KYNDRYL HOLDINGS, INC. OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
Overview
For the Three Months Ended For the Nine Months Ended
September 30 , September 30 ,(Dollars in millions) 2021 2020 Change 2021 2020 Change Revenue$ 4,579 $ 4,856 (5.7) %$ 14,102 $ 14,425 (2.2) % Cost of services (1) 4,182 4,332 (3.5) 12,727 12,876 (1.2) Gross profit (1) $ 397$ 524 (24.2) %$ 1,375 $ 1,549 (11.2) % Gross profit margin (1) 8.7 % 10.8 % (2.1) pts. 9.7 % 10.7 % (1.0) pts. Total expense and other (income) (2) $ 866$ 694 24.7 %$ 2,565 $ 2,598 (1.2) % Loss before income taxes (3)$ (469) $ (170) NM$ (1,191) $ (1,050) NM Provision for income taxes 223 68 230.4 % 389 243 59.8 % Net loss (3)$ (692) $ (238) NM$ (1,579) $ (1,293) NM Net loss margin (15.1) % (4.9) % (10.2) pts. (11.2) % (9.0) % (2.2) pts.
(1) Includes impact from
charges for the three and nine months ended
(2) Includes
the three and nine months ended
(3) Includes
the three and nine months ended
NM - not meaningful
At September 30, At December 31,
(Dollars in millions) 2021 2020
Assets $ 12,063 $ 11,205
Liabilities $ 6,581 $ 6,274
Equity $ 5,481 $ 4,931
Organization of Information
Kyndryl 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 to prepare historic
combined financial statements. The combined financial statements 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 periods presented. For additional information, see "Basis of
Presentation" in note 1, "Background and Basis of Presentation" to the
accompanying unaudited Combined Financial Statements.
Financial Performance Summary
Macro Dynamics
With the unprecedented COVID-19 pandemic and macroeconomic uncertainty beginning inMarch 2020 , many clients experienced declines in their business volumes, and client priorities shifted to maintaining operational stability, flexibility and preservation of cash. While there was continued demand for offerings that support their digital 28 Table of Contents
Management Discussion (continued)
transformation, clients moved to shorter-duration engagements and prioritized operational expenditures over capital expenditures. These dynamics began impacting our performance in 2020.
We expect the rate and pace of recovery from the pandemic to differ by geography and industry. The underlying fundamentals of our business continue to remain sound as we continue to manage through this macroeconomic uncertainty, since large organizations' need for assistance in designing, building, managing and modernizing technology systems is enduring.
2021 Financial Performance
Three months ended
In the third quarter of 2021, we reported$4.6 billion in revenue, a decrease of 5.7 percent. This trend was consistent across all segments as some existing clients paused on new project activity in advance of our Spin-off.Americas revenue declined 5.6 percent, EMEA declined 5.2 percent,Japan declined 5.2 percent, andAsia Pacific declined 9.3 percent. Gross profit margin of 8.7 percent decreased 2.1 points versus the prior-year period, including$108 million of spin-off-related charges. Excluding these charges, gross profit margin increased 0.2 points year-over-year, reflecting the benefits from the workforce rebalancing actions taken in 2020. Total expense and other income of$866 million increased 24.7 percent, primarily due to spin-off-related charges of$165 million recorded in the third quarter of 2021. Net loss of$692 million increased$454 million versus the prior-year period.
