, 2021, the Separation was achieved through the Parent’s pro rata distribution of
Basis of Presentation
Prior to the Separation on November 3, 2021 (the “pre-Separation periods”), our historical financial statements were prepared on a combined basis and were derived from the consolidated financial statements of IBM. For the period subsequent to November 3, 2021, the financial statements are presented on a consolidated basis as the Company became a standalone public company. Management believes the accompanying financial statements include all adjustments necessary to present fairly the Company’s financial position as of March 31, 2022, and December 31, 2021, and its results of operations for the three months ended March 31, 2022 and 2021. The financial statements for historical periods were derived from the Company’s audited annual consolidated financial statements but do not contain all of the footnote disclosures from the annual financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 10, 2022 (our “2021 Annual Report”).
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain items have been recast to conform to current-period presentation.
Principles of Consolidation
For the pre-Separation periods, the accompanying financial statements were derived from the consolidated financial statements and accounting records of the Parent as if the Company operated on a standalone basis during the periods presented and were prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC.
All significant intercompany transactions during the pre-Separation periods between Kyndryl and IBM have been included in the consolidated financial statements. Intercompany transactions between Kyndryl and IBM were considered to be effectively settled in the consolidated financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected as Net transfers from Parent in the financing activities section in the Consolidated Statement of Cash Flows and in the Consolidated Balance Sheet within Net Parent investment.
After the Separation on November 3, 2021, the Company’s consolidated financial statements are based on our reported results as a standalone company. All significant transactions and accounts within Kyndryl were eliminated.
8
Notes to Consolidated Financial Statements (continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts that are reported in the consolidated financial statements and accompanying disclosures. Estimates are used in determining the following, among others: revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets including goodwill and intangible assets, the depreciable and amortizable lives of long-lived assets, loss contingencies, allowance for credit losses, deferred transition costs and other matters. Estimates were also used in determining the allocation of costs and expenses from IBM for the pre-Separation periods. These estimates are based on management’s knowledge of current events, historical experience and actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may be different from these estimates.
Transition Period
On January 27, 2022, the Board of Directors of Kyndryl approved a change to the fiscal year-end of the Company from December 31 to March 31. This is our transition report for the period from January 1, 2022, to March 31, 2022. The Company’s 2023 fiscal year began on April 1, 2022, and will end on March 31, 2023.
NOTE 2. ACCOUNTING CHANGES
Standards Implemented
In October 2021, the Financial Accounting Standards Board (“FASB”) issued guidance (“Revenue Contracts with Customers Acquired in a Business Combination”) which requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination as if the acquirer had originated the contracts, in accordance with ASC 606, Revenue from Contracts with Customers. Deferred revenue acquired in a business combination is no longer required to be measured at its fair value, which had historically resulted in a deferred revenue impairment at the date of acquisition. The guidance is effective January 1, 2023, and early adoption is permitted. The Company has early adopted the guidance as of January 1, 2022. Our adoption did not materially affect our consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
Disaggregation of Revenue
The Company views its segment results to be the best view of disaggregated revenue. Refer to Note 4 – Segments.
Remaining Performance Obligations
The remaining performance obligation (“RPO”) represents the aggregate amount of contractual deliverables yet to be recognized as revenue at the end of the reporting period. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed. The customer is not considered committed when it is able to terminate for convenience without payment of a substantive penalty. The RPO also includes estimates of variable consideration. Additionally, as a practical expedient, the Company does not include contracts that have an original duration of
At March 31, 2022, the aggregate amount of RPO related to customer contracts that are unsatisfied or partially unsatisfied was $
9
Notes to Consolidated Financial Statements (continued)
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
During the three months ended March 31, 2022, revenue was reduced by $
Contract Balances
The following table provides information about accounts receivable, contract assets and deferred income balances:
March 31, | December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Accounts receivable (net of allowances of $ | $ | | $ | | ||
Contract assets * |
| |
| | ||
Deferred income (current) |
| |
| | ||
Deferred income (noncurrent) |
| |
| | ||
* |
The amount of revenue recognized during the three months ended March 31, 2022, that was included within the deferred income balance at December 31, 2021, was $
The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the three months ended March 31, 2022, and the year ended December 31, 2021:
Three Months Ended | Year Ended | |||||
(Dollars in millions) | March 31, 2022 |
| December 31, 2021 | |||
Beginning balance | $ | | $ | | ||
Additions (releases) | | ( | ||||
Write-offs | ( | ( | ||||
Other * | ( | ( | ||||
Ending balance | $ | | $ | | ||
* |
The contract assets allowance for expected credit losses was not material in any of the periods presented.
Major Clients
No single client represented more than 10 percent of the Company’s total revenue during the three months ended March 31, 2022 and 2021. Other than the former Parent (see Note 13 – Related-Party Transactions), no single client represented more than 10 percent of the Company’s total accounts receivable balance as of March 31, 2022, and December 31, 2021.
Deferred Costs
Costs to acquire and fulfill customer contracts are deferred and amortized over the contract period or expected customer relationship life. The expected customer relationship period is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from to
10
Notes to Consolidated Financial Statements (continued)
The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at March 31, 2022, and December 31, 2021:
March 31, | December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Deferred transition costs | $ | | $ | | ||
Prepaid software costs |
| |
| | ||
Capitalized costs to fulfill contracts |
| |
| | ||
Capitalized costs to obtain contracts |
| |
| | ||
Total deferred costs * | $ | | $ | | ||
* | Of the total deferred costs, $ |
The amount of total deferred costs amortized for the three months ended March 31, 2022, was $
NOTE 4. SEGMENTS
Our reportable segments correspond to how the chief operating decision maker (“CODM”) reviews performance and allocates resources. Our
United States: This reportable segment is comprised of Kyndryl’s operations in the United States.
Japan: This reportable segment is comprised of Kyndryl’s operations in Japan.
Principal Markets: This reportable segment represents the aggregation of our operations in Australia / New Zealand, Canada, France, Germany, India, Italy, Spain / Portugal, and the United Kingdom / Ireland.
Strategic Markets: This reportable segment is comprised of our operations in all other countries in which we operate.
The measure of segment operating performance used by Kyndryl’s CODM is adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), transaction-related costs, pension costs other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges, impairment expense, significant litigation costs, and foreign currency impacts of highly inflationary countries. The use of revenue and adjusted EBITDA aligns with how the CODM assesses performance and allocates resources for the Company’s segments. The Company has recast the prior-period results to reflect the change in segment structure that became effective in the fourth quarter of 2021. In addition, during the three months ended March 31, 2022, the Company updated certain allocation methodologies related to its measure of segment adjusted EBITDA and has accordingly recast the prior-period information to reflect these updates, which did not change the aggregate amount of segment adjusted EBITDA.
Our geographic markets frequently work together to sell and implement certain contracts. The economic environment and its effects on the industries served by our geographic markets affect revenues and operating expenses within our geographic markets to differing degrees. Currency fluctuations also tend to affect our geographic markets differently, depending on the geographic concentrations and locations of their businesses.
