美國
證券交易委員會
華盛頓特區20549
表格
證券交易所法案
截至2022年1月31日的季度期
或者
證券交易所法案
在從_______________到_______________的過渡期間
（委託文件編號）
(根據其章程規定的註冊人準確名稱)
| ||
（設立或組織的其他管轄區域） | （納稅人識別號） | |
，（主要行政辦公地址） | (郵政編碼) |
(註冊人電話號碼，包括區號)
N/A
（前名稱、地址及財政年度，如果自上次報告以來有更改）
每個交易所的名稱
每一類的名稱 |
| 交易標的 |
| 普通股，每股面值$0.001 |
請用複選標記表示，註冊公司（1）是否在過去12個月內（或者針對註冊公司需要提交上述報告的更短時期內）已提交1934年證券交易法第13或15(d)條規定提交的所有報告，並且（2）在過去90天內是否受到這些提交要求的約束。
請勾選以下內容。申報人是否已在過去12個月內（或申報人需要提交此類文件的時間較短的期間內）逐個以電子方式提交了根據規則405提交的互動數據文件。這章的交易中規定。
請勾選標記以說明註冊人是大型快速申報人、加速申報人、非加速申報人、較小的報告公司還是新興成長型公司。請查看《交易所法》第120億.2條中「大型快速申報人」、「加速申報人」、「較小的報告公司」和「新興成長型公司」的定義。
如果是新興增長公司，請勾選是否註冊人選擇不使用執行交易所第13（a）條規定所提供的任何新的或修訂的財務會計準則的推遲過渡期。 ☐☐ | |
非加速歸檔企業☐ | 小型報告公司 |
新興成長公司 |
如果是新興成長型企業，請勾選複選標記，表明註冊者已選擇不使用延長過渡期來符合根據證券交易法第13(a)條規定提供的任何新財務會計準則。 ☐
請在對應的複選框內表示下文所提及的公司是否爲殼公司（如1934年第12b-2條規定所定義）。是
截至2024年10月31日，註冊人普通股每股面值$0.01的股份數量爲
第I部分-財務信息
項目 1. 綜合基本報表（未經審計）：
KYNDRYL HOLDINGS, INC.
合併利潤表
（以百萬爲單位，每股數據除外）
(未經審計)
截至9月30日，三個月的結束 | 截至9月30日的六個月 | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
收入 | $ | | $ | | $ | | $ | | ||||
服務成本 | $ | | $ | | $ | | $ | | ||||
銷售，總務及管理費用 | | | | | ||||||||
員工再平衡費用 | | | | | ||||||||
交易相關成本 | — | | | | ||||||||
利息支出 | | | | | ||||||||
其他支出 | | | | | ||||||||
總成本和費用 | $ | | $ | | $ | | $ | | ||||
稅前收益（虧損） | $ | ( | $ | ( | $ | | $ | ( | ||||
所得稅費用 | $ | | $ | | $ | | $ | | ||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||
基本每股收益（虧損） | $ | ( | $ | ( | $ | ( | $ | ( | ||||
攤薄每股收益（虧損） | $ | ( | $ | ( | $ | ( | $ | ( | ||||
加權平均基本股本數 | | | | | ||||||||
每股加權平均攤薄股數 | | | | | ||||||||
財務報表的附註是不可或缺的組成部分。
3
KYNDRYL HOLDINGS, INC.
綜合收益（損失）綜合報表
(金額單位：百萬美元)
(未經審計)
| 截至9月30日，三個月的結束 | 截至9月30日的六個月 | ||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
| $ | ( | $ | ( | $ | ( | $ | ( | ||||
稅前其他全面收益(虧損): | ||||||||||||
外幣財務報表折算調整： | ||||||||||||
外幣兌換調整 | | ( | | ( | ||||||||
淨投資對沖未實現收益（損失） | ( | — | ( | — | ||||||||
外幣貨幣兌換調整總額 | | ( | | ( | ||||||||
現金流量套期交易未實現收益（損失）： | ||||||||||||
期間內發生的未實現收益（損失）： | ( | | ( | | ||||||||
將（損益）重新分類至淨利潤 | — | ( | — | ( | ||||||||
現金流量套期產品未實現收益（損失）總額 | ( | | ( | | ||||||||
養老相關福利計劃-淨利潤（損失）攤銷 | | | | | ||||||||
稅前其他綜合收益(虧損) | | ( | | ( | ||||||||
與其他全面收益（損失）項目相關的所得稅（支出）利益 | | ( | | ( | ||||||||
其他綜合收益（虧損），淨額 | | ( | | ( | ||||||||
總綜合收益（損失） | $ | | $ | ( | $ | | $ | ( | ||||
財務報表的附註是不可或缺的組成部分。
4
KYNDRYL HOLDINGS, INC.
合併資產負債表
在所提供的時期內，某些重要措施如下：
(未經審計)
2021年9月30日 | [12月31日] | |||||
| 2024 |
| 2024 | |||
資產： |
|
| ||||
流動資產： | ||||||
現金及現金等價物 | $ | | $ | | ||
受限現金 | | | ||||
應收賬款（扣除$ | | | ||||
待攤費用（流動部分） |
| |
| | ||
預付費用和其他流動資產 | | | ||||
總流動資產 | $ | | $ | | ||
資產和設備，淨值 | $ | | $ | | ||
經營租賃權資產淨值 | | | ||||
遞延成本（非流動部分） | | | ||||
遞延所得稅 | | | ||||
商譽 | | | ||||
無形資產, 淨額 | | | ||||
養老金資產 | | | ||||
其他非流動資產 | | | ||||
資產總額 | $ | | $ | | ||
負債： | ||||||
流動負債: | ||||||
應付賬款 | $ | | $ | | ||
增值稅和所得稅責任 | | | ||||
開多次數 | | | ||||
應計的薪酬和福利 |
| |
| | ||
遞延收入（流動部分） |
| |
| | ||
經營租賃負債（流動部分） |
| |
| | ||
應計合同成本 | | | ||||
其他應計費用和負債 | | | ||||
流動負債合計 | $ | | $ | | ||
長期債務 | $ | | $ | | ||
養老和非養老後離職福利義務 | | | ||||
遞延收入（非流動部分） | | | ||||
經營租賃負債（非流動部分） | | | ||||
其他非流動負債 | | | ||||
負債合計 | $ | | $ | | ||
承諾和 contingencies | ||||||
股東權益： | ||||||
股東權益 | ||||||
普通股，每股面值 $，授權股數：百萬股；發行股數：分別爲2024年6月30日和2023年12月31日：百萬股；流通股數：分別爲2024年6月30日和2023年12月31日：百萬股 | $ | | $ | | ||
累積赤字 | ( | ( | ||||
庫藏股，按成本計量（股份：2024年9月30日－ | ( | ( | ||||
累計其他綜合收益(虧損) | ( | ( | ||||
非控股權前的股東權益總額 | $ | | $ | | ||
非控股權益 | | | ||||
股東權益總計 | $ | | $ | | ||
負債和所有者權益總額 | $ | | $ | | ||
財務報表的附註是不可或缺的組成部分。
5
KYNDRYL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended September 30, | ||||||
| 2024 |
| 2023 | |||
Cash flows from operating activities: |
|
|
| |||
Net income (loss) | $ | ( | $ | ( | ||
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
| ||||
Depreciation and amortization: |
|
| ||||
Depreciation of property, equipment and capitalized software | | | ||||
Depreciation of right-of-use assets | | | ||||
Amortization of transition costs and prepaid software |
| |
| | ||
Amortization of capitalized contract costs | | | ||||
Amortization of acquisition-related 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 | ( | ( | ||||
Other assets and other liabilities |
| ( |
| | ||
Net cash provided by (used in) operating activities | $ | | $ | ( | ||
Cash flows from investing activities: |
|
| ||||
Capital expenditures | $ | ( | $ | ( | ||
Proceeds from disposition of property and equipment |
| |
| | ||
Acquisitions and divestitures, net of cash acquired | ( | — | ||||
Other investing activities, net | | ( | ||||
Net cash used in investing activities | $ | ( | $ | ( | ||
Cash flows from financing activities: |
|
| ||||
Debt repayments | $ | ( | $ | ( | ||
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 beginning of period | $ | | $ | | ||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
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 | Other | Non- | |||||||||||||||||||
Paid-In Capital | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||
Shares | Amount | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||
Equity – July 1, 2024 | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||
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 – September 30, 2024 | $ | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||||
Common Stock and | Accumulated | ||||||||||||||||||||
Additional | Other | Non- | |||||||||||||||||||
Paid-In Capital | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||
Shares | Amount | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||
Equity – July 1, 2023 | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||
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 – September 30, 2023 | | $ | | $ | ( | $ | ( | $ | ( | $ | $ | | |||||||||
Common Stock and | Accumulated | ||||||||||||||||||||
Additional | Other | Non- | |||||||||||||||||||
Paid-In Capital | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||
Shares | Amount | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||
Equity – April 1, 2024 | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||
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 – September 30, 2024 | $ | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||||
Common Stock and | Accumulated | ||||||||||||||||||||
Additional | Other | Non- | |||||||||||||||||||
Paid-In Capital | Comprehensive | Treasury | Accumulated | Controlling | Total | ||||||||||||||||
Shares | Amount | Income (Loss) | Stock | Deficit | Interests | Equity | |||||||||||||||
Equity – April 1, 2023 | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||
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 – September 30, 2023 | $ | $ | ( | $ | ( | $ | ( | $ | | $ | | ||||||||||
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 IT infrastructure services provider in the world, serving thousands of enterprise customers whose operations span over
In November 2021, our former Parent effected the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit of its Global Technology Services segment through the distribution of shares of Kyndryl’s common stock to IBM stockholders. Kyndryl’s stock began trading as an independent company on November 4, 2021.
Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the accompanying financial statements include all adjustments necessary to present fairly the Company’s financial position and its results of operations for all the periods presented. The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2024.
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
The accompanying financial statements are presented on a consolidated basis. All significant transactions and intercompany accounts between Kyndryl entities were eliminated.
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 and deferred transition costs. Future results may be different from these estimates.
The Company uses the estimated annual effective tax rate method in computing its interim tax provision in accordance with U.S. GAAP. The estimated annual effective tax rate is applied to the year-to-date ordinary income, exclusive of discrete items, to arrive at the reported interim tax provision.
Change in Accounting Estimate
In March 2024, the Company completed its assessment of the useful lives of its information technology equipment. Based on our usage experience and data analysis, the Company determined it should increase the estimated useful lives of its information technology equipment from to
8
Notes to Consolidated Financial Statements (continued)
NOTE 2. ACCOUNTING PRONOUNCEMENTS
Recent Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. The guidance should be applied retrospectively, effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the disclosures in its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which is intended to enhance the transparency and usefulness of income tax disclosures through improved reporting related to the rate reconciliation and income taxes paid. The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the disclosures in its 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 for 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. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency.
At September 30, 2024, the aggregate amount of RPO related to customer contracts that are unsatisfied or partially unsatisfied was $
During the three and six months ended September 30, 2024, revenue was increased by $
9
Notes to Consolidated Financial Statements (continued)
Contract Balances
The following table provides information about accounts receivable, contract assets and deferred income balances:
September 30, | March 31, | |||||
(Dollars in millions) |
| 2024 |
| 2024 | ||
Accounts receivable (net of allowances for credit losses of $ | $ | | $ | | ||
Contract assets ** |
| |
| | ||
Deferred income (current) |
| |
| | ||
Deferred income (noncurrent) |
| |
| | ||
* | Including unbilled receivable balances of $ |
** | Contract assets represent goods or services delivered by the Company, which give the Company the right to consideration that is typically subject to milestone completion or client acceptance and are included within prepaid expenses and other current assets in the Consolidated Balance Sheet. |
The amount of revenue recognized during the three and six months ended September 30, 2024 that was included within the deferred income balance at the beginning of the period was $
The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the six months ended September 30, 2024 and 2023.
Six Months Ended September 30, | ||||||
(Dollars in millions) | 2024 |
| 2023 | |||
Beginning balance | $ | | $ | | ||
Additions (releases) | ( | — | ||||
Write-offs | | ( | ||||
Other * | — | ( | ||||
Ending balance | $ | | $ | | ||
* | Primarily represents translation adjustments. |
The contract assets allowance for expected credit losses was not material in any of the periods presented.
Major Clients
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 September 30, 2024 and March 31, 2024:
September 30, | March 31, | |||||
(Dollars in millions) |
| 2024 |
| 2024 | ||
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 September 30, 2024 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 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 Company made a minor change to its geographic reportable segments effective June 1, 2024 to reflect how the Company manages its operations and measures business performance, transitioning the reporting and management of its operations in Australia/New Zealand from the Principal Markets segment to the Strategic Markets segment. All historical segment information has been recast to reflect this change.
The measure of segment operating performance used by Kyndryl’s CODM is adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) excluding income taxes, interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased and owned fixed assets, charges related to lease terminations, transaction-related costs, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges incurred prior to March 31, 2024, impairment expense, significant litigation costs and benefits, and
11
Notes to Consolidated Financial Statements (continued)
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.
Our geographic markets frequently work together to sell and implement certain contracts. The resulting revenues and costs from these contracts may be apportioned among the participating geographic markets. 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.
The following table reflects the results of the Company’s segments:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
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 segment adjusted EBITDA to consolidated pretax income (loss):
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Segment adjusted EBITDA | $ | | $ | | $ | | $ | | ||||
Workforce rebalancing charges incurred prior to March 31, 2024 | — | ( | — | ( | ||||||||
Charges related to ceasing to use leased/fixed assets and lease terminations | ( | — | ( | ( | ||||||||
Transaction-related costs | — | ( | ( | ( | ||||||||
Stock-based compensation expense | ( | ( | ( | ( | ||||||||
Interest expense | ( | ( | ( | ( | ||||||||
Depreciation of property, equipment and capitalized software | ( | ( | ( | ( | ||||||||
Amortization expense | ( | ( | ( | ( | ||||||||
Corporate expense not allocated to the segments | ( | ( | ( | ( | ||||||||
Other adjustments* | ( | ( | | ( | ||||||||
Pretax income (loss) | $ | ( | $ | ( | $ | | $ | ( | ||||
| * | Other adjustments represent pension expenses other than pension servicing costs and multi-employer plan costs, significant litigation costs and benefits, and currency impacts of highly inflationary countries. For the three and six months ended September 30, 2023, other adjustments also include an adjustment to reduce amortization expense for the amount already included in transaction-related costs above. |
12
Notes to Consolidated Financial Statements (continued)
NOTE 5. TAXES
For the three months ended September 30, 2024, the Company’s effective tax rate was (
The Company’s effective tax rate for the three months ended September 30, 2024 and 2023 and the six months ended September 30, 2023 was lower than the Company’s statutory tax rate, and its effective tax rate for the six months ended September 30, 2024 was higher than the Company’s statutory tax rate, primarily due to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.
NOTE 6. NET LOSS PER SHARE
We did
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
(In millions, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||
Net income (loss) on which basic and diluted earnings per share is calculated | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Number of shares on which basic and diluted earnings (loss) per share is calculated | | | | | ||||||||
Basic earnings (loss) per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted earnings (loss) per share |
| ( | ( |
| ( | ( | ||||||
For the three and six months ended September 30, 2024 and 2023, the number of shares on which basic and diluted earnings (loss) per share is calculated was the same as a result of the net loss incurred in the period. The following securities were not included in the computation of diluted earnings per share:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||
(In millions) | 2024 | 2023 | 2024 | 2023 | ||||
Nonvested restricted stock units | | | | | ||||
Nonvested performance-conditioned stock units | | | | | ||||
Nonvested market-conditioned stock units | | | | | ||||
Stock options issued and outstanding | | | | | ||||
Total | | | | | ||||
13
Notes to Consolidated Financial Statements (continued)
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 and |
| ● | 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. The determination of fair value considers various factors including yield curves and time value underlying the financial instruments. For derivatives and debt securities, the Company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.