Nine months ended
In the first nine months of 2021, we reported$14.1 billion in revenue, a decline of 2.2 percent when compared to the prior-year period.Americas revenue declined 3.9 percent compared to the first nine months of 2020, EMEA declined 0.4 percent,Japan declined 0.9 percent, andAsia Pacific declined 4.9 percent. Gross profit margin of 9.7 percent declined by 1 point versus the prior-year period, including$168 million of spin-off-related charges. Excluding these charges, gross profit margin increased 0.2 points year-over-year, reflecting the benefits from the workforce rebalancing actions taken in 2020. Total expense and other income of$2.6 billion decreased 1.2 percent year-over-year primarily driven by lower workforce rebalancing charges, offset by spin-off-related charges recorded in the first nine months of 2021. Net loss of$1.6 billion increased by$287 million versus the prior-year period. Net cash used in operating activities in the first nine months of 2021 of$725 million includes$319 million of cash outflows driven by current-year payments for our workforce rebalancing actions initiated in the fourth quarter of 2020. Total assets of$12.1 billion increased by$858 million fromDecember 31, 2020 primarily driven by an increase in cash and cash equivalents and restricted cash of$713 million , an increase in deferred taxes of$421 million and an increase in accounts receivable of$302 million , partially offset by a decrease in property and equipment of$510 million . Total liabilities of$6.6 billion increased by$307 million from year-end 2020 primarily as a result of an increase in retirement and nonpension postretirement benefit obligations of$445 million , long-term debt of$141 million from a bank loan agreement to finance a purchase of software licenses, and an increase in accrued compensation and benefits of$121 million , partially offset by a decrease in workforce rebalancing liabilities of$387 million . Total equity of$5.5 billion increased$550 million from year-end 2020, mainly driven by totalNet Parent investment of$557 million . 29 Table of Contents
Management Discussion (continued)
Third Quarter and First Nine Months in Review
Segment Results
The following tables represent changes in reportable segments' revenue and gross margin results in the third quarter and first nine months of 2021 versus the same periods of 2020. Segment revenue, revenue growth at constant currency and pretax income (losses) exclude any transactions between the segments. Revenue growth at constant currency is a non-GAAP measure that eliminates the effects of exchange rate fluctuations when translating from foreign currencies tothe United States dollar. It is calculated by using the average exchange rate that existed for the same period of the prior year. Constant currency measures are provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. These disclosures are provided in addition to, and not as a substitute for, the percentage change in revenue on a GAAP basis for the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes. (Dollars in millions) Year-over-Year For the three months ended September 30: 2021 2020 ChangeAmericas Revenue as reported$ 1,737 $ 1,841 (5.6) % Revenue growth at constant currency (6.6) % Gross profit 250 290 (13.5) % Gross profit margin 14.4 % 15.2 % (0.8) pts. EMEA Revenue as reported$ 1,741 $ 1,837 (5.2) % Revenue growth at constant currency (6.7) % Gross profit (23) 12 NM Gross profit margin (1.3) % 0.9 % (2.2) pts. Japan Revenue as reported$ 729 $ 769 (5.2) % Revenue growth at constant currency (1.6) % Gross profit 133 154 (13.5) % Gross profit margin 18.3 % 20.3 % (2.0) pts. Asia Pacific Revenue as reported$ 372 $ 410 (9.3) % Revenue growth at constant currency (11.1) % Gross profit 37 68 (46.1) % Gross profit margin 9.9 % 16.2 % (6.3) pts. Total Revenue as reported$ 4,579 $ 4,856 (5.7) % Revenue growth at constant currency (6.2) % Gross profit 397 524 (24.2) % Gross profit margin 8.7 % 10.8 % (2.1) pts. NM - not meaningful 30 Table of Contents
Management Discussion (continued)
(Dollars in millions)
Year-over-Year
For the nine months ended September 30: 2021 2020 ChangeAmericas Revenue as reported$ 5,334 $ 5,553 (3.9) % Revenue growth at constant currency (5.3) % Gross profit 823 847 (2.8) % Gross profit margin 15.4 % 15.2 % 0.2 pts. EMEA Revenue as reported$ 5,370 $ 5,394 (0.4) % Revenue growth at constant currency (6.6) % Gross profit (77) 46 NM Gross profit margin (1.4) % 0.9 % (2.3) pts. Japan Revenue as reported$ 2,236 $ 2,257 (0.9) %
Revenue growth at constant currency