11
Notes to Consolidated Financial Statements (continued)
The following table reflects the results of the Company’s segments:
Three Months Ended March 31, | ||||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Revenue | ||||||
United States | $ | | $ | | ||
Japan | | | ||||
Principal Markets | | | ||||
Strategic Markets | | | ||||
Total revenue | $ | | $ | | ||
Segment adjusted EBITDA | ||||||
United States | $ | $ | | |||
Japan | | |||||
Principal Markets | | |||||
Strategic Markets | | |||||
Total segment adjusted EBITDA | $ | $ | | |||
The following table reconciles consolidated pretax income to segment adjusted EBITDA:
Three Months Ended March 31, | ||||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Pretax income (loss) | $ | ( | $ | ( | ||
Workforce rebalancing charges | — | | ||||
Transaction-related costs | | |||||
Stock-based compensation expense | | |||||
Interest expense | | |||||
Depreciation expense | | |||||
Amortization expense | | |||||
Corporate expense not allocated to the segments | | |||||
Other adjustments * | | |||||
Segment adjusted EBITDA | $ | $ | | |||
* Other adjustments represents significant litigation costs and pension costs other than pension servicing costs and multi-employer plan costs.
NOTE 5. TAXES
Due to the change in fiscal year-end discussed in Note 1 – Significant Accounting Policies, income taxes for the three months ended March 31, 2022, are computed using the actual tax rate for the period. For the period prior to the Separation, income taxes have been calculated as if Kyndryl had filed income tax returns on a standalone basis, as our operations were historically included in certain tax returns filed by IBM.
For the three months ended March 31, 2022, the Company’s effective tax rate was (
The Company’s effective tax rate for the three months ended March 31, 2021, was lower than the Company’s statutory tax rate primarily due to the geographic mix of pretax income and changes in valuation allowances.
12
Notes to Consolidated Financial Statements (continued)
NOTE 6. NET LOSS PER SHARE
We did
Three Months Ended March 31, | ||||||
(In millions, except per share amounts) | 2022 | 2021 | ||||
Net income (loss) on which basic and diluted earnings per share is calculated | $ | ( | $ | ( | ||
Number of shares on which basic and diluted earnings per share is calculated | | | ||||
Basic earnings (loss) per share | $ | ( | $ | ( | ||
Diluted earnings (loss) per share |
| ( | ( | |||
Prior to the Separation, the Company did not have any publicly-traded issued and outstanding common stock or equivalents. Accordingly, the net loss per share for the three months ended March 31, 2021, is calculated based on the
For the three months ended March 31, 2022, basic and weighted-average shares outstanding were the same because the effect of the below securities would have been anti-dilutive.
(In millions) | ||
Nonvested restricted stock units issued and outstanding | | |
Market-conditioned performance awards | | |
Stock options issued and outstanding | | |
Total | |
NOTE 7. FINANCIAL ASSETS AND LIABILITIES
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following fair value hierarchy:
| ● | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date. |
| ● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 – Unobservable inputs for the asset or liability. |
The level of an asset or liability within the fair value hierarchy is determined based on the lowest level of any input that is significant to the fair value measurement.
In determining the fair value of certain financial instruments, the Company considers certain market valuation adjustments to the “base valuations” using the methodologies described below for several parameters that market participants would consider in determining fair value:
13
Notes to Consolidated Financial Statements (continued)
| ● | Counterparty credit risk adjustments are applied to certain financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument. |
| ● | Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing certain liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s credit risk as observed in the credit default swap market. |
Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are recorded at fair value or at cost, as appropriate, in the period they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The impairment models used for non-financial assets depend on the type of asset. The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy.
We perform a qualitative assessment of assets on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value is less than carrying value. There were no impairments of non-financial assets recognized for the three months ended March 31, 2022 and 2021, respectively.
Financial Assets and Liabilities Measured at Fair Value
The gross balances of derivative assets contained within prepaid expenses and other current assets in the Consolidated Balance Sheet was $
The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Balance Sheet, the Company does not offset derivative assets against liabilities with counterparties in master netting arrangements by counterparty, and there was
Financial Assets and Liabilities Not Measured at Fair Value
Accounts receivable are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. If measured at fair value in the consolidated financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.
The Company also has time deposits that have maturities of 90 days or less, and their carrying values approximate fair value. They are measured for impairment on a recurring basis by comparing their fair value with their amortized cost basis. There were
The fair value of our outstanding debt (excluding finance lease obligations) is based on various methodologies, including quoted prices in active markets for identical debt instruments, which is a Level 1 measurement, and calculated fair value using an expected present value technique that uses rates currently available to the Company for debt in active markets with similar terms and remaining maturities, which is a Level 2 measurement. As of March 31, 2022, our outstanding debt (excluding finance lease obligations) had a carrying value of $
14
Notes to Consolidated Financial Statements (continued)
$
Derivative Financial Instruments
Foreign Exchange Risk
Anticipated Cost Transactions
The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage foreign currency risk that was deemed to be associated with the Company’s operations and has been allocated to the Company’s Consolidated Income Statement through the pre-Separation periods, based on its pro rata share of the underlying items hedged, where applicable, with the remainder allocated on a pro rata basis of revenue. Changes in fair value of derivatives designated as a cash flow hedge are recorded, net of applicable taxes, in other comprehensive income and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings. The cash flows associated with derivatives designated as cash flow hedges are reported in cash flows from operating activities in the Consolidated Statement of Cash Flows.
At March 31, 2022, and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $
At March 31, 2022, in connection with cash flow hedges of foreign currency cost transactions, the Company recorded net deferred gains of $
Subsidiary Cash and Foreign Currency Asset / Liability Management
The Company uses global treasury centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. Changes in fair value of derivatives not designated as hedges are reported in earnings in other (income) and expense. Cash flows from derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. The terms of these swap contracts are generally less than
15
Notes to Consolidated Financial Statements (continued)
The Effect of Derivative Instruments in the Consolidated Income Statement
The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of cash flow hedges and derivatives not designated as hedging instruments are recorded, and the total effect of hedge activity on these income and expense line items are as follows:
Gains (Losses) from | ||||||||||||
(Dollars in millions) | Total | Hedge Activity | ||||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Cost of services | $ | | $ | | $ | | $ | — | ||||
Selling, general and administrative expenses | | | — | — | ||||||||
Other expenses | | | ( | — | ||||||||
Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||||
(Dollars in millions) | Consolidated | Recognized on | Attributable to Risk | |||||||||||
For the three months | Income Statement | Derivatives | Being Hedged | |||||||||||
ended March 31: |
| Line Item | 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Derivative instruments not designated as hedging instruments: | ||||||||||||||
Foreign exchange contracts | Other expenses | $ | ( | $ | — | NA | NA | |||||||
Total |
| $ | ( | $ | — | $ | — | $ | — | |||||
Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income | ||||||||||||||
(Dollars in millions) | Recognized | Consolidated | Reclassified | |||||||||||
For the three months | in OCI | Income Statement | from AOCI | |||||||||||
ended March 31: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 | ||||
Derivative instruments in cash flow hedges: |
|
|
| |||||||||||
Foreign exchange contracts | $ | $ | — | Cost of services | $ | $ | — | |||||||
Selling, general and administrative expenses | — | — | ||||||||||||
Other expenses | — | — | ||||||||||||
Total | $ | | $ | — |
| $ | | $ | — | |||||
NA - not applicable
For the three months ended March 31, 2022 and 2021, there were
Prior to the third quarter of 2021, Kyndryl did not independently execute derivative financial instruments to manage its foreign currency risk and instead participated in a centralized foreign currency hedging program administered by IBM. The hedging activity allocated to Kyndryl was for the former Parent’s forecasted currency exposures. In the third quarter of 2021, we began to execute trades to hedge the Company’s foreign exchange exposures, and this activity is recorded in the Company’s consolidated financial statements.