In determining the fair value of 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:
| ● | Counterparty credit risk adjustments are applied to 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 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 balances 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 asset impairments on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value is less than carrying value. There were
14
Notes to Consolidated Financial Statements (continued)
Financial Assets and Liabilities Measured at Fair Value
The following table presents the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2024 and March 31, 2024:
Fair Value | ||||||||||||||||||||
Hierarchy | At September 30, 2024 | At March 31, 2024 | ||||||||||||||||||
(Dollars in millions) |
| Level |
| Assets |
| Liabilities |
| Fair Value |
| Assets |
| Liabilities |
| Fair Value | ||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||
Foreign exchange contracts | 2 | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||
Cross-currency swap contracts | 2 | | | ( | | | ( | |||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||
Foreign exchange contracts | 2 | | | ( | | | ( | |||||||||||||
Total | $ | | $ | | $ | ( | $ | | $ | | $ | ( | ||||||||
The gross balances of derivative assets, including accrued interest, are contained within prepaid expenses and other current assets and other noncurrent assets in the Consolidated Balance Sheet. The gross balances of derivative liabilities are contained within other accrued expenses and liabilities and other noncurrent liabilities in the Consolidated Balance Sheet. The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures. 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, or 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. See Note 10 – Borrowings for additional information. Our outstanding debt (excluding finance lease obligations) had a carrying value of $
15
Notes to Consolidated Financial Statements (continued)
Transfers of Financial Assets
The Company has entered into agreements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company has determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized at the time of the transfer.
The net proceeds from these arrangements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under this program were $
Derivative Financial Instruments
The following table summarizes the notional amounts of the Company’s outstanding derivatives:
At September 30, 2024 | At March 31, 2024 | |||||||||||||||||
(Dollars in millions) | Foreign Exchange Contracts |
| Cross-currency Swap Contracts |
| Total Notional Amount | Foreign Exchange Contracts |
| Cross-currency Swap Contracts |
| Total Notional Amount | ||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||
Cash flow hedges | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
Net investment hedges | | | | — | | | ||||||||||||
Derivatives not designated as hedging instruments | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
The notional amounts of derivative instruments do not necessarily represent the amounts exchanged by the Company with third parties and are not necessarily a direct measure of the financial exposure.
Derivatives Designated as Hedging Instruments
Cash Flow Hedges
The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain currencies. Changes in fair value of derivatives designated as cash flow hedges are recorded, net of applicable taxes, in other comprehensive income (“OCI”) 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.
The maximum remaining length of time over which the Company hedged its exposure is approximately
16
Notes to Consolidated Financial Statements (continued)
Net Investment Hedges
The Company has entered into and designated cross-currency interest rate swap contracts and currency forward contracts as net investment hedges to mitigate foreign exchange exposure related to net investments. Under the terms of the cross-currency swaps, the Company makes fixed-rate payments in foreign currencies and receives fixed-rate amounts in U.S. dollars, with the exchange of the underlying notional amounts at maturity whereby the Company will receive U.S. dollars and pay foreign currencies at exchange rates which are determined at contract inception. Under the terms of the currency forward contracts, the Company commits to sell the local currency of certain subsidiaries in exchange for U.S. dollars at specified forward rates. Derivatives designated as net investment hedges are accounted for using the spot method, with changes in the fair value of the derivatives attributable to changes in spot rates recorded within foreign currency translation (“CTA”) as a component of other comprehensive income (loss) and remaining there until the hedged net investments are sold or substantially liquidated. The changes in the fair value of the derivatives that are attributable to changes in the difference between the forward rate and spot rate are excluded from the assessment of hedge effectiveness. The changes in fair value that are attributable to the excluded components are initially recorded in CTA and then recognized in interest expense on the Consolidated Income Statement over the life of the derivative instruments. Cash flows from derivatives designated as net investment hedges are reported as cash flows from investing activities in the Consolidated Statement of Cash Flows, except for cash flows from the periodic interest settlements of cross-currency interest rate swaps designated as net investment hedges, which are reported as cash flows from operating activities in the Consolidated Statement of Cash Flows.
The maximum remaining length of time over which the Company has hedged its exposure is approximately
Derivatives Not Designated as Hedging Instruments
The Company enters into currency forward and swap contracts to hedge exposures related to assets, liabilities and earnings across its subsidiaries. These contracts are not designated as hedging instruments, and therefore changes in fair value of these contracts are reported in earnings in other expense in the Consolidated Income Statement. The gains and losses on these contracts generally offset the gains and losses in the underlying hedged exposures, which are also reported in other expense in the Consolidated Income Statement. 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
17
Notes to Consolidated Financial Statements (continued)
The Effect of Derivative Instruments in the Consolidated Income Statement
The effects of derivatives designated as hedging instruments on the Consolidated Income Statement and Other Comprehensive Income are as follows:
Unrealized Gain (Loss) | Consolidated | Gain (Loss) Reclassified | ||||||||||||
(Dollars in millions) | Recognized in OCI | Income Statement | from AOCI to Income | |||||||||||
Three months ended September 30: |
| 2024 |
| 2023 |
| Line Item |
| 2024 |
| 2023 | ||||
Derivative instruments in cash flow hedges: | ||||||||||||||
Foreign exchange contracts | $ | ( | $ | | Cost of services | $ | — | $ | | |||||
Derivative instruments in net investment hedges*: | ||||||||||||||
Cross-currency swaps | ( | — | Interest expense | | — | |||||||||
Foreign exchange contracts | ( | — | Interest expense | | — | |||||||||
Total | $ | ( | $ | |
| $ | | $ | | |||||
Unrealized Gain (Loss) | Consolidated | Gain (Loss) | ||||||||||||
(Dollars in millions) | Recognized in OCI | Income Statement | Reclassified from AOCI | |||||||||||
Six months ended September 30: |
| 2024 |
| 2023 |
| Line Item |
| 2024 |
| 2023 | ||||
Derivative instruments in cash flow hedges: | ||||||||||||||
Foreign exchange contracts | $ | ( | $ | | Cost of services | $ | — | $ | | |||||
Derivative instruments in net investment hedges*: | ||||||||||||||
Cross-currency swaps | — | — | Interest expense | | — | |||||||||
Foreign exchange contracts | ( | — | Interest expense | | — | |||||||||
Total | $ | ( | $ | |
| $ | | $ | | |||||
| * | For the three and six months ended September 30, 2024, the Company recognized a gain of $ |
For the three and six months ended September 30, 2024 and 2023, there were
The effects of derivatives not designated as hedging instruments on the Consolidated Income Statement are as follows:
Consolidated | Gain (Loss) | |||||||
(Dollars in millions) | Income Statement | Recognized on Derivatives | ||||||
Three months ended September 30: |
| Line Item | 2024 |
| 2023 | |||
Foreign exchange contracts | $ | | $ | ( | ||||
Total |
| $ | | $ | ( | |||
Consolidated | Gain (Loss) | |||||||
(Dollars in millions) | Income Statement | Recognized on Derivatives | ||||||
Six months ended September 30: |
| Line Item | 2024 |
| 2023 | |||
Foreign exchange contracts | $ | | $ | ( | ||||
Total |
| $ | | $ | ( | |||
18
Notes to Consolidated Financial Statements (continued)
NOTE 8. ACQUISITIONS AND DIVESTITURES
Acquisition of Skytap
In April 2024, the Company completed the acquisition of Skytap, Inc. (“Skytap”), a leading specialized workload services provider, by acquiring all outstanding equity interests of Skytap in exchange for cash consideration. The acquisition of Skytap was accounted for as a business combination in accordance with ASC 805, Business Combinations. Our financial statements for the three and six months ended September 30, 2024 reflect the assets, liabilities, operating results and cash flows of Skytap, commencing from the acquisition date. The Company acquired Skytap for cash consideration of approximately $
The acquisition of Skytap expands the Company’s hybrid cloud services portfolio. The purchase price allocation resulted in approximately $
During the quarter ended September 30, 2024, the Company made immaterial adjustments to the preliminary purchase price allocation impacting the valuation of goodwill and assets transferred. The purchase price allocation for this acquisition is preliminary, and there may be further 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 date.
Disposal of the Securities Industry Services (“SIS”) Business
In the three months ended June 30, 2024, the Company entered into a definitive agreement to sell its transaction processing platform for the securities brokerage industry services in Canada (which is a component of the Company’s Principal Markets segment), known as “SIS”, for approximately $
The Company classifies assets and liabilities as held for sale in the period when all the relevant classification criteria have been met. Assets and liabilities held for sale are measured at the lower of carrying value or fair value less costs to sell. Losses (if any) resulting from the measurement are recognized in the period in which the held for sale criteria are met. Conversely, gains from a disposal group are not recognized until the date of sale. The fair value of a disposal group, less any costs to sell, will be reassessed during each subsequent reporting period it remains classified as held for sale, and any subsequent changes will be reported as an adjustment to the carrying value of the disposal group until it is no longer classified as held for sale. Upon determining that a disposal group meets the criteria as held for sale, the Company discontinues depreciation and amortization of the related assets and liabilities.