0.0 % Gross profit 455 458 (0.6) % Gross profit margin 20.3 % 20.3 % 0.1 pts.Asia Pacific Revenue as reported$ 1,161 $ 1,222 (4.9) % Revenue growth at constant currency (10.5) % Gross profit 174 198 (12.1) % Gross profit margin 15.0 % 16.2 % (1.2) pts. Total Revenue as reported$ 14,102 $ 14,425 (2.2) % Revenue growth at constant currency (5.4) % Gross profit 1,375 1,548 (11.2) % Gross profit margin 9.7 % 10.7 % (1.0) pts. NM - not meaningful Americas (Dollars in millions) Year-over-Year For the three months ended September 30: 2021 2020 Change Revenue$ 1,737 $ 1,841 (5.6) % Gross profit 250 290 (13.5) % Gross profit margin 14.4 % 15.2 % (0.8) pts. Pretax income (loss)$ (89) $ (13) NM Pretax margin (5.1) % (0.7) % (4.4) pts. NM - not meaningful (Dollars in millions) Year-over-Year For the nine months ended September 30: 2021 2020 Change Revenue$ 5,334 $ 5,553 (3.9) % Gross profit 823 847 (2.8) % Gross profit margin 15.4 % 15.2 % 0.2 pts. Pretax income (loss)$ (211) $ (230) NM Pretax margin (4.0) % (4.1) % 0.2 pts. NM - not meaningful 31 Table of Contents
Management Discussion (continued)
In the third quarter of 2021,Americas revenue of$1.7 billion declined by 5.6 percent when compared to the prior-year period. For the first nine months of 2021,Americas revenue of$5.3 billion decreased 3.9 percent as compared to the prior-year period. Gross profit margin percent declined 0.8 points in the third quarter and improved 0.2 points in the first nine months of 2021, respectively, as compared to the prior-year period. Pretax loss of$89 million in the third quarter of 2021 and$211 million in the first nine months of 2021 increased$76 million and decreased$19 million , respectively, when compared to the prior-year periods. Pretax margin of (5.1) percent and (4.0) percent decreased by 4.4 points and increased 0.2 points in the three and nine months endedSeptember 30, 2021 , respectively, when compared to the prior-year periods.
(Dollars in millions)
Year-over-Year
For the three months ended September 30: 2021 2020 Change Revenue$ 1,741 $ 1,837 (5.2) % Gross profit (23) 12 NM Gross profit margin (1.3) % 0.9 % (2.2) pts. Pretax income (loss)$ (381) $ (280) NM Pretax margin (21.9) % (15.2) % (6.6) pts. NM - not meaningful (Dollars in millions) Year-over-Year
For the nine months ended September 30: 2021 2020
Change Revenue$ 5,370 $ 5,394 (0.4) % Gross profit (77) 46 NM Gross profit margin (1.4) % 0.9 % (2.3) pts. Pretax income (loss)$ (1,126) $ (1,101) NM Pretax margin (21.0) % (20.4) % (0.6) pts. NM - not meaningful In the third quarter of 2021, EMEA revenue of$1.7 billion decreased 5.2 percent when compared to the prior-year period. For the first nine months of 2021, EMEA revenue of$5.4 billion decreased 0.4 percent as compared to the prior-year period. Gross profit margin percent declined by 2.2 points and 2.3 points to (1.3) percent and (1.4) percent, in the third quarter and first nine months of 2021, respectively, as compared to the prior-year periods. Overall, gross profit margins within the EMEA segment are typically lower than those in other reportable segments due to a higher labor resource cost profile. Pretax loss of$381 million in the third quarter of 2021 and$1.1 billion in the first nine months of 2021 increased$101 million and$25 million , respectively, compared to the prior-year periods. Pretax margin of (21.9) percent and (21.0) percent declined by 6.6 points in the three months endedSeptember 30, 2021 and 0.6 points in the first nine months of 2021, when compared to the prior-year periods. 32 Table of Contents
Management Discussion (continued)
Japan (Dollars in millions) Year-over-Year For the three months ended September 30: 2021 2020 Change Revenue$ 729 $ 769 (5.2) % Gross profit 133 154 (13.4) % Gross profit margin 18.3 % 20.3 % (2.0) pts. Pretax income (loss)$ 23 $ 56 (58.9) % Pretax margin 3.1 % 7.3 % (4.1) pts. (Dollars in millions) Year-over-Year For the nine months ended September 30: 2021 2020 Change Revenue$ 2,236 $ 2,257 (0.9) % Gross profit 455 458 (0.6) % Gross profit margin 20.3 % 20.3 % 0.1 pts. Pretax income (loss)$ 78 $ 131 (40.4) % Pretax margin 3.5 % 5.8 % (2.3) pts. In the third quarter of 2021,Japan revenue of$729 million decreased 5.2 percent when compared to the prior-year period. For the first nine months of 2021,Japan revenue of$2.2 billion decreased 0.9 percent when compared to the prior-year period. Gross profit margin percent decreased 2.0 points and increased 0.1 points, in the third quarter and first nine months of 2021, respectively, as compared to the prior-year periods. Pretax income of$23 million in the third quarter of 2021 and$78 million in the first nine months of 2021 decreased$33 million and$53 million , respectively, when compared to the prior-year periods. Pretax margin declined by 4.1 points and 2.3 points in the three and nine months endedSeptember 30, 2021 , respectively, when compared
to the prior-year periods.Asia Pacific (Dollars in millions) Year-over-Year For the three months ended September 30: 2021 2020 Change Revenue$ 372 $ 410 (9.3) % Gross profit 37 68 (46.1) % Gross profit margin 9.9 % 16.2 % (6.3) pts. Pretax income (loss)$ (23) $ 66 NM Pretax margin (6.1) % 16.2 % (22.3) pts. NM - not meaningful (Dollars in millions) Year-over-Year For the nine months ended September 30: 2021 2020 Change Revenue$ 1,161 $ 1,222 (4.9) % Gross profit 174 198 (12.1) % Gross profit margin 15.0 % 16.2 % (1.2) pts. Pretax income (loss)$ 68 $ 149 (54.5) % Pretax margin 5.8 % 12.2 % (6.4) pts.