16
Notes to Consolidated Financial Statements (continued)
NOTE 8. INTANGIBLE ASSETS INCLUDING GOODWILL
Business Combinations
In the three months ended March 31, 2022, the Company completed
The Exa transaction enabled us to seamlessly continue our relationships with certain key customers in Japan. The purchase price allocation for the business combinations is preliminary, and there may be changes in the allocation of consideration to assets acquired and liabilities assumed, including intangible assets and goodwill, for up to twelve months from the acquisition closing dates.
The following table summarizes total consideration transferred, fair value of net assets acquired, net liabilities assumed and goodwill for the Exa transaction:
(Dollars in millions) | |||
Cash consideration | $ | | |
Non-controlling interest | | ||
Total enterprise value | $ | | |
Cash acquired | $ | | |
Net liabilities assumed, excluding cash | ( | ||
Deferred tax liabilities arising from acquired intangibles | ( | ||
Intangible assets * | | ||
Goodwill | | ||
Total purchase price allocation | $ | | |
* Intangible assets acquired consists of $16 million of patents and trademarks and $91 million of customer relationships.
Intangible Assets
The following tables present the Company’s intangible asset balances by major asset class.
At March 31, 2022 | At December 31, 2021 | |||||||||||||||||
| Gross Carrying |
| Accumulated |
| Net Carrying |
| Gross Carrying |
| Accumulated |
| Net Carrying | |||||||
(Dollars in millions) |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||
Capitalized software | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Customer relationships | | ( | | | ( | | ||||||||||||
Completed technology |
| |
| ( |
| — |
| |
| ( |
| — | ||||||
Patents and trademarks |
| |
| ( |
| |
| |
| ( |
| — | ||||||
Total | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
The net carrying amount of intangible assets increased by $
17
Notes to Consolidated Financial Statements (continued)
amortization. The aggregate intangible asset amortization expense was $
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at March 31, 2022:
Capitalized | Customer | Patents and | ||||||||||
(Dollars in millions) | Software |
| Relationships | Trademarks | Total | |||||||
Year ending March 31: | ||||||||||||
2023 | $ | | $ | $ | $ | |||||||
2024 | — |
| ||||||||||
2025 | — |
| ||||||||||
2026 | — |
| ||||||||||
2027 | — |
| ||||||||||
Thereafter | — | — |
| |||||||||
Goodwill
The changes in the goodwill balances by segment for the three months ended March 31, 2022, and for the year ended December 31, 2021, were as follows:
Additions and | |||||||||
(Dollars in millions) | Balance at | Other | Balance at | ||||||
Segment | December 31, 2021 | Adjustments |
| March 31, 2022 | |||||
United States | $ | — | $ | — | $ | — | |||
Japan | | | | ||||||
Principal Markets |
| |
| — |
| | |||
Strategic Markets |
| |
| — |
| | |||
Total | $ | | $ | | $ | | |||
The increase in goodwill in our Japan segment primarily reflects the Exa transaction. Goodwill is calculated as the excess of the fair value of the consideration transferred over the fair value of the net assets recognized and represents the future economic benefits arising from other net assets acquired that could not be individually identified and separately recognized. We believe that the primary items that generated goodwill enable us to serve certain customers in Japan. The Exa transaction did not result in any tax-deductible goodwill.
There were
18
Notes to Consolidated Financial Statements (continued)
NOTE 9. BORROWINGS
Debt
The following table presents the components of our debt:
|
| March 31, | December 31, | |||||||
(Dollars in millions) | Interest Rate | Maturity | 2022 | 2021 | ||||||
Unsecured floating-rate term loan | | November, 2024 | $ | | $ | | ||||
Commercial loan agreement | July, 2026 | | | |||||||
Unsecured senior notes due 2026 | October, 2026 | | | |||||||
Unsecured senior notes due 2028 | October, 2028 | | | |||||||
Unsecured senior notes due 2031 | October, 2031 | | | |||||||
Unsecured senior notes due 2041 | October, 2041 | | | |||||||
Finance lease obligations ** | 2022-2027 | | | |||||||
$ | | $ | | |||||||
Less: Unamortized discount | | | ||||||||
Less: Unamortized debt issuance costs |
|
| | | ||||||
Less: Current maturities of long-term debt |
|
| | | ||||||
Total long-term debt |
|
| $ | | $ | | ||||
* Floating rate calculated as of March 31, 2022, using a rate equal to one-month U.S. dollar LIBOR plus
** Finance lease obligations presented using the weighted-average interest rate and calendar-year maturity dates.
Contractual obligations of long-term debt outstanding at March 31, 2022, exclusive of finance lease obligations, are as follows:
(Dollars in millions)* |
| Principal | |
Year ending March 31: | |||
2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 | | ||
Thereafter |
| | |
Total | $ | | |
* Contractual obligations approximate scheduled repayments.
Revolving Credit Agreement
In October 2021, we entered into a $
The Revolving Credit Agreement expires, unless extended, in October 2026. Interest rates on borrowings under the Revolving Credit Agreements are based on prevailing market interest rates, plus a margin, as further described in the Revolving Credit Agreement. The total expense recorded by the Company for the Revolving Credit Agreement was not material in any of the periods presented.
We may voluntarily prepay borrowings under the Revolving Credit Agreement without premium or penalty, subject to customary “breakage” costs. The Revolving Credit Agreement includes certain customary mandatory prepayment provisions.
19
Notes to Consolidated Financial Statements (continued)
Interest on Debt
Interest expense for the three months ended March 31, 2022 and 2021, was $
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at March 31, 2022, and December 31, 2021, were not material. Additionally, the Company has contractual commitments that are noncancellable with certain software and cloud partners to provide services to its customers. During the three months ended March 31, 2022, there were no significant changes to such contractual commitments as presented in our 2021 Annual Report.
As a company with approximately
The Company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In accordance with the relevant accounting guidance, the Company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the Company may also disclose matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.
The Company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate) to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the Company will continue to defend itself vigorously, it is possible that the Company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.
20
Notes to Consolidated Financial Statements (continued)
In July 2017, BMC Software, Inc. (“BMC”) filed suit against IBM in the U.S. Court for the Southern District of Texas in a dispute involving IBM’s managed infrastructure services business. BMC alleges IBM’s removal of BMC software from one of its client’s sites at the client’s request constituted breach of contract and trade secret misappropriation. IBM defeated BMC’s motion for injunctive relief, completed the client’s transformation project and counterclaimed for breach of contract. In September 2021, the trial court overruled in part and granted in part the magistrate judge’s recommendations on summary judgment, dismissing IBM’s counterclaims and permitting some of BMC’s claims for damages to proceed. The case went to trial in March 2022, and the outcome remains pending.