The Company classified the assets and liabilities related to SIS as held for sale in the three months ended June 30, 2024 within “Prepaid expenses and other current assets” and “Other accrued expenses and liabilities” on the Consolidated Balance Sheet. This disposition is not accounted for as discontinued operations as it does not meet the relevant criteria. The carrying value of the net assets being sold is not material.
19
Notes to Consolidated Financial Statements (continued)
NOTE 9. INTANGIBLE ASSETS INCLUDING GOODWILL
Intangible Assets
The following table presents the Company’s intangible asset balances by major asset class.
At September 30, 2024 | At March 31, 2024 | |||||||||||||||||
| 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 | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
* Amounts include effects from foreign currency translation.
The net carrying amount of intangible assets increased by $
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at September 30, 2024:
Capitalized | Customer | Completed | Patents and | ||||||||||||
(Dollars in millions) | Software |
| Relationships | Technology | Trademarks | Total | |||||||||
Year ending March 31: | |||||||||||||||
2025 (remaining six months) | $ | | $ | $ | $ | $ | |||||||||
2026 | |
| |||||||||||||
2027 | |
| |||||||||||||
2028 | | | — |
| |||||||||||
2029 | | | — |
| |||||||||||
Thereafter | | | — | — |
| ||||||||||
20
Notes to Consolidated Financial Statements (continued)
Goodwill
The changes in the goodwill balances by segment for the six months ended September 30, 2024 were as follows:
Foreign Currency | |||||||||||||||
(Dollars in millions) | Balance at | Acquisitions and | Translation | Balance at | |||||||||||
Segment | March 31, 2024 | (Divestitures)* | Adjustments | Reallocation |
| September 30, 2024 | |||||||||
United States | $ | — | $ | | $ | — | $ | — | $ | | |||||
Japan | | — | | — | | ||||||||||
Principal Markets |
| |
| ( |
| — |
| ( |
| | |||||
Strategic Markets |
| |
| — |
| — |
| |
| | |||||
Total | $ | | $ | ( | $ | | $ | — | $ | | |||||
| * | These amounts represent the goodwill acquired as part of the purchase of Skytap, in addition to the allocation of goodwill to assets held for sale related to the divestiture of the SIS business using the relative fair value approach. See Note 8 – Acquisitions and Divestitures for additional details. |
As discussed in Note 4 – Segments, Kyndryl’s operations in Australia/New Zealand transitioned from the Principal Markets segment to the Strategic Markets segment in the quarter ended June 30, 2024. As a result, the Company reallocated the goodwill associated with Australia/New Zealand from the Principal Markets segment to the Strategic Markets segment. The Company also performed a qualitative impairment test immediately before and after the change in reporting units and determined that it is not more likely than not that the fair value of the reporting units is less than their carrying amounts, including goodwill. Accordingly, the Company concluded that the goodwill related to those reporting units was not impaired.
There were
21
Notes to Consolidated Financial Statements (continued)
NOTE 10. BORROWINGS
Debt
The following table presents the components of our debt:
September 30, | March 31, | |||||||||
(Dollars in millions) | Interest Rate | Maturity | 2024 | 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 2034 | February 2034 | | | |||||||
Unsecured senior notes due 2041 | October 2041 | | | |||||||
Finance lease obligations | 2024-2030 | | | |||||||
$ | | $ | | |||||||
Less: Unamortized discount | | | ||||||||
Less: Unamortized debt issuance costs |
|
| | | ||||||
Less: Current portion of long-term debt |
|
| | | ||||||
Total long-term debt |
|
| $ | | $ | | ||||
| * | Including the cross-currency swaps that the Company entered into subsequent to the issuance of the unsecured senior notes due 2034, the effective interest rate on such notes was approximately |
** Weighted-average discount rate.
Contractual obligations of long-term debt outstanding at September 30, 2024, exclusive of finance lease obligations, are as follows:
(Dollars in millions)* |
| Principal | |
Year ending March 31: | |||
2025 (remaining six months) | $ | | |
2026 |
| | |
2027 |
| | |
2028 |
| — | |
2029 | | ||
Thereafter |
| | |
Total | $ | | |
| * | Contractual obligations approximate scheduled repayments. |
As of September 30, 2024, there were
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company guarantees certain loans and financial commitments, but the maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at September 30, 2024 and March 31, 2024 were not material. Additionally, the Company has contractual commitments that are noncancellable with certain software, hardware and cloud partners used in the delivery of services to customers. During the six months ended September 30, 2024, contractual commitments decreased due to satisfaction of existing commitments outpacing new additions.
22
Notes to Consolidated Financial Statements (continued)
As a Fortune 500 company with customers and employees around the world, Kyndryl is subject to, or could become subject to, either as plaintiff or defendant, a variety of contingencies, including claims, demands and suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. Given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the Company or its clients could become subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of Kyndryl’s scope and scale, the Company is subject to, or could become subject to, actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the Company’s benefit plans), as well as actions with respect to contracts, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, employees, government and regulatory agencies, stockholders and representatives of the locations in which the Company does business. Some of the actions to which the Company is, or may become, party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise. Additionally, the Company is, or may be, a party to agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters.
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.
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.
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 various aspects of IBM’s business, including its managed infrastructure business. BMC alleged IBM’s removal of BMC software from one of its client’s sites at the client’s request constituted breach of contract, fraudulent inducement and trade secret misappropriation. In May 2022, the trial court entered a judgment against IBM and awarded BMC $
Separately, certain contractual disputes have arisen between Kyndryl and IBM following the Separation. IBM and Kyndryl have commenced arbitration proceedings related to certain of these matters. Certain of these matters have recently been concluded, resulting in a credit recorded in Cost of services in the six months ended September 30, 2024, while others are in preliminary stages. Kyndryl intends to vigorously pursue its interests and defenses in these matters, including asserting its own claims in arbitration if necessary.
23
Notes to Consolidated Financial Statements (continued)
NOTE 12. EQUITY
The following tables present reclassifications and taxes related to items of other comprehensive income (loss) for the three and six months ended September 30, 2024 and 2023:
| Pretax |
| Tax (Expense) |
| Net-of-Tax | ||||
(Dollars in millions) |
| Amount |
| Benefit |
| Amount | |||
For the three months ended September 30, 2024: | |||||||||
Foreign currency translation adjustments: | |||||||||
Foreign currency translation adjustments | $ | | $ | — | $ | | |||
Unrealized gains (losses) on net investment hedges | ( | — | ( | ||||||
Total 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 – amortization of net (gains) losses* | $ | | $ | ( | $ | | |||
Other comprehensive income | $ | | $ | | $ | | |||
For the three months ended September 30, 2023: | |||||||||
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 – amortization of net (gains) losses* | $ | | $ | — | $ | | |||
Other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | |||
| * | These AOCI components are included in the computation of net periodic benefit cost. Refer to Note 13 – Retirement-Related Benefits for additional information. |
24
Notes to Consolidated Financial Statements (continued)
| Pretax |
| Tax (Expense) |
| Net-of-Tax | ||||
(Dollars in millions) |
| Amount |
| Benefit |
| Amount | |||
For the six months ended September 30, 2024: | |||||||||
Foreign currency translation adjustments: | |||||||||
Foreign currency translation adjustments | $ | | $ | — | $ | | |||
Unrealized gains (losses) on net investment hedges | ( | — | ( | ||||||
Total 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 – amortization of net (gains) losses* | $ | | $ | ( | $ | | |||
Other comprehensive income | $ | | $ | | $ | | |||
For the six months ended September 30, 2023: |
| ||||||||
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 – amortization of net (gains) losses* | $ | | $ | ( | $ | | |||
Other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | |||
| * | These AOCI components are included in the computation of net periodic benefit cost. Refer to Note 13 – Retirement-Related Benefits for additional information. |
25
Notes to Consolidated Financial Statements (continued)
The following tables present 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) | ||||||
July 1, 2024 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) | ( | | | | ||||||||
September 30, 2024 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
July 1, 2023 | $ | | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) | | ( | | ( | ||||||||
September 30, 2023 | $ | | $ | ( | $ | ( | $ | ( | ||||
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) | ||||||
April 1, 2024 | $ | — | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) | ( | | | | ||||||||
September 30, 2024 | $ | ( | $ | ( | $ | ( | $ | ( | ||||
April 1, 2023 | $ | — | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) | | ( | | ( | ||||||||
September 30, 2023 | $ | | $ | ( | $ | ( | $ | ( | ||||
* | Foreign currency translation adjustments are presented gross. |
NOTE 13. RETIREMENT-RELATED BENEFITS
The following table presents the components of net periodic pension cost for the defined benefit pension plans recognized in the Consolidated Income Statement for the three and six months ended September 30, 2024 and 2023.