In the third quarter and first nine months of 2021,Asia Pacific revenue of$372 million and$1.2 billion , decreased 9.3 percent and 4.9 percent, respectively, when compared to the prior-year periods. Gross profit margin percent declined by 6.3 points in the third quarter of 2021 as compared to the prior-year period and decreased by 1.2 points in first nine months of 2021 as compared to the prior-year period. The pretax loss of$23 million in the third quarter of 2021 and pretax income of$68 million in the first nine months of 2021 decreased$89 million and$81 million in the first nine months of 2021, respectively, when compared to the prior-year periods. Pretax margin declined by 22.3 points and 6.4 points in the first nine months of 2021, respectively, when compared to
the
prior-year periods.
33
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Management Discussion (continued)
Spin-off-related Charges
For the Three Months Ended For the Nine Months Ended(Dollars in millions) September 30, 2021 September 30, 2021 Cost of services $ 108 $ 168 Selling, general and administrative expenses 162 329 Workforce rebalancing charges 3 7 Research, development and engineering expenses
1 1 Total costs and expenses $ 273 $ 505 The process of completing our Separation involves significant costs and expenses. Spin-off-related charges are primarily related to costs to establish certain standalone functions and information technology systems, professional services fees and other transaction-related costs during the Company's transition to being a standalone public company. These charges are primarily recorded within Selling, general and administrative expenses and cost of services in the Combined Income Statement. These costs primarily include finance, IT, consulting and legal fees, facilities costs, and other items that are incremental and one-time in nature. During the three and nine months endedSeptember 30, 2021 , we recorded spin-off-related charges of$273 million and$505 million , respectively. There were no spin-off-related charges recorded in the third quarter and first nine months of 2020.
Total Expense and Other Income
(Dollars in millions) Year-over-Year
For the three months ended September 30: 2021 2020
Change
Expense and other (income) Selling, general and administrative expenses$ 854 (1)$ 654 30.6 % Workforce rebalancing charges/(benefit) (1) (2) (1)
NM
Research, development and engineering expenses 14 17
(21.6) % Interest expense 17 16 5.5 % Other (income) and expense (17) 8 NM
Total expense and other (income)$ 866 (3)$ 694
24.7 %
(1) Includes
(2) Includes
(3) Includes
NM- not meaningful (Dollars in millions) Year-over-Year
For the nine months ended September 30: 2021 2020
Change
Expense and other (income) Selling, general and administrative expenses$ 2,421 (1)$ 2,123 14.1 % Workforce rebalancing charges 40 (2) 355 (88.9) % Research, development and engineering expenses 42 56
(24.6) %
Interest expense 46 47 (1.2) %
Other (income) and expense 16 17 (5.2) %Total expense and other (income)$ 2,565 (3)$ 2,598
(1.2) %
(1) Includes
(2) Includes
(3) Includes
Total expense and other (income) increased 24.7 percent in the third quarter of
2021 versus the prior year primarily driven by spin-off-related charges recorded
in the quarter.
34
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Management Discussion (continued)
Total expense and other (income) declined by 1.2 percent in the nine months
ended
For additional information regarding total expense and other (income) for both periods, see the following analyses by category.