NOTE 11. EQUITY
The following table presents reclassifications and taxes related to items of other comprehensive income (loss) for the three months ended March 31, 2022 and 2021:
| Pretax |
| Tax (Expense) |
| Net of Tax | ||||
(Dollars in millions) |
| Amount |
| Benefit |
| Amount | |||
For the three months ended March 31, 2022: | |||||||||
Foreign currency translation adjustments | $ | ( | $ | — | $ | ( | |||
Unrealized gains (losses) on cash flow hedges: | |||||||||
Unrealized gains (losses) arising during the period | | — | | ||||||
Reclassification of (gains) losses to net income | ( | — | ( | ||||||
Total unrealized gains (losses) on cash flow hedges | $ | — | $ | — | $ | — | |||
Retirement-related benefit plans*: |
|
|
| ||||||
Net (losses) gains arising during the period | $ | | $ | ( | $ | | |||
Curtailments and settlements | | ( | | ||||||
Amortization of net (gains) losses |
| | ( | | |||||
Total retirement-related benefit plans | $ | | $ | ( | $ | | |||
Other comprehensive income (loss) | $ | | $ | ( | $ | | |||
For the three months ended March 31, 2021: |
| ||||||||
Foreign currency translation adjustments | $ | ( | $ | — | $ | ( | |||
Retirement-related benefit plans*: |
|
|
| ||||||
Net (losses) gains arising during the period | $ | | $ | ( | $ | | |||
Amortization of net (gains) losses |
| | ( | | |||||
Total retirement-related benefit plans | $ | | $ | ( | $ | | |||
Other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | |||
| * | These AOCI components are included in the computation of net periodic benefit cost. Refer to Note 12 – Retirement-Related Benefits for additional information. |
21
Notes to Consolidated Financial Statements (continued)
The following table presents the components of accumulated other comprehensive income (loss), net of taxes:
Net Unrealized | Foreign | Net Change | Accumulated | |||||||||
Gain (Losses) | Currency | Retirement- | Other | |||||||||
on Cash | Translation | Related | Comprehensive | |||||||||
(Dollars in millions) |
| Flow Hedges | Adjustments* |
| Benefit Plans | Income (Loss) | ||||||
January 1, 2022 | $ | | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss)** | — | ( | | | ||||||||
March 31, 2022 | $ | | $ | ( | $ | ( | $ | ( | ||||
January 1, 2021 | $ | — | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss)** | — | ( | | ( | ||||||||
March 31, 2021 | $ | — | $ | ( | $ | ( | $ | ( | ||||
* | Foreign currency translation adjustments are presented gross. |
** | No amounts were reclassified from accumulated other comprehensive income. |
NOTE 12. RETIREMENT-RELATED BENEFITS
The following table presents the components of net periodic benefit cost for the retirement-related benefit plans recognized in the Consolidated Income Statement, excluding defined contribution plans, for the three months ended March 31, 2022 and 2021.
(Dollars in millions) | Defined Benefit Pension Plans | Nonpension Postretirement Benefit Plans | ||||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost |
| $ | |
| $ | |
| $ | — |
| $ | — |
| |
| |
| — |
| | |||||
| ( |
| ( |
| — |
| — | |||||
| — |
| — |
| — |
| — | |||||
| |
| |
| — |
| — | |||||
| — | — | — | |||||||||
Multi-employer plans and other costs(2) |
| ( |
| |
| — |
| — | ||||
Net periodic benefit cost |
| $ | |
| $ | |
| $ | — |
| $ | |
| (1) | These components of net periodic benefit cost are included in other (income) and expense in the Consolidated Income Statement. |
| (2) | Multi-employer plan costs represent required contributions for the period to multi-employer plans, which are plans sponsored by third parties. The Company recognizes expense in connection with multi-employer plans as operating costs as contributions are funded. |
During the three months ended March 31, 2022, Company contributions paid to the defined benefit pension plans, multi-employer plans and nonpension postretirement benefit plans were not significantly different from amounts previously disclosed in our 2021 Annual Report.
The Company estimates contributions to its defined benefit pension plans, multi-employer plans and nonpension postretirement benefit plans for fiscal year 2023 to be approximately $
In connection with the change to the fiscal year-end to March 31 from December 31, the Company performed an interim remeasurement of our retirement-related benefit plans at March 31, 2022, which resulted in a change in the discount rate from
22
Notes to Consolidated Financial Statements (continued)
NOTE 13. RELATED-PARTY TRANSACTIONS
Related-Party Revenue and Purchases
Kyndryl provides various services to IBM, including those related to hosting data centers and servicing IBM’s information technology infrastructure, which are reported as revenue in the Company’s Consolidated Income Statement. Revenue generated from these services was $
Kyndryl utilizes various IBM products and services, recognized as costs of services, in the fulfillment of services contracts. Total cost of services recognized from these related-party transactions in the Company’s Consolidated Income Statement was $
Capital expenditures for purchases of IBM hardware were reflected as payments for property and equipment within the investing section of the Company’s Consolidated Statement of Cash Flows in the amounts of $
Related Party Agreements
On November 2, 2021, in connection with the Separation, the Company entered into several agreements with IBM that govern the relationship of the parties following the Separation. Such agreements were described in our 2021 Annual Report.
Allocation of Corporate Expenses
Post-Separation, general corporate expenses from IBM were no longer allocated to Kyndryl; therefore,
Prior to the Separation, IBM allocated certain general corporate expenses that would have been incurred by Kyndryl had it been a separate, standalone company. These allocated general corporate expenses from IBM were recorded in the historical Consolidated Income Statement, Consolidated Statement of Comprehensive Income (Loss) and Consolidated Statement of Cash Flows. Allocations for management costs and corporate support services provided to Kyndryl for the three months ended March 31, 2021, totaled $
23
Notes to Consolidated Financial Statements (continued)
Net Parent Investment
As a result of the Separation, Net Parent investment in the Consolidated Balance Sheet and Consolidated Statement of Equity was fully settled on November 3, 2021. As such, there was
Prior to the Separation, Net Parent investment in the historical Balance Sheet and Statement of Equity represented IBM’s historical investment in Kyndryl, the net effect of transactions with and allocations from IBM, and Kyndryl’s accumulated earnings. The Net Parent investment balance at March 31, 2021, was $
Assignment of Receivables
Historically, a portion of Kyndryl’s receivables with extended payment terms have been assigned to IBM’s Global Financing business. In October 2021, in preparation for the Separation, the Company entered into a Receivables Purchase Agreement with an unaffiliated bank. There were
Lease Guarantees
Kyndryl has identified
NOTE 14. REVISION OF PRIOR-PERIOD FINANCIAL STATEMENTS
During the quarter ended March 31, 2022, the Company identified and corrected an $
A summary of the impact of the revision to the accompanying prior-period consolidated balance sheet and consolidated statement of equity is presented in the tables below. The impacts to the consolidated statements of operations, comprehensive income (loss) and cash flow for the period ended March 31, 2021, are considered immaterial.