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
| |
| |
| |
| | |||||
| ( |
| ( |
| ( |
| ( | |||||
| — |
| — |
| |
| | |||||
| — | | — | |||||||||
| | | | |||||||||
Net periodic pension cost |
| $ | |
| $ | |
| $ | |
| $ | |
* These components of net periodic pension cost are included in other expense in the Consolidated Income Statement.
The components of net periodic benefit cost for the nonpension postretirement benefit plans and multi-employer plans recognized in the Consolidated Income Statement were not material for any period presented.
26
Notes to Consolidated Financial Statements (continued)
NOTE 14. WORKFORCE REBALANCING AND SITE-RATIONALIZATION CHARGES
During the six months ended September 30, 2024, the Company initiated actions to reduce our overall cost structure and increase our operating efficiency which we expect to continue through the end of the 2025 fiscal year. These actions resulted in workforce rebalancing charges, and charges related to ceasing to use leased and owned fixed assets (collectively, the “Fiscal 2025 Program”). We expect the total charges to be incurred related to the Fiscal 2025 Program to be approximately $
During the year ended March 31, 2023, the Company initiated actions to reduce our overall cost structure and increase our operating efficiency, which continued through the year ended March 31, 2024. These actions resulted in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and lease termination charges (collectively, the “Fiscal 2024 Program”). The total charges incurred related to the Fiscal 2024 Program were approximately $
The following table presents the segment breakout of charges incurred during the three and six months ended September 30, 2024 and 2023.
Three Months Ended | Six Months Ended | Costs Incurred to Date | ||||||||||||||||
September 30, | September 30, | Fiscal 2025 | Fiscal 2024 | |||||||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | Program |
| Program | |||||||
United States | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Japan | | — | | | | | ||||||||||||
Principal Markets(1) | | | | | | | ||||||||||||
Strategic Markets(1) | | | | | | | ||||||||||||
Sub-total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Corporate and other | — | — | — | | — | | ||||||||||||
Total charges | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) | Kyndryl’s operations in Australia/New Zealand transitioned from Principal Markets to Strategic Markets in the quarter ended June 30, 2024; historical segment information has been recast to reflect this change. |
The following table presents the classification of workforce rebalancing and site-rationalization activities in the Consolidated Income Statement during the three and six months ended September 30, 2024 and 2023.
Three Months Ended | Six Months Ended | Costs Incurred to Date | ||||||||||||||||
September 30, | September 30, | Fiscal 2025 | Fiscal 2024 | |||||||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 |
| Program |
| Program | ||||||
Cost of services | $ | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||
Selling, general and administrative expenses | — | | | | | | ||||||||||||
Workforce rebalancing charges | | | | | | | ||||||||||||
Total charges | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
27
Notes to Consolidated Financial Statements (continued)
The following table presents the components of and changes in our workforce rebalancing and site-rationalization charges liabilities during the six months ended September 30, 2024.
Liabilities | |||||||||
Workforce | Related to | ||||||||
Rebalancing | Ceasing to Use | ||||||||
(Dollars in millions) |
| Liabilities* | Leased Assets | Total | |||||
Fiscal 2024 Program | |||||||||
Balance at March 31, 2024 | $ | | $ | — | $ | | |||
Charges | — | — | — | ||||||
Cash payments | ( | — | ( | ||||||
Non-cash adjustments | ( | — | ( | ||||||
Balance at September 30, 2024 | $ | — | $ | — | $ | — | |||
Fiscal 2025 Program | |||||||||
Balance at March 31, 2024 | $ | — | $ | — | $ | — | |||
Charges | | | | ||||||
Cash payments | ( | — | ( | ||||||
Non-cash adjustments | — | ( | ( | ||||||
Balance at September 30, 2024 | $ | | $ | — | $ | | |||
| * | The Fiscal 2024 Program excludes workforce rebalancing liabilities inherited from our former Parent of $ |
NOTE 15. SUBSEQUENT EVENT
The Company completed the sale of the SIS business described in Note 8 – Acquisitions and Divestitures in November 2024. The accounting for the divestiture, including the calculation of the expected gain, has not yet been completed.
28
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2024
Overview
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 | ||||||||||
Revenue | $ | 3,774 | $ | 4,073 | $ | 7,513 | $ | 8,266 | ||||||||
Revenue growth (GAAP) | (7) | % | (3) | % | (9) | % | (2) | % | ||||||||
Revenue growth in constant currency(1) | (7) | % |
| (5) | % | (8) | % |
| (3) | % | ||||||
Net income (loss) | $ | (43) | $ | (142) | $ | (32) | $ | (283) | ||||||||
Adjusted EBITDA(1) | $ | 557 | $ | 574 | $ | 1,113 | $ | 1,186 | ||||||||
(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 U.S. GAAP, see “Segment Results.”
| September 30, | March 31, | ||||
(Dollars in millions) |
| 2024 |
| 2024 | ||
Assets | $ | 10,396 | $ | 10,590 | ||
Liabilities | 9,224 | 9,468 | ||||
Equity | 1,172 | 1,122 | ||||
Organization of Information
Kyndryl Holdings, Inc. was formed as a wholly-owned subsidiary of IBM in September 2021 to hold the operations of the infrastructure services unit of IBM’s Global Technology Services segment. On November 3, 2021, Kyndryl separated from IBM through a spin-off that was tax-free for U.S. federal tax purposes. Following the Separation, Kyndryl became an independent, publicly-traded company and the world’s leading IT infrastructure services provider.
Financial Performance Summary
Macro Dynamics
In fiscal year 2025, we have seen continuing demand for information technology services, despite concerns about economic growth and geopolitical tensions. Most economists, including the International Monetary Fund, expect positive macroeconomic growth to continue in calendar years 2024 and 2025.
Financial Performance
For the three months ended September 30, 2024, we reported $3.8 billion in revenue, a decline of 7 percent compared to the prior-year period. The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships. United States revenue declined 13 percent, Japan revenue increased 6 percent, Principal Markets revenue declined 4 percent and Strategic Markets revenue decreased 12 percent, in each case compared to the three months ended September 30, 2023. Net loss of $43 million improved by $99 million versus the prior-year period driven by a combination of lower depreciation expenses resulting from the change of useful life of information technology equipment effective April 1, 2024 (a net year-over-year benefit of $50 million), lower transaction-related costs, and progress on our key initiatives to drive operating efficiencies and increased margins, partially offset by increased software costs.
29
Management Discussion (continued)
For the six months ended September 30, 2024, we reported $7.5 billion in revenue, a decline of 9 percent compared to the prior-year period. The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships, as well as currency effects. United States revenue declined 14 percent, Japan revenue was unchanged (but increased in constant currency), Principal Markets revenue declined 5 percent and Strategic Markets revenue decreased 14 percent, in each case compared to the six months ended September 30, 2023. Net loss of $32 million improved by $251 million versus the prior-year period driven by a combination of lower depreciation expenses resulting from the change of useful life of information technology equipment effective April 1, 2024 (a net year-over-year benefit of $110 million), lower transaction-related costs, progress on our key initiatives to drive operating efficiencies and increased margins, and a vendor credit, partially offset by increased software costs.
Segment Results
The Company made a minor change to its geographic reportable segments effective June 1, 2024 to reflect how the Company manages its operations and measures business performance, transitioning the reporting and management of its operations in Australia/New Zealand from the Principal Markets segment to the Strategic Markets segment. All historical segment information has been recast to reflect this change. The following table presents our reportable segments’ revenue and adjusted EBITDA for the three and six months ended September 30, 2024 and 2023. Segment revenue and revenue growth in constant currency exclude any transactions between the segments.