Selling, General and Administrative Expense
(Dollars in millions)
Year-over-Year
For the three months ended September 30: 2021 2020
Change
Selling, general and administrative expense Allocation of corporate expenses$ 292 $ 266 9.8 % Spin-off-related charges 162 - NM Related party intangible assets fee 12 12 0.2 % Stock-based compensation 12 11 14.9 % Advertising and promotional expense 7 8 (10.6) % Provision for (benefit from) expected credit loss expense (4) (4) NM Amortization of acquired intangible assets 5 5 (3.8) % Other selling, general and administrative expenses 368 356 3.3 % Total selling, general and administrative expense$ 854 $ 654
30.6 %
NM - not meaningful
(Dollars in millions) Year-over-Year
For the nine months ended September 30: 2021 2020 Change
Selling, general and administrative expense
Allocation of corporate expenses $ 922 $ 860 7.2 %
Spin-off-related charges 329 - NM
Related party intangible assets fee 37 37 1.5 %
Stock-based compensation 32 28 14.9 %
Advertising and promotional expense 20 26 (21.9) %
Provision for (benefit from) expected credit loss expense (27) 24 NM
Amortization of acquired intangible assets 14 15 (4.1) %
Other selling, general and administrative expenses 1,094 1,134 (3.5) %
Total selling, general and administrative expense $ 2,421 $ 2,123 14.1 %
NM - not meaningful
Total selling, general and administrative (SG&A) expense increased 30.6 percent
in the third quarter of 2021 versus the prior year, primarily driven by
spin-off-related charges in the current-year period of
Total SG&A expense increased 14.1 percent in the first nine months of 2021
versus the prior year driven primarily by spin-off-related charges in the
current-year period of
Provisions for expected credit loss expense decreased$51 million year-over-year in the first nine months of 2021, primarily driven by decreases in both specific and general reserves in the current year compared with increases in the prior-year period. In the prior year, the global pandemic resulted in some deterioration in customer credit quality and/or bankruptcies which had an impact to provisions in the first nine months of 2020. Total provision as percentage of receivables was 3.2 percent atSeptember 30, 2021 , compared to 5.9 percent atDecember 31, 2020 primarily driven by lower customer-specific provisions. 35
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Management Discussion (continued)
Workforce Rebalancing
Workforce rebalancing charges decreased$316 million year-over-year in the first nine months endedSeptember 30, 2021 when compared to the prior-year period. Workforce rebalancing charges are recorded in the Combined Income Statement for severance and employee-related benefits in accordance with the accounting guidance for ongoing benefit arrangements. The impact to pretax income by segment for the nine months endedSeptember 30, 2020 was as follows: EMEA$236 million ,Americas $84 million ,Asia Pacific $19 million , andJapan $15 million .
Research, Development and Engineering Expense
(Dollars in millions) Year-over-Year
For the three months ended
(Dollars in millions)
Year-over-Year
For the nine months ended
Research, development and engineering (RD&E) expense was$14 million and$42 million in the three and nine months endedSeptember 30, 2021 , a decrease of$3 million and$14 million compared to the prior-year periods. Within these amounts, software-related expense was$12 million and$35 million in the third quarter and first nine months of 2021, respectively. Other (Income) and Expense (Dollars in millions) Year-over-Year
For the three months ended
$ 7 $ 7 (6.7) % Allocation of corporate expenses (income) 2 2 (12.8) % Net(gain) loss from derivatives (5) (1)
NM
Net(gain) loss from property disposition (20) -
NM
Other (income) and expense (1) 1
NM
Total other (income) and expense$ (17) $ 8 NM % NM- not meaningful (Dollars in millions) Year-over-Year For the nine months ended September 30: 2021 2020 Change Other (income) and expense Retirement-related costs (income)$ 21 $ 20 4.6 % Allocation of corporate expenses (income) 10 5 106.0 % Net(gain) loss from derivatives 3 (10)
NM
Net(gain) loss from property disposition (17) -
NM
Other (income) and expense (1) 2
NM
Total other (income) and expense$ 16 $ 17 (5.2) % NM- not meaningful
Total other (income) and expense was$17 million of income and$16 million of expense in the third quarter and first nine months of 2021. Other (income) and expense decreased by$25 million in the third quarter when compared to the prior-year period driven by a gain on property disposition. Other (income) and expense decreased by$1 million in the first nine months of 2021 when compared to the prior-year period primarily driven by a gain on property disposition, 36 Table of Contents
Management Discussion (continued)
offset by net exchange losses (including impacts from IBM derivative instruments) in the current-year period versus net exchange gains (including impacts from IBM derivative instruments) in the prior-year period.