24
Notes to Consolidated Financial Statements (continued)
At December 31, 2021 | |||||||||
Consolidated Balance Sheet ($ in millions) |
| As Previously Reported |
| Adjustments |
| As Revised | |||
Accrued contract costs | $ | | $ | ( | $ | | |||
Total current liabilities | | ( | | ||||||
Other liabilities | | | | ||||||
Total liabilities | | ( | | ||||||
Common stock, par value $ | | | | ||||||
Accumulated other comprehensive income/(loss) | ( | ( | ( | ||||||
Total stockholders’ equity before non-controlling interests | | | | ||||||
Total equity | | | | ||||||
At March 31, 2021 | |||||||||
Consolidated Statement of Equity ($ in millions) |
| As Previously Reported |
| Adjustments |
| As Revised | |||
Net parent investment | $ | | $ | | $ | | |||
Accumulated other comprehensive income (loss) | ( | | ( | ||||||
Total equity | | | | ||||||
At January 1, 2021 | |||||||||
Consolidated Statement of Equity ($ in millions) |
| As Previously Reported |
| Adjustments |
| As Revised | |||
Net parent investment | $ | | $ | | $ | | |||
Accumulated other comprehensive income (loss) | ( | | ( | ||||||
Total equity | | | | ||||||
25
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Overview
Three Months Ended March 31, | ||||||||
(Dollars in millions) | 2022 | 2021 | ||||||
Revenue | $ | 4,431 | $ | 4,771 | ||||
Revenue growth (GAAP) | (7) | % | (1) | % | ||||
Revenue growth in constant currency(1) | (3) | % |
| (5) | % | |||
Net income (loss) | $ | (229) | $ | (494) | ||||
Adjusted EBITDA(1) | $ | 536 | $ | 410 | ||||
(1) Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics. For definitions of these metrics and a reconciliation of adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see “⸺Segment Results.”
| March 31, | December 31, | ||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Assets | $ | 13,442 | $ | 13,213 | ||
Liabilities | 10,730 | 10,446 | ||||
Equity | 2,711 | 2,767 | ||||
Organization of Information
Kyndryl Holdings, Inc. was formed as a wholly-owned subsidiary of IBM in September 2021 to hold the operations of the managed infrastructure services unit of IBM’s Global Technology Services segment. On November 3, 2021, IBM distributed shares representing 80.1% of Kyndryl’s outstanding common stock to holders of record of IBM’s common stock as of the close of business on October 25, 2021, in a Spin-off that is tax-free for U.S. federal tax purposes. Following the distribution, Kyndryl became an independent, publicly-traded company and is the world’s leading managed infrastructure services provider.
Kyndryl utilized allocations and carve-out methodologies through November 3, 2021, to prepare historical financial statements. The consolidated financial statements for the pre-Separation periods herein may not be indicative of our future performance, do not necessarily include the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position and cash flows had we been a separate, standalone company during the historical periods presented. For additional information, see “Basis of Presentation” in Note 1 – Significant Accounting Policies to the accompanying Consolidated Financial Statements.
Financial Performance Summary
Macro Dynamics
In 2021, we saw a broad-based macroeconomic recovery in most regions of the world. Demand for technology services rebounded, as large organizations again demonstrated a need for assistance in designing, building, managing and modernizing their technology systems. Thus far in 2022, we have seen continued global economic growth and continuing demand for information technology services, despite increased geopolitical tensions, lingering effects of the COVID-19 pandemic, inflationary pressures and belated government efforts to stem inflation. Most economists, including the International Monetary Fund, expect global macroeconomic growth to continue in 2022.
26
Management Discussion (continued)
2022 Financial Performance
For the three months ended March 31, 2022, we reported $4.4 billion in revenue, a decline of 7 percent when compared to the prior year, primarily driven by a four-point negative impact from currency. United States revenue declined 5 percent, Japan revenue declined 7 percent, Principal Markets revenue declined 14 percent and Strategic Markets revenue increased 2 percent compared to the three months ended March 31, 2021. Net loss of $229 million improved by $265 million versus the prior year, primarily driven by cost reductions, including the benefit from workforce actions taken in prior periods.
Segment Results
As a result of the Separation, in the fourth quarter of 2021, the Company implemented a new operating model and reporting structure resulting in four reportable segments: United States, Japan, Principal Markets and Strategic Markets. Principal Markets consists of our operations in Australia/New Zealand, Canada, France, Germany, Italy, India, Spain/Portugal and United Kingdom/Ireland. Strategic Markets consists of our operations in all other countries in which we operate. In addition to this change, the measures of segment operating performance changed to revenue and adjusted EBITDA. The Company has recast the prior-period results to reflect this change in segment structure. During the current quarter, the Company updated certain allocation methodologies among segments related to its measure of adjusted EBITDA and has accordingly recast the prior-period information to reflect these updates, which did not change the aggregate amount of adjusted EBITDA.
The following table presents our reportable segments’ revenue and adjusted EBITDA for the three months ended March 31, 2022 and 2021. Segment revenue and revenue growth in constant currency exclude any transactions between the segments.
| Three Months Ended March 31, | Year-over-Year Change | |||||||||
(Dollars in millions) |
| 2022 | 2021 | 2022 vs. 2021 | |||||||
Revenue | |||||||||||
United States | $ | 1,169 | $ | 1,228 | (5) | % | |||||
Japan | 706 | 763 | (7) | % | |||||||
Principal Markets | 1,579 | 1,825 | (14) | % | |||||||
Strategic Markets | 978 | 955 | 2 | % | |||||||
Total revenue | $ | 4,431 | $ | 4,771 | (7) | % | |||||
Revenue growth in constant currency(1) | (3) | % | (5) | % | |||||||
Adjusted EBITDA(1) | |||||||||||
United States | $ | 248 | $ | 180 | 38 | % | |||||
Japan | 154 | 123 | 25 | % | |||||||
Principal Markets | 98 | 52 | 89 | % | |||||||
Strategic Markets | 92 | 96 | (5) | % | |||||||
Corporate and other(2) | (56) | (40) | NM | ||||||||
Total adjusted EBITDA(1) | $ | 536 | $ | 410 | 31 | % | |||||
NM – not meaningful
| (1) | Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics. See the information below for definitions of these metrics and a reconciliation of adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP. |
| (2) | Represents net amounts not allocated to segments |
We report our financial results in accordance with GAAP. We also present certain non-GAAP financial measures to provide useful supplemental information to investors. We provide these non-GAAP financial measures as
27
Management Discussion (continued)
we believe it improves visibility to underlying results and the impact of management decisions on operational performance and enables better comparison to peer companies.
Revenue growth in constant currency is a non-GAAP measure that eliminates the effects of exchange rate fluctuations when translating from foreign currencies to the United States dollar. It is calculated by using the average exchange rates that existed for the same period of the prior year. Constant-currency measures are provided so that revenue can be viewed without the effect of fluctuations in currency exchange rates, which is consistent with how management evaluates our revenue results and trends.
Additionally, management uses adjusted EBITDA to evaluate our performance. Adjusted EBITDA is a non-GAAP measure and defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), pension costs other than pension servicing costs and multi-employer plan costs, early extinguishment of debt charges, workforce rebalancing and restructuring charges, transaction-related and integration-related items, goodwill and long-lived asset impairment charges, foreign currency impacts of highly inflationary countries, significant litigation costs, stock-based compensation expense and income taxes. We believe that adjusted EBITDA is a helpful supplemental measure to assist investors in evaluating our operating results as it excludes certain items whose fluctuation from period to period does not necessarily correspond to changes in the operations of our business. We provide this non-GAAP financial measure as we believe it improves visibility to underlying results and the impact of management decisions on operational performance, enables better comparison to peer companies and allows us to provide a long-term strategic view of the business.