Three Months Ended September 30, | Year-over-Year Change | Six Months Ended September 30, | Year-over-Year Change | |||||||||||||||||||
(Dollars in millions) |
| 2024 | 2023 | 2024 vs. 2023 |
| 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
Revenue | ||||||||||||||||||||||
United States | $ | 960 | $ | 1,108 | (13) | % | $ | 1,946 | $ | 2,272 | (14) | % | ||||||||||
Japan | 604 | 569 | 6 | % | 1,174 | 1,180 | (0) | % | ||||||||||||||
Principal Markets | 1,318 | 1,376 | (4) | % | 2,633 | 2,768 | (5) | % | ||||||||||||||
Strategic Markets | 892 | 1,019 | (12) | % | 1,761 | 2,046 | (14) | % | ||||||||||||||
Total revenue | $ | 3,774 | $ | 4,073 | (7) | % | $ | 7,513 | $ | 8,266 | (9) | % | ||||||||||
Revenue growth in constant currency(1) | (7) | % | (5) | % | (8) | % | (3) | % | ||||||||||||||
Adjusted EBITDA(1) | ||||||||||||||||||||||
United States | $ | 159 | $ | 176 | (10) | % | $ | 292 | $ | 412 | (29) | % | ||||||||||
Japan | 94 | 84 | 12 | % | 177 | 184 | (4) | % | ||||||||||||||
Principal Markets | 187 | 169 | 10 | % | 428 | 320 | 34 | % | ||||||||||||||
Strategic Markets | 138 | 166 | (17) | % | 258 | 315 | (18) | % | ||||||||||||||
Corporate and other(2) | (22) | (21) | NM | (42) | (45) | NM | ||||||||||||||||
Total adjusted EBITDA(1) | $ | 557 | $ | 574 | (3) | % | $ | 1,113 | $ | 1,186 | (6) | % | ||||||||||
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 net income (loss). |
| (2) | Represents net amounts not allocated to segments. |
We report our financial results in accordance with U.S. GAAP. We also present certain non-GAAP financial measures to provide useful supplemental information to investors. We provide these non-GAAP financial measures as we believe it enhances 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 going forward.
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
30
Management Discussion (continued)
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 income taxes, interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased/fixed assets, charges related to lease terminations, transaction-related costs, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges incurred prior to March 31, 2024, impairment expense, significant litigation costs and benefits, and currency impacts of highly inflationary countries. 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.
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 U.S. 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 these measures for comparative purposes.
The following table provides a reconciliation of U.S. GAAP net income (loss) to adjusted EBITDA:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||
(Dollars in millions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Net income (loss) | $ | (43) | $ | (142) | $ | (32) | $ | (283) | ||||
Provision for income taxes | 38 | 33 | 91 | 65 | ||||||||
Interest expense | 25 | 31 | 52 | 61 | ||||||||
Depreciation of property, equipment and capitalized software | 150 | 220 | 276 | 431 | ||||||||
Amortization expense | 347 | 313 | 664 | 646 | ||||||||
Workforce rebalancing charges incurred prior to March 31, 2024 | — | 39 | — | 97 | ||||||||
Charges related to ceasing to use leased/fixed assets and lease terminations | 10 | — | 20 | 10 | ||||||||
Transaction-related costs | — | 48 | 21 | 89 | ||||||||
Stock-based compensation expense | 25 | 25 | 49 | 48 | ||||||||
Other adjustments* | 5 | 7 | (27) | 23 | ||||||||
Adjusted EBITDA (non-GAAP) | $ | 557 | $ | 574 | $ | 1,113 | $ | 1,186 | ||||
| * | Other adjustments represent pension expenses other than pension servicing costs and multi-employer plan costs, significant litigation costs and benefits, and currency impacts of highly inflationary countries. For the three and six months ended September 30, 2023, other adjustments also include an adjustment to reduce amortization expense for the amount already included in transaction-related costs above. |
United States
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
| 2024 | 2023 | 2024 | 2023 | |||||||||||
Revenue | $ | 960 | $ | 1,108 | $ | 1,946 | $ | 2,272 | ||||||||
Revenue year-over-year change | (13) | % | (4) | % | (14) | % | (2) | % | ||||||||
Adjusted EBITDA | $ | 159 | $ | 176 | $ | 292 | $ | 412 | ||||||||
Adjusted EBITDA year-over-year change | (10) | % | (29) | % | ||||||||||||
For the three months ended September 30, 2024, United States revenue of $960 million decreased 13 percent compared to the prior-year quarter, driven by the Company’s efforts to reduce certain low-margin revenues and the expiration of certain low- and negative-margin contracts entered into before the Spin-off. Adjusted EBITDA decreased
31
Management Discussion (continued)
$17 million from the prior-year quarter, primarily driven by the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.
For the six months ended September 30, 2024, United States revenue of $1.9 billion decreased 14 percent compared to the prior-year period, driven by the Company’s efforts to reduce certain low-margin revenues and the expiration of certain low- and negative-margin contracts entered into before the Spin-off. Adjusted EBITDA decreased $120 million from the prior-year period, primarily driven by lower revenue and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.
Japan
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 | ||||||||||
Revenue | $ | 604 | $ | 569 | $ | 1,174 | $ | 1,180 | ||||||||
Revenue year-over-year change | 6 | % | (7) | % | (0) | % | (6) | % | ||||||||
Revenue growth in constant currency | 9 | % | (3) | % | 7 | % | (1) | % | ||||||||
Adjusted EBITDA | $ | 94 | $ | 84 | $ | 177 | $ | 184 | ||||||||
Adjusted EBITDA year-over-year change | 12 | % | (4) | % | ||||||||||||
For the three months ended September 30, 2024, Japan revenue of $604 million increased 6 percent compared to the prior-year quarter, driven by increased Kyndryl Consult revenue. Adjusted EBITDA increased $10 million from the prior-year quarter, primarily driven by the increase in revenue.
For the six months ended September 30, 2024, Japan revenue of $1.2 billion was unchanged compared to the prior-year period, and increased 7 percent in constant currency. Adjusted EBITDA decreased $7 million from the prior-year period, primarily driven by unfavorable currency movements that impacted both non-yen-denominated costs and the translation of earnings into U.S. dollars.
Principal Markets
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 | ||||||||||
Revenue | $ | 1,318 | $ | 1,376 | $ | 2,633 | $ | 2,768 | ||||||||
Revenue year-over-year change | (4) | % | 0 | % | (5) | % | 0 | % | ||||||||
Revenue growth in constant currency | (5) | % | (5) | % | (5) | % | (3) | % | ||||||||
Adjusted EBITDA | $ | 187 | $ | 169 | $ | 428 | $ | 320 | ||||||||
Adjusted EBITDA year-over-year change | 10 | % | 34 | % | ||||||||||||
For the three months ended September 30, 2024, Principal Markets revenue of $1.3 billion decreased 4 percent compared to the prior-year quarter, driven by actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA increased $18 million from the prior-year quarter, primarily due to increased operating efficiencies and higher margins on recent signings.
For the six months ended September 30, 2024, Principal Markets revenue of $2.6 billion decreased 5 percent compared to the prior-year period, driven by actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA increased $108 million from the prior-year period, primarily due to increased operating efficiencies and higher margins on recent signings, as well as a vendor credit.
32
Management Discussion (continued)
Strategic Markets
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 | ||||||||||
Revenue | $ | 892 | $ | 1,019 | $ | 1,761 | $ | 2,046 | ||||||||
Revenue year-over-year change | (12) | % | (2) | % | (14) | % | (4) | % | ||||||||
Revenue growth in constant currency | (11) | % | (8) | % | (13) | % | (6) | % | ||||||||
Adjusted EBITDA | $ | 138 | $ | 166 | $ | 258 | $ | 315 | ||||||||
Adjusted EBITDA year-over-year change | (17) | % | (18) | % | ||||||||||||
For the three months ended September 30, 2024, Strategic Markets revenue of $892 million decreased 12 percent compared to the prior-year quarter. The revenue decline was largely attributable to actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA decreased $28 million from the prior-year quarter primarily due to revenue declines and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.
For the six months ended September 30, 2024, Strategic Markets revenue of $1.8 billion decreased 14 percent compared to the prior-year period. The revenue decline was largely attributable to actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA decreased $57 million from the prior-year period primarily due to revenue declines and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.
Corporate and Other
Corporate and other had an adjusted EBITDA loss of $22 million in the three months ended September 30, 2024, compared to a loss of $21 million in the three months ended September 30, 2023. Corporate and other had an adjusted EBITDA loss of $42 million in the six months ended September 30, 2024, compared to a loss of $45 million in the six months ended September 30, 2023.