Interest Expense (Dollars in millions) Year-over-Year
For the three months ended
$ 17 $ 16 5.2 % Allocation of corporate expenses 17 16 (Dollars in millions) Year-over-Year
For the nine months ended
$ 46 $ 47 (1.2) % Allocation of corporate expenses 46 47 Interest expense increased$1 million in the third quarter of 2021 compared to the prior-year period and decreased$1 million in the first nine months of 2021 versus prior-year period. We share in a portion of the interest expense incurred by Parent as Parent's debt balance is considered to support the operations of our business. Such interest expense was allocated on a pro rata basis based on our portion of total assets compared to Parent. In addition, we incurred interest expense on a loan transferred over to the Company in the third quarter of 2021. Income Taxes The provision for income taxes for the third quarter of 2021 was$223 million , compared to$68 million in the third quarter of 2020. The provision for income taxes for the first nine months of 2021 was$389 million , compared to$243 million for the first nine months of 2020. The provision for income taxes for the periods presented was attributable to jurisdictions generating taxable income as well as jurisdictions in which losses do not generate a benefit for the Company. The increase in the provision for income taxes was primarily driven by tax charges related to the transfer ofKyndryl's operations from Parent in contemplation of the Company's separation from IBM.
Financial Position
Dynamics
Cash, restricted cash and marketable securities atSeptember 30, 2021 were$751 million , up$713 million when compared to prior year end. Total assets of$12.1 billion increased by$858 million fromDecember 31, 2020 predominantly driven by increases in deferred taxes of$421 million and accounts receivables of$302 million , partially offset by a decrease in property and equipment of$510 million . Total liabilities of$6.6 billion increased by$307 million from year-end 2020 primarily as a result of an increase in retirement and nonpension postretirement benefit obligations of$445 million in connection with establishment of certainKyndryl legal entities, as a result of which the Company was required to assume certain retirement and nonpension postretirement benefit obligations. This was partially offset by a decrease in workforce rebalancing liabilities of$387 million . Total equity of$5.5 billion increased$550 million from year-end 2020, mainly driven by an increase inNet Parent investment of$557 million .
Net cash used in operating activities of
Overall pension funded status as of the end of September was materially consistent with year-end 2020.
37
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Management Discussion (continued)
Working Capital
At September 30, At December 31,
(Dollars in millions) 2021 2020
Current assets $ 3,856 $ 2,843
Current liabilities 3,709 3,910
Working capital $ 147 $ (1,067)
Working capital improved
Current assets increased
? An increase of
and
? An increase of
Current liabilities decreased
? A decrease in workforce rebalancing liabilities of
to payments related to the action taken in 2020, partially offset by
? An increase in compensation and benefits of
? An increase in value-added tax liabilities of
Receivables and Allowances
Roll Forward of Receivables Allowance for Credit Losses
(Dollars in millions) January 1, 2021 Additions / (Releases) Write-offs Other* September 30, 2021 $ 91 $ (27)$ (5) $ (1) $ 58
* Primarily represents translation adjustments and reclassifications.
Total provision as percentage of receivables was 3.2 percent at
As discussed in Note 4, "Segments", we will be evaluating the recasting of our geographic segments to reflect management's updated view of the business. The annual goodwill impairment test cycle is normally scheduled for the fourth quarter and will be conducted in the context of any recast in the reporting units. It is possible that the carrying value of a new reporting unit will exceed its estimated fair value, in which case the difference would result in a non-cash impairment charge.
Non-Current Assets and Liabilities
Non-current assets of$8.2 billion atSeptember 30, 2021 decreased by$155 million (increased by$189 million adjusted for currency) when compared toDecember 31, 2020 , primarily driven by a decline in property and equipment of$510 million which includes the impact from the sale of a datacenter inJapan of$101 million , offset by an increase in 38
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Management Discussion (continued)
deferred taxes of
Non-current liabilities of$2.9 billion atSeptember 30, 2021 increased$509 million ($617 million adjusted for currency) when compared toDecember 31, 2020 , mainly driven by an increase in retirement and nonpension postretirement benefit obligations of$445 million in connection with establishment of certainKyndryl legal entities, as a result of which the Company was allocated pension assets and required to assume certain retirement and nonpension postretirement benefit obligations. Equity
Total equity of
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Combined Statement of Cash Flows are summarized in the table below.