These disclosures are provided in addition to and not as a substitute for the percentage change in revenue and profit or loss measures on a GAAP basis compared to the corresponding period in the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
The following table provides a reconciliation of GAAP net income (loss) to adjusted EBITDA:
Three Months Ended March 31, | ||||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Net income (loss) | $ | (229) | $ | (494) | ||
Provision for income taxes | 40 | 91 | ||||
Workforce rebalancing charges | — | 52 | ||||
Transaction-related costs | 58 | 55 | ||||
Stock-based compensation expense | 31 | 16 | ||||
Interest expense | 21 | 14 | ||||
Depreciation expense | 246 | 339 | ||||
Amortization expense | 326 | 330 | ||||
Other adjustments * | 43 | 7 | ||||
Adjusted EBITDA (non-GAAP) | $ | 536 | $ | 410 | ||
| * | Other adjustments represent pension expense other than pension servicing costs and multi-employer plan costs, significant litigation costs and currency impacts of highly inflationary countries. |
28
Management Discussion (continued)
United States
| Three Months Ended March 31, | Year-over-Year | |||||||||
(Dollars in millions) |
| 2022 | 2021 | Change | |||||||
Revenue | $ | 1,169 | $ | 1,228 | (5) | % | |||||
Adjusted EBITDA | 248 | 180 | 38 | % | |||||||
For the three months ended March 31, 2022, United States revenue of $1.2 billion decreased 5 percent as compared to the prior-year quarter, primarily driven by reduced signings in the prior year. Adjusted EBITDA increased $68 million from the prior year, primarily driven by lower costs from our post-Separation commercial agreements with IBM, partially offset by lower revenues.
Japan
| Three Months Ended March 31, | Year-over-Year | |||||||||
(Dollars in millions) |
| 2022 | 2021 | Change | |||||||
Revenue | $ | 706 | $ | 763 | (7) | % | |||||
Revenue growth in constant currency | 1 | % | 0 | % | |||||||
Adjusted EBITDA | $ | 154 | $ | 123 | 25 | % | |||||
For the three months ended March 31, 2022, Japan revenue of $706 million decreased 7 percent as compared to the prior-year quarter. Revenue decreased primarily due to unfavorable currency impacts, as well as a delay in the transfer of a joint venture from IBM that was finalized mid-quarter, which was captured in the operating results of the pre-Separation period under the carve-out assumptions of our former Parent. Adjusted EBITDA increased $31 million from the prior-year quarter, primarily driven by lower costs from our post-Separation commercial agreements with IBM, partially offset by unfavorable currency impacts.
Principal Markets
| Three Months Ended March 31, | Year-over-Year | |||||||||
(Dollars in millions) |
| 2022 | 2021 | Change | |||||||
Revenue | $ | 1,579 | $ | 1,825 | (14) | % | |||||
Revenue growth in constant currency | (9) | % | (6) | % | |||||||
Adjusted EBITDA | $ | 98 | $ | 52 | 89 | % | |||||
For the three months ended March 31, 2022, Principal Markets revenue of $1.6 billion decreased 14 percent as compared to the prior-year quarter. Revenue decreased due to certain joint ventures not transferring to us in connection with the Separation as well as an unfavorable currency exchange rate impact of five points, primarily driven by the strengthening of the U.S. dollar against the Euro and British pound. Adjusted EBITDA increased $46 million from the prior year, primarily due to the benefit from structural actions taken in prior periods as well as lower costs from our post-Separation commercial agreements with IBM.
Strategic Markets
| Three Months Ended March 31, | Year-over-Year | |||||||||
(Dollars in millions) |
| 2022 | 2021 | Change | |||||||
Revenue | $ | 978 | $ | 955 | 2 | % | |||||
Revenue growth in constant currency | 6 | % | (11) | % | |||||||
Adjusted EBITDA | $ | 92 | $ | 96 | (5) | % | |||||
For the three months ended March 31, 2022, Strategic Markets revenue of $978 million increased 2 percent as compared to the prior-year quarter, despite a four-point headwind from currency exchange rates. Revenue increased due
29
Management Discussion (continued)
to strong revenue generation from recent signings of incremental business. Adjusted EBITDA decreased $4 million from the prior year, since the majority of Strategic Markets countries were not charged for IBM software pre-Separation and software cost allocations began post-Separation. The increased software costs from IBM partially offset by higher revenues.
Corporate and Other
Corporate and other had an adjusted EBITDA loss of $56 million in the three months ended March 31, 2022, compared to a loss of $40 million in the three months ended March 31, 2021.
Costs and Expenses
Three Months Ended March 31, | Percent of Revenue | Change | |||||||||||||
(Dollars in millions) |
| 2022 | 2021 |
| 2022 | 2021 |
| 2022 vs. 2021 | |||||||
Revenue | $ | 4,431 | $ | 4,771 | 100.0 | % | 100.0 | % | (7) | % | |||||
Cost of services | 3,824 | 4,318 | 86.3 | % | 90.5 | % |
| (11) | % | ||||||
Selling, general and administrative expenses | 690 | 714 | 15.6 | % | 15.0 | % |
| (3) | % | ||||||
Workforce rebalancing charges |
| — |
| 52 |
| — | % | 1.1 | % |
| NM | ||||
Transaction-related costs | 58 | 55 | 1.3 | % | 1.2 | % | 5 | % | |||||||
Interest expense |
| 21 |
| 14 |
| 0.5 | % | 0.3 | % |
| 54 | % | |||
Other expenses |
| 27 |
| 22 |
| 0.6 | % | 0.5 | % |
| 21 | % | |||
Income (loss) before income taxes | $ | (189) | $ | (403) |
|
|
|
| NM | ||||||
NM – not meaningful
Cost of services were 86.3% of revenue in the three months ended March 31, 2022, compared to 90.5% in the three months ended March 31, 2021, primarily driven by benefits realized from structural actions taken in prior periods as well as lower costs from our post-Separation commercial agreements with IBM. Selling, general and administrative expenses were 15.6% of revenue in 2022 compared to 15.0% in 2021, primarily driven by our stand-alone expense structure compared to allocations incurred in the prior year within IBM. Workforce rebalancing charges arise from structural actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to employees terminated in the ongoing course of business. Workforce rebalancing charges were not incurred in 2022 and were 1.1% of revenue in 2021. Transaction-related costs were 1.3% of revenue in 2022 compared to 1.2% in 2021, primarily driven by higher marketing expenses to establish the Kyndryl brand in the current quarter. Interest expense was 0.5% of revenue in 2022 compared to 0.3% in 2021, and includes interest expense associated with the indebtedness we incurred in connection with our Separation. Other expenses were 0.6% of revenue in 2022 compared to 0.5% in 2021.
Transaction-related Charges
The Company classifies certain expenses related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs” in the Consolidated Income Statement. Transaction-related costs include expenditures incurred to prepare for and execute the Separation and establish Kyndryl as a standalone business. These costs include employee retention expenses, information technology costs, marketing expenses to establish the Kyndryl brand, legal, accounting, consulting and other professional service costs required to prepare for and execute the Separation, and other costs related to contract and supplier novation and integration. Transaction-related charges totaled $58 million and $55 million for the three months ended March 31, 2022 and 2021, respectively.
Income Taxes
The provision for income taxes for the three months ended March 31, 2022, was $40 million, compared to $91 million for the three months ended March 31, 2021. Our income tax expense for the three months ended March 31, 2022,
30
Management Discussion (continued)
was primarily related to undistributed foreign earnings, taxes on foreign operations and the establishment of valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized. Our income tax expense for the three months ended March 31, 2021, was primarily driven by the geographic mix of pretax income and changes in the valuation allowance.