Costs and Expenses
Three Months Ended September 30, | Percent of Revenue | Change | |||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 |
| 2024 vs. 2023 | |||||||
Revenue | $ | 3,774 | $ | 4,073 | 100.0 | % | 100.0 | % | (7) | % | |||||
Cost of services | 3,024 | 3,422 | 80.1 | % | 84.0 | % |
| (12) | % | ||||||
Selling, general and administrative expenses | 647 | 634 | 17.1 | % | 15.6 | % |
| 2 | % | ||||||
Workforce rebalancing charges |
| 39 |
| 39 |
| 1.0 | % | 1.0 | % |
| (1) | % | |||
Transaction-related costs | — | 48 | 0.0 | % | 1.2 | % | (100) | % | |||||||
Interest expense |
| 25 |
| 31 |
| 0.7 | % | 0.8 | % |
| (21) | % | |||
Other expense |
| 44 |
| 8 |
| 1.2 | % | 0.2 | % |
| 439 | % | |||
Income (loss) before income taxes | $ | (5) | $ | (109) |
|
|
|
| |||||||
Cost of services was 80.1% of revenue in the three months ended September 30, 2024, compared to 84.0% in the three months ended September 30, 2023, driven by lower depreciation expenses, increased operating efficiencies and higher margins on recent signings. Selling, general and administrative expenses were 17.1% of revenue in the three months ended September 30, 2024 compared to 15.6% in the prior-year quarter, primarily due to lower revenue. Interest expense was 0.7% of revenue in the three months ended September 30, 2024 compared to 0.8% in the prior-year quarter. Other expense was 1.2% of revenue in the three months ended September 30, 2024 compared to 0.2% in the prior-year quarter, driven by currency-related hedging losses recorded this year.
33
Management Discussion (continued)
Six Months Ended September 30, | Percent of Revenue | Change | |||||||||||||
(Dollars in millions) |
| 2024 | 2023 |
| 2024 | 2023 |
| 2024 vs. 2023 | |||||||
Revenue | $ | 7,513 | $ | 8,266 | 100.0 | % | 100.0 | % | (9) | % | |||||
Cost of services | 5,958 | 6,871 | 79.3 | % | 83.1 | % |
| (13) | % | ||||||
Selling, general and administrative expenses | 1,304 | 1,353 | 17.4 | % | 16.4 | % |
| (4) | % | ||||||
Workforce rebalancing charges |
| 74 |
| 97 |
| 1.0 | % | 1.2 | % |
| (23) | % | |||
Transaction-related costs | 21 | 89 | 0.3 | % | 1.1 | % | (77) | % | |||||||
Interest expense |
| 52 |
| 61 |
| 0.7 | % | 0.7 | % |
| (14) | % | |||
Other expense |
| 44 |
| 13 |
| 0.6 | % | 0.2 | % |
| 249 | % | |||
Income (loss) before income taxes | $ | 59 | $ | (218) |
|
|
| ||||||||
Cost of services was 79.3% of revenue in the six months ended September 30, 2024, compared to 83.1% in the six months ended September 30, 2023, driven by lower depreciation expenses, increased operating efficiencies, higher margins on recent signings, and a vendor credit. Selling, general and administrative expenses were 17.4% of revenue in the six months ended September 30, 2024 compared to 16.4% in the prior-year period, driven by lower revenue, partially offset by the release of a legal reserve. Workforce rebalancing charges were 1.0% of revenue in the six months ended September 30, 2024 versus 1.2% of revenue in the prior-year period. Interest expense was 0.7% of revenue in the six months ended September 30, 2024 and 2023. Other expense was 0.6% of revenue in the six months ended September 30, 2024 compared to 0.2% in the prior-year period, driven by currency-related hedging losses recorded this year.
Transaction-Related Costs
The Company classifies certain expenses and benefits related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs” in the Consolidated Income Statement. Transaction-related costs include employee retention expenses, information technology costs, marketing expenses to establish the Kyndryl brand, legal, accounting, consulting and other professional service costs required, pre-Separation and post-Separation, to prepare for and execute the Separation, costs and benefits resulting from settlements with our former Parent associated with pre-Separation and Separation-related matters, and other costs related to contract and supplier novation and integration.
Workforce Rebalancing and Site-Rationalization Charges
Fiscal 2025 Program
During the six months ended September 30, 2024, management initiated actions to reduce the Company’s overall cost structure and increase our operating efficiency. These actions will result in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. During the three months ended September 30, 2024, the Company recorded $39 million in workforce rebalancing charges and $10 million in charges related to ceasing to use leased and owned fixed assets including lease termination charges. During the six months ended September 30, 2024, the Company recorded $74 million in workforce rebalancing charges and $20 million in charges related to ceasing to use leased and owned fixed assets, including lease termination charges.
Total cash outlays for this program are expected to be $140 million, of which approximately $60 million has been paid through September 30, 2024 and approximately $50 million is expected to be paid through the end of fiscal year 2025, and the remainder thereafter. Management expects that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by more than $200 million in fiscal year 2026. There can be no guarantee that we will achieve our expected cost savings.
The Company will continue to seek opportunities to improve operational efficiency and reduce costs, which may result in additional charges in future periods. For additional information, see Note 14 – Workforce Rebalancing and Site-Rationalization Charges in the accompanying Consolidated Financial Statements.
34
Management Discussion (continued)
Fiscal 2024 Program
During the year ended March 31, 2023, management initiated certain actions to reduce the Company’s overall cost structure and increase our operating efficiency, which continued through the year ended March 31, 2024. These actions resulted in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. Workforce rebalancing charges arise from cost-reduction actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to the terminated employees. In addition, we identified certain leased and owned assets that were inherited from IBM as a result of the Separation that we determined will no longer provide any economic benefit to Kyndryl. During the three months ended September 30, 2023, the Company recognized $39 million in workforce rebalancing charges. During the six months ended September 30, 2023, the Company recognized $97 million in workforce rebalancing charges and $10 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.
Total cash outlays for this program were $300 million, of which approximately $250 million has been paid through September 30, 2024 (including approximately $50 million of contractual payments toward leased assets we have ceased to use) and approximately $15 million is expected to be paid in fiscal year 2025. Management estimates that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by approximately $400 million in fiscal year 2025. There can be no guarantee that we will achieve our expected cost savings.
Income Taxes
The provision for income taxes for the three months ended September 30, 2024 was $38 million of expense, compared to $33 million of expense for the three months ended September 30, 2023. Our income tax expense for the three months ended September 30, 2024 and 2023 was primarily related to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.
The provision for income taxes for the six months ended September 30, 2024 was $91 million of expense, compared to $65 million of expense for the six months ended September 30, 2023. Our income tax expense for the six months ended September 30, 2024 and 2023 was primarily related to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.
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, the reversal of existing temporary differences, and the feasibility of ongoing tax planning strategies and actions. Estimates of future taxable income and loss 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
Dynamics
Total assets of $10.4 billion decreased by $194 million (and decreased by $363 million adjusted for currency) from March 31, 2024, primarily driven by: a decrease in cash and cash equivalents of $228 million mainly due to payments for annual license agreements and annual incentives; and a decrease of $158 million in accounts receivable mainly due to lower revenue; partially offset by an increase of $109 million in prepaid expenses and other current assets mainly due to prepayment for software subscriptions and currency effects.
Total liabilities of $9.2 billion decreased by $244 million (and decreased by $375 million adjusted for currency) from March 31, 2024, primarily as a result of: a decrease in accounts payable of $168 million due to lower costs; a decrease in accrued contract costs of $83 million due to lower volumes; and a decrease in accrued compensation and
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Management Discussion (continued)
benefits of $71 million due to payments of annual incentives, partially offset by currency effects. Total equity of $1.2 billion increased by $50 million from March 31, 2024, principally due to our comprehensive income in the period.
Cash Flow
Our cash flows from operating, investing and financing activities are summarized in the table below.
Six Months Ended September 30, | ||||||
(Dollars in millions) |
| 2024 |
| 2023 | ||
Net cash provided by (used in): |
|
|
| |||
Operating activities | $ | 101 | $ | (127) | ||
Investing activities |
| (241) |
| (208) | ||
Financing activities |
| (101) |
| (80) | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| 17 |
| (33) | ||
Net change in cash, cash equivalents and restricted cash | $ | (224) | $ | (448) | ||
Net cash provided by operating activities was $101 million in the six months ended September 30, 2024, compared to a net cash use of $127 million in the prior-year period mainly due to higher margins.