(Dollars in millions) For the nine months endedSeptember 30 : 2021
2020
Net cash provided by/(used in) continuing operations Operating activities$ (725) $ 323 Investing activities (425) (678) Financing activities 1,876 350 Effect of exchange rate changes on cash, cash equivalents and restricted cash (12)
(3)
Net change in cash, cash equivalents and restricted cash$ 713 $ (7)
Net cash from operating activities declined
? A decrease in cash provided by receivables of
collections performance in the prior-year period, and
? A decrease in workforce rebalancing liabilities of
driven by payments.
Net cash used by investing activities decreased$253 million in the first nine months of 2021 when compared to the prior-year period driven by sales of data centers and higher spending in prior periods. Net cash provided by financing activities increased$1.5 billion in the first nine months of 2021 when compared to the prior-year period driven by an increase in net transfers from IBM of$1.4 billion and an increase in third-party debt of$140 million . 39 Table of Contents
Management Discussion (continued)
Other Information Signings
The following tables present the Company's signings for the three and nine
months ended
(Dollars in billions)
Year-over-Year
For the three months ended September 30: 2021 2020 Change Total signings$ 2.8 $ 4.0 (29.2) % (Dollars in billions) Year-over-Year
For the nine months ended
$ 9.1 $ 12.1 (25.0) % The following tables present the total contract value for the Company's signings greater than$100 million for new and existing customers for the three and nine months endedSeptember 30, 2021 . Three Months Ended Nine Months Ended ($ in millions) September 30, September 30, 2021 New $ - $ 218 Existing $ 564 $ 2,942 2020 New $ - $ 558 Existing $ 1,805 $ 5,715
Signings were historically used by IBM's management as an initial estimate of the value of a customer's commitment under a contract. Our management continues to evaluate the metrics that we will utilize to assess business performance moving forward as an independent company. We believe that the estimated values of signings provide insight into the Company's potential future revenue and that IBM management historically used signings as a tool to monitor the performance of the business including the business' ability to attract new customers and sell additional scope into our existing customer base, as well as viewed signings as useful decision-making information for investors. There are no third-party standards or requirements governing the calculation of signings. The calculation historically used by IBM's management, which is the same calculation we have used in this report, 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, macroeconomic environment or external events.
Liquidity and Capital Resources
We believe that our existing cash and cash equivalents and the subsequent Notes, Term Loan Credit Agreement and Revolving Credit Agreement each entered into inOctober 2021 will be sufficient to meet our anticipated cash needs for at least the next 12 months. 40 Table of Contents
Management Discussion (continued)
Senior Unsecured Notes
InOctober 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 (the "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 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 byOctober 15, 2022 . If the exchange offer is not completed on or beforeOctober 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
InOctober 2021 , we entered into a$500 million three-year variable rate term loan credit agreement (the "Term Loan Credit Agreement"). InNovember 2021 , we drew down the full$500 million available under the Term Loan Credit Agreement. InOctober 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, inOctober 2026 and the Term Loan Credit Agreement matures, unless extended, inNovember 2024 . Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, plus a margin, as further described in the Credit Agreements. The Notes, revolving credit facility and term loan 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 onNovember 3, 2021 , the guarantee was released, and the Notes, term loan and revolving credit facility are no longer obligations of IBM. We expect to be able to 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. 41
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Management Discussion (continued)
Receivables Purchase Agreement
A portion of our receivables with extended payment terms were historically assigned to IBM's Global Financing business. These receivables were not recognized on the Company's Combined Balance Sheet. InOctober 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.
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.
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Management Discussion (continued)
Additional risks and uncertainties include, among others, those risks and uncertainties described in the "Risk Factors" section of the Company's Form 10 included as Exhibit 99.1 to Amendment No. 1 filed with theSecurities and Exchange Commission (the "SEC") onOctober 12, 2021 , as such factors may be updated from time to time in the Company's periodic filings with theSEC . 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.
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. 43 Table of Contents
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