In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction, including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies and actions. Estimates of future taxable income could change, perhaps materially, which may require us to revise our assessment of the recoverability of the deferred tax asset at that time.
Financial Position
Our historical balance sheet has been revised to reflect the previous over-accrual of $87 million related to accrued contract costs. Kyndryl concluded that this over-accrual was not material to its previously issued consolidated financial statements. Further information regarding the revision is included in "Note 14 – Revision of Prior-Period Financial Statements" of this Transition Report.
Dynamics
Cash and cash equivalents at March 31, 2022 were $2.1 billion, down $89 million compared to December 31, 2021. Total assets of $13.4 billion increased by $228 million from December 31, 2021, primarily driven by an increase in deferred costs of $201 million due to billings for prepaid software that typically occur in the first calendar quarter of the year, an increase of $188 million in prepaid expenses and other current assets due to increased spending of cloud-computing arrangements, an increase in goodwill of $91 million and an increase in intangible assets of $108 million primarily from the transfer of a majority interest (51%) of a joint venture in Japan from our former Parent that could not be completed at the Separation date due to local regulatory approvals, partially offset by a decrease in deferred tax assets of $120 million and a decrease in property and equipment of $89 million due to depreciation outpacing capital expenditures. Total liabilities of $10.7 billion increased by $284 million from December 31, 2021, primarily as a result of an increase in accounts payable of $415 million due to timing of invoice receipts from vendors, an increase in accrued contract costs of $178 million that was established with our former Parent and certain other vendors for the first time as an independent entity post-Separation, and an increase in accrued compensation and benefits of $128 million due to semi-annual incentive-compensation accruals in certain regions and the timing of salary payments. This was partially offset by a decrease in retirement obligations of $140 million primarily due to higher discount rates used in the March 2022 remeasurement of pension obligations. Total equity of $2.7 billion decreased $56 million from December 31, 2021, principally due to our net loss in the period, partially offset by the change in pension obligations.
Working Capital
March 31, | December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Current assets |
| $ | 6,092 |
| $ | 5,777 |
Current liabilities |
| 5,058 |
| 4,457 | ||
Working capital | $ | 1,035 | $ | 1,320 | ||
Working capital decreased $285 million from the year-end 2021 position. Current assets increased $315 million due to an increase of $223 million in deferred costs (current portion) driven by billings for prepaid software that typically occur in the first calendar quarter of the year and an increase of $188 million in prepaid expenses and other current assets due to increased spending of cloud-computing arrangements, partially offset by a decrease of cash of $89 million. Current liabilities increased $601 million as a result of an increase in accounts payable of $415 million due to timing of invoice receipts from vendors and an increase in accrued contract costs of $178 million that was established with certain vendors for the first time as an independent entity post-Separation.
31
Management Discussion (continued)
Noncurrent Assets and Liabilities
Noncurrent assets of $7.3 billion at March 31, 2022, decreased by $87 million (and decreased by $9 million adjusted for currency) compared to December 31, 2021, primarily driven by a decline in property and equipment of $89 million due to depreciation outpacing new capital expenditures, a decline in deferred tax assets of $120 million and a decline in noncurrent right-of-use assets of $49 million, partially offset by an increase in goodwill of $91 million and intangible assets of $108 million due to the business combinations in the quarter (see Note 8 – Intangible Assets Including Goodwill).
Noncurrent liabilities of $5.7 billion at March 31, 2022, decreased $317 million (and decreased by $277 million adjusted for currency) compared to December 31, 2021, mainly driven by a decrease in retirement benefit of $140 million as a result of higher discount rates used in the March remeasurement of pension obligations, a decrease in operating lease liabilities (noncurrent portion) of $78 million driven by lease payments and a decrease in other noncurrent liabilities of $73 million related to lower deferred tax liabilities.
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows are summarized in the table below.
Three Months Ended March 31, | |||||||
(Dollars in millions) |
| 2022 |
| 2021 | |||
Net cash provided by (used in): |
|
|
|
| |||
Operating activities | $ | 189 | $ | (328) | |||
Investing activities |
| (225) |
| (100) | |||
Financing activities |
| (43) |
| 443 | |||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| (7) |
| (3) | |||
Net change in cash, cash equivalents and restricted cash | $ | (86) | $ | 13 | |||
Net cash provided by operating activities of $189 million in the three months ended March 31, 2022, compared to a net cash use of $328 million in the prior-year period was driven by a decrease in net loss and cash provided by accounts payables, accrued compensation and benefits and accrued contract costs.
Net cash used by investing activities of $225 million in the three months ended March 31, 2022, compared to a net cash use of $100 million in the prior-year period was driven by the sale of a data center in the quarter ended March 31, 2021, that provided net cash proceeds of $90 million and cash used for business combinations in the quarter ended March 31, 2022.
Net cash used by financing activities of $43 million in the three months ended March 31, 2022, compared to net cash provided by financing activities of $443 million in the prior-year period was driven by a decrease in net transfers from former Parent of $460 million, as transfers from former Parent did not continue post-Separation.
Other Information
Signings
The following tables present the Company’s signings for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31, | |||||
(Dollars in billions) |
| 2022 |
| 2021 | ||
Total signings | $ | 3.1 | $ | 2.5 | ||
32
Management Discussion (continued)
The following tables present the total contract value for the Company’s signings greater than $100 million for new and existing customers for the three months ended March 31, 2022 and 2021.
Three Months Ended March 31, | ||||||
(Dollars in millions) | 2022 | 2021 | ||||
New customers | $ | — | $ | 218 | ||
Existing customers | $ | 938 | $ | 141 | ||
We believe that the estimated values of signings provide insight into the Company’s potential future revenue and a tool to monitor trends in the business, including the business’ ability to attract new customers and sell additional scope into our existing customer base, and we believe signings are helpful information for investors. There are no third-party standards or requirements governing the calculation of signings. We define signings as an initial estimate of the value of a customer’s commitment under a contract. The calculation involves estimates and judgments to gauge the extent of a customer’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger outsourcing contracts. The conversion of signings into revenue may vary based on the types of services and solutions, customer decisions and other factors, which may include, but are not limited to, the macroeconomic environment or external events.
Liquidity and Capital Resources
We believe that our existing cash and cash equivalents and the Revolving Credit Agreement entered into in October 2021 will be sufficient to meet our anticipated cash needs for at least the next twelve months.
Senior Unsecured Notes
In October 2021, in preparation for our Spin-off, we completed the offering of $2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes as follows: $700 million aggregate principal amount of 2.05% Senior Notes due 2026, $500 million aggregate principal amount of 2.70% Senior Notes due 2028, $650 million aggregate principal amount of 3.15% Senior Notes due 2031 and $550 million aggregate principal amount of 4.10% Senior Notes due 2041 (the “Notes”). The Notes were offered and sold to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to non-U.S. persons in reliance on Regulation S of the Securities Act. The Notes are subject to customary affirmative covenants, negative covenants and events of default for financings of this type and are redeemable at our option in a customary manner.
In connection with the issuance of the Notes, we entered into a registration rights agreement with the initial purchasers of the Notes, pursuant to which we will use commercially reasonable efforts to file and have declared effective a registration statement with respect to a registered offer to exchange each series of Notes for new notes with substantially identical terms by October 15, 2022. If the exchange offer is not completed on or before October 15, 2022, and under certain other circumstances, we are required to use commercially reasonable efforts to file and have declared effective a shelf registration statement relating to the resale of the Notes.