Net cash used in investing activities was $241 million in the six months ended September 30, 2024, compared to a net cash use of $208 million in the prior-year period due to the acquisition of Skytap.
Net cash used in financing activities totaled $101 million in the six months ended September 30, 2024, compared to net cash used in financing activities of $80 million in the prior-year period.
Other Information
Signings
The following table presents the Company’s signings for the three and six months ended September 30, 2024 and 2023.
| Three Months Ended September 30, |
| Six Months Ended September 30, | ||||||||||
(Dollars in billions) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Total signings | $ | 5.6 | $ | 2.4 | $ | 8.7 | $ | 5.2 | |||||
Signings increased by $3.2 billion in the three months ended September 30, 2024, or 132%, compared to the prior-year quarter, and signings increased by $3.5 billion in the six months ended September 30, 2024, or 67%, compared to the six months ended September 30, 2023, driven by growth in each of our four operating segments. Management uses 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. 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 as well as the length of those 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.
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Management Discussion (continued)
Liquidity and Capital Resources
We believe that our existing cash and cash equivalents and the Company’s 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 “Initial Notes”). The Initial 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. In connection with the issuance of the Initial Notes, we entered into a registration rights agreement with the purchasers of the Initial Notes, pursuant to which we completed a registered offering to exchange each series of Initial Notes for new notes with substantially identical terms during the quarter ended September 30, 2022.
In February 2024, we completed a registered offering of $500 million in aggregate principal amount of 6.35% senior unsecured notes due 2034 (the “2034 Notes”). We received proceeds of $494 million, net of debt issuance costs and discounts. The 2034 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s other existing and future senior unsecured indebtedness.
The Initial Notes and the 2034 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.
Revolving Credit Facility
In October 2021, we entered into a $3.15 billion multi-currency revolving credit agreement (the “Revolving Credit Agreement”), which expires, unless extended, in October 2026. The Revolving Credit Agreement was amended in June 2023, replacing the London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”). Interest rates on borrowings under the Revolving Credit Agreement will be based on prevailing market interest rates, plus a margin, as further described in the Revolving Credit Agreement. As of September 30, 2024, there has been no drawdown on the Revolving Credit Agreement.
The Revolving Credit Agreement includes certain customary mandatory prepayment provisions. In addition, it includes 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 Revolving Credit Agreement) for any period of four consecutive fiscal quarters be no greater than 3.50 to 1.00. The Company is in compliance with its debt covenants.
Transfers of Financial Assets
The Company has entered into arrangements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company has determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized, at the time of the transfer. The first agreement, which was executed in November 2021 and subsequently amended, enabled us to sell certain of our trade receivables to the counterparty. The initial term of this agreement was 18 months, and the agreement automatically resets to a term of 18 months after every six months, unless either party elects not to extend. This agreement was further amended during the quarter ended September 30, 2024 to reduce the committed facility limit from $1 billion to $600 million and to add an incremental uncommitted facility limit of $200 million that is subject to the counterparty’s sole discretion to purchase such incremental amount. The second agreement was executed in June 2022 with a separate third-party financial institution and renews automatically on its anniversary date, unless either party elects not to extend.
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Management Discussion (continued)
The net proceeds from these agreements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under the aforementioned programs were $1.1 billion and $1.9 billion for the three and six months ended September 30, 2024, respectively, and $913 million and $2.1 billion for the three and six months ended September 30, 2023, respectively. The fees associated with the transfers of receivables were $10 million and $20 million for the three and six months ended September 30, 2024, respectively, and $12 million and $28 million for the three and six months ended September 30, 2023, respectively.
Supplier Financing Program
In the year ended March 31, 2024, the Company initiated a supplier financing program with a third-party financial institution under which the Company agrees to pay the financial institution the stated amounts of invoices from participating suppliers on the originally invoiced due date, which have an average term of 90 to 120 days. The financial institution offers earlier payment of the invoices at the sole discretion of the supplier for a discounted amount. The Company does not provide secured legal assets or other forms of guarantees under the arrangements. The Company is not a party to the arrangement between its suppliers and the financial institution. The Company or the financial institution may terminate the agreement upon at least 180 days’ notice. The Company’s obligations under this program continue to be recognized as accounts payable in the Consolidated Balance Sheet. The obligations outstanding under this program were immaterial at September 30, 2024 and March 31, 2024.
Critical Accounting Estimates
The application of U.S. 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 fiscal year ended March 31, 2024 for more information; we refer to the Annual Report on Form 10-K for the fiscal year ended March 31, 2024 as the “Form 10-K”.
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 “aim,” “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “opportunity,” “plan,” “position,” “predict,” “project,” “should,” “seek,” “target,” “will,” “would” 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:
| ● | failure to attract new customers, retain existing customers or sell additional services to customers; |
| ● | failure to meet growth and productivity objectives; |
| ● | competition; |
| ● | impacts of relationships with critical suppliers and partners; |
| ● | failure to address and adapt to technological developments and trends; |
| ● | inability to attract and retain key personnel and other skilled employees; |
| ● | impact of economic, political, public health and other conditions; |
| ● | damage to the Company’s reputation; |
| ● | inability to accurately estimate the cost of services and the timeline for completion of contracts; |
| ● | service delivery issues; |
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Management Discussion (continued)
| ● | the Company’s ability to successfully manage acquisitions 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, retain and extend necessary licenses; |
| ● | the impairment of our goodwill or long-lived assets; |
| ● | risks relating to cybersecurity, data governance and privacy; |
| ● | risks relating to non-compliance with legal and regulatory requirements; |
| ● | adverse effects from tax matters and environmental matters; |
| ● | legal proceedings and investigatory risks and potential indemnification obligations; |
| ● | impact of changes in market liquidity conditions and customer credit risk on receivables; |
| ● | the Company’s pension plans; |
| ● | the impact of currency fluctuations; |
| ● | risks related to the Company’s spin-off from IBM; |
| ● | risks related to deficiencies identified in our information technology controls; 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 our Form 10-K for the fiscal year ended March 31, 2024, as such factors may be updated from time to time in the Company’s subsequent 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, whether as a result of new information, future events or otherwise.
Available Information
We routinely post on or make accessible through our corporate website at www.kyndryl.com and Investor Relations website at https://investors.kyndryl.com information that may be material or of interest to our investors, including news and materials regarding our financial performance, business developments, investor events and other important information regarding the Company. 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. We encourage investors, media, our customers, consumers, business partners and others interested in our Company to review the information we provide through these channels. The information contained on the websites referenced above is not, and shall not be deemed to be, incorporated into this filing or any of our other filings with the SEC.
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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 not effective as of the end of the period covered by this report due to a material weakness in internal control over financial reporting in the area of our information technology general controls (“ITGCs”) that was disclosed in Part II, Item 9A of the Company’s Form 10-K. The deficiencies in ITGCs were related to access and program development and change management controls associated with the Company’s large-scale migration in a compressed timeframe of its internal operating systems to a new enterprise resource planning system, which was required to replace the systems temporarily being made available to the Company by our former Parent following our Spin-off. These control deficiencies did not result in a misstatement to the annual or interim consolidated financial statements previously filed or included in this Form 10-Q.
Changes in Internal Control over Financial Reporting
There have been no changes 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 quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than the ongoing remediation of the ITGC deficiencies described below.
Remediation
The Company has substantially completed the design and implementation, and has begun testing the operating effectiveness, of controls to address ITGC deficiencies that were previously described in Part II, Item 9A of the Company’s Form 10-K. These controls include but are not limited to (i) implementing and/or formalizing additional controls across our information technology environment, including user access and segregation of duty controls, program development and change management controls, and certain computer operations controls, and (ii) training of relevant personnel on the design and operation of any new or modified ITGCs. The deficiencies will not be considered fully remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The remediation plan is subject to ongoing management review, as well as oversight by the Audit Committee of our Board.
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Part II — Other Information
Item 1. Legal Proceedings
Refer to Note 11 – 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 our Form 10-K for the year ended March 31, 2024. 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, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended September 30, 2024, of the Company’s directors or executive officers adopted, terminated or
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Item 6. Exhibits
Exhibit Number | Description of Exhibit |
2.1 | |
3.1 | |
3.2 | |
10.1 | |
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.
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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: | November 7, 2024 | |||
By: | /s/ Vineet Khurana | |||
Vineet Khurana | ||||
Senior Vice President and Global Controller (Principal Accounting Officer and Authorized Signatory) | ||||
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