Term Loan and Revolving Credit Facility
In October 2021, we entered into a $500 million three-year variable rate term loan credit agreement (the “Term Loan Credit Agreement”). In November 2021, we drew down the full $500 million available under the Term Loan Credit Agreement.
33
Management Discussion (continued)
In October 2021, we entered into a $3.15 billion multi-currency revolving credit agreement (the “Revolving Credit Agreement” and, together with the Term Loan Credit Agreement, the “Credit Agreements”) for our future liquidity needs.
The Revolving Credit Agreement expires, unless extended, in October 2026, and the Term Loan Credit Agreement matures, unless extended, in November 2024. Interest rates on borrowings under the Credit Agreements are based on prevailing market interest rates, plus a margin, as further described in the Credit Agreements.
The Notes and the Credit Agreements were initially guaranteed by IBM. Approximately $900 million of the net proceeds from the term loan and the sale of the Notes was transferred to IBM in conjunction with the Separation. Following the completion of the Separation, the guarantee was released, and the Notes and the Credit Agreements are no longer obligations of IBM.
We may voluntarily prepay borrowings under the Credit Agreements without premium or penalty, subject to customary “breakage” costs. The Credit Agreements include certain customary mandatory prepayment provisions. In addition, the Credit Agreements include customary events of default and affirmative and negative covenants as well as a maintenance covenant that will require that the ratio of our indebtedness for borrowed money to consolidated EBITDA (as defined in the Credit Agreements) for any period of four consecutive fiscal quarters be no greater than 3.50 to 1.00.
Receivables Purchase Agreement
A portion of our receivables with extended payment terms were historically assigned to IBM’s Global Financing business. In connection with the assignment, these receivables were not recognized on the Company’s Consolidated Balance Sheet. In October 2021, in preparation for the Separation, we entered into a receivables purchase agreement with an unaffiliated bank with similar volumes to the amounts historically financed by IBM (the “Receivables Agreement”). Pursuant to the Receivables Agreement, we may sell at any one time, on a revolving basis, up to $1.1 billion of our trade receivables. Under the Receivables Agreement, from time to time, we sell certain customers’ trade receivables with extended payment terms at a discount on a non-recourse basis. These transactions are accounted for as sales. The initial term of the Receivables Agreement is 18 months.
Critical Accounting Estimates
The application of GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. There have been no changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 10, 2022 (the “Form 10-K”).
34
Management Discussion (continued)
Cautionary Note Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements concerning the Company’s plans, objectives, goals, beliefs, business strategies, future events, business condition, results of operations, financial position, business outlook and business trends and other non-historical statements in this report are forward-looking statements. Such forward-looking statements often contain words such as “will,” “anticipate,” “predict,” “project,” “contemplate,” “plan,” “forecast,” “estimate,” “expect,” “intend,” “target,” “may,” “should,” “would,” “could,” “seek,” “aim” and other similar words or expressions or the negative thereof or other variations thereon. Forward-looking statements are based on the Company’s current assumptions and beliefs regarding future business and financial performance. The Company’s actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others:
| ● | risks related to the Company’s recent spin-off from IBM; |
| ● | failure to attract new customers, retain existing customers or sell additional services to customers; |
| ● | technological developments and the Company’s response to such developments; |
| ● | failure to meet growth and productivity objectives; |
| ● | competition; |
| ● | impacts of relationships with critical suppliers; |
| ● | inability to attract and retain key personnel and other skilled employees; |
| ● | impact of local legal, economic, political, health and other conditions, including the COVID-19 pandemic; |
| ● | a downturn in economic environment and customer spending budgets; |
| ● | damage to the Company’s reputation; |
| ● | inability to accurately estimate the cost of services and the timeline for completion of contracts; |
| ● | service delivery issues; |
| ● | the Company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; |
| ● | the impact of our business with government customers; |
| ● | failure of the Company’s intellectual property rights to prevent competitive offerings and the failure of the Company to obtain necessary licenses; |
| ● | risks relating to cybersecurity and data privacy; |
| ● | adverse effects from tax matters and environmental matters; |
| ● | legal proceedings and investigatory risks; |
| ● | impact of changes in market liquidity conditions and customer credit risk on receivables; |
| ● | the Company’s pension plans; |
| ● | the impact of foreign currency fluctuations; and |
| ● | risks related to the Company’s common stock and the securities market. |
Additional risks and uncertainties include, among others, those risks and uncertainties described in the “Risk Factors” section of the Form 10-K, as such factors may be updated from time to time in the Company’s periodic filings with the SEC. Any forward-looking statement in this report speaks only as of the date on which it is made. Except as required by law, the Company assumes no obligation to update or revise any forward-looking statements.
35
Management Discussion (continued)
Website and Social Media Disclosure
The Company may use its website and/or social media outlets, such as Facebook, LinkedIn and Twitter, as distribution channels of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at https://investors.kyndryl.com, its Facebook page at https://www.facebook.com/kyndryl, its LinkedIn page at https://linkedin.com/company/kyndryl and its Twitter account (@Kyndryl) at https://twitter.com/Kyndryl. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Investor Email Alerts” section under the “Resources” section at https://investors.kyndryl.com.
36
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For our disclosures about market risk, see the information under the heading “Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K. There have been no material changes to the Company’s disclosure about market risk in the Form 10-K.
Item 4. Controls and Procedures
The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
37
Part II — Other Information
Item 1. Legal Proceedings
Refer to Note 10 – Commitments and Contingencies, in the notes to consolidated financial statements in this report.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in the Form 10-K. There have been no material changes with respect to the risk factors disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
38
Item 6. Exhibits
Exhibit Number | Description of Exhibit |
2.1 | |
3.1 | |
3.2 | |
10.1 | |
10.2 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and do not apply in any other context or at any time other than the date they were made.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Kyndryl Holdings, Inc. | ||||
(Registrant) | ||||
Date: | May 13, 2022 | |||
By: | /s/ Vineet Khurana | |||
Vineet Khurana | ||||
Vice President and Controller (Principal Accounting Officer and Authorized Signatory) | ||||
40
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Martin J. Schroeter, certify that:
1. I have reviewed this Transition Report on Form 10-QT of Kyndryl Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 13, 2022
| /s/ Martin J. Schroeter |
| Martin J. Schroeter |
| Chairman and Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, David B. Wyshner, certify that:
1. I have reviewed this Transition Report on Form 10-QT of Kyndryl Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 13, 2022
| /s/ David B. Wyshner |
| David B. Wyshner |
| Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 32.1
KYNDRYL HOLDINGS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Transition Report of Kyndryl Holdings, Inc. (the “Company”) on Form 10-QT for the transition period from January 1, 2022 to March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin J. Schroeter, Chairman and Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 13, 2022
| /s/ Martin J. Schroeter |
| Martin J. Schroeter |
| Chairman and Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 32.2
KYNDRYL HOLDINGS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Transition Report of Kyndryl Holdings, Inc. (the “Company”) on Form 10-QT for the transition period from January 1, 2022 to March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David B. Wyshner, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 13, 2022
| /s/ David B. Wyshner |
| David B. Wyshner |
| Chief Financial Officer |
| (Principal Financial Officer) |