What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-05-26 compared with 2022-03-10 · 265 added, 160 removed, 282 unchanged (60% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Included below are year-over-year comparisons between 2021 and 2020.

For further information on year-over-year comparisons between 2020 and 2019 not covered in the “Segment Results” below, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10 for the period, which was filed with the SEC on September 28, 2021.

Year Ended December 31,

In January 2022, the Company changed its fiscal year-end to March 31 from December 31.

Included below are selected results and year-over-year comparisons for the year ended March 31, 2023, the twelve months ended March 31, 2022 (unaudited), the three-month transition period ended March 31, 2022 and the year ended December 31, 2021.

The Company is presenting unaudited results of operations for the twelve months ended March 31, 2022 because management believes this comparison will be helpful to a reader’s understanding of our fiscal year 2023 results.

Results for the twelve months ended March 31, 2022 were derived from our quarterly consolidated financial statements as previously reported.

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included elsewhere in this report.

For further information on the comparisons between the years ended December 31, 2021 and 2020 not covered in the “Segment Results” below, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Amendment No.

1 to our Current Report on Form 8-K/A filed with the SEC on May 27, 2022 (the “8-K/A”).

We refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, revised and updated as set forth on Exhibit 99.1 to the 8-K/A, as the “2021 Form 10-K”.

(Dollars in millions)

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(1) Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics.

For definitions of these metrics and a reconciliation of adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP, see “⸺Segment Results.”

At December 31,

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.”

(Dollars in millions)

Organization of Information

Kyndryl was formed as a wholly-owned subsidiary of IBM in September 2021 to hold the operations of the managed infrastructure services unit of IBM’s Global Technology Services segment.

On November 3, 2021, IBM distributed shares representing 80.1% of Kyndryl’s outstanding common stock to holders of record of IBM’s common stock as of the close of business on October 25, 2021, in a Spin-off that is tax-free for U.S.

Kyndryl Holdings, Inc.

was formed as a wholly-owned subsidiary of IBM in September 2021 to hold the operations of the managed infrastructure services unit of IBM’s Global Technology Services segment.

federal tax purposes.

Following the distribution, Kyndryl became an independent, publicly-traded company and is the world’s leading managed infrastructure services provider.

Kyndryl utilized allocations and carve-out methodologies through the date of distribution to prepare historical financial statements.

The consolidated financial statements for periods prior to the Separation herein may not be indicative of our future performance, do not necessarily include the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position and cash flows had we been a separate, standalone company during the historical periods presented.

For additional information, see “Basis of Presentation” in Note 1 – Significant Accounting Policies to the accompanying Consolidated Financial Statements.

IBM disposed of its 19.9% retained interest in Kyndryl common stock in the year following the Spin-off.

Kyndryl utilized allocations and carve-out methodologies through November 3, 2021 to prepare historical financial statements.

The consolidated financial statements for the pre-Separation periods herein may not be indicative of our future performance, do not necessarily include the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position and cash flows had we been a separate, standalone company during the historical periods presented.

For additional information, see “Basis of Presentation” in Note 1 – Significant Accounting Policies in the accompanying Consolidated Financial Statements.

Financial Performance Summary

Macro Dynamics

The COVID-19 pandemic and related macroeconomic uncertainty beginning in March 2020 caused many clients to experience declines in their business volumes and resulted in client priorities shifting toward maintaining operational stability, flexibility, and preservation of cash.

The declines in business volumes and shifting client priorities negatively impacted demand for technology services in 2020.

In 2021, we saw a broad-based macroeconomic recovery in most regions of the world.

Demand for technology services rebounded, as large organizations again demonstrated a need for assistance in designing, building, managing

and modernizing their technology systems.

Most economists, including the International Monetary Fund, expect global macroeconomic growth to continue in 2022.

In calendar year 2021, we saw a broad-based macroeconomic recovery in most regions of the world.

Demand for technology services rebounded after declines resulting from the COVID-19 pandemic, as large organizations again demonstrated a need for assistance in designing, building, managing and modernizing their technology systems.

In fiscal year 2023, we saw continuing demand for information technology services, despite declining economic growth, increased geopolitical tensions, lingering effects of the COVID-19 pandemic, inflationary pressures and government efforts to stem inflation.

Although the risk of economic slowdowns in certain geographies has recently increased, most economists, including the International Monetary Fund, expect positive global macroeconomic growth in calendar years 2023 and 2024.

Fiscal 2023 Financial Performance

For the year ended March 31, 2023, we reported $17.0 billion in revenue, a decline of 7 percent when compared to the twelve months ended March 31, 2022, primarily driven by a seven-point negative impact from currency.

Among our segments, United States revenue was unchanged, Japan revenue declined 13 percent, Principal Markets revenue declined 13 percent, and Strategic Markets revenue decreased 1 percent compared to the prior twelve-month period, with the declines primarily due to currency movements.

Net loss of $1.4 billion improved by $665 million versus the prior twelve-month period, primarily driven by lower impairment expense, lower transaction-related costs, and lower cost of services as a percentage of revenue, reflecting our progress on our key initiatives.

Item 1, “Business – Our Strategies” for additional information on our key initiatives.

Transition Period Financial Performance

For the three months ended March 31, 2022, we reported $4.4 billion in revenue, a decline of 7 percent when compared to the three months ended March 31, 2021, primarily driven by a four-point negative impact from currency.

Among our segments, United States revenue declined 5 percent, Japan revenue declined 7 percent, Principal Markets revenue declined 14 percent, and Strategic Markets revenue increased 2 percent compared to the three months ended March 31, 2021, with the declines primarily due to currency movements.

Net loss of $229 million improved by $265 million versus the prior-year quarter, primarily driven by cost reductions, including the benefit from workforce actions taken in prior periods.

2021 Financial Performance

In 2021, we reported $18.7 billion in revenue, a decline of 4 percent when compared to the prior year primarily driven by lower contract volumes due to existing and new clients pausing activities during our planned Separation from our former Parent, as well as expected price declines in certain new and renewed customer contracts.

For the year ended December 31, 2021, we reported $18.7 billion in revenue, a decline of 4 percent when compared to the prior year primarily driven by lower contract volumes due to existing and new clients pausing activities during our planned Separation from our former Parent, as well as expected price declines in certain new and renewed customer contracts.

This was a consistent trend across all segments.

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Net loss of $2.3 billion increased by $297 million versus the prior year.

The current year Net loss includes a goodwill impairment charge of $469 million, transaction-related costs of $627 million and litigation charges for certain long-standing claims and disputes of $52 million, as well as cost allocations from our former Parent.

2020 Financial Performance

In 2020, we reported $19.4 billion in revenue, a decline of 5 percent when compared to the prior year which was primarily driven by declines in the United States.

Revenue declined primarily due to a reduction in client volumes within industries heavily impacted by the global pandemic.

Net loss was $2.0 billion, an increase of $1.1 billion when compared to the prior year, primarily due to higher workforce rebalancing charges of $759 million.

We took these structural actions to simplify and optimize our operating model.

The net loss for the year ended December 31, 2021 included a goodwill impairment charge of $469 million, transaction-related costs of $627 million and litigation charges for certain long-standing claims and disputes of $52 million, as well as cost allocations from our former Parent.

Basis of Presentation

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We prepared these estimates based on the most current and best available information, but actual results could differ materially from these estimates and assumptions.

COVID-19 has had and we expect will continue to have, significant effects on economic activity, on demand for our services and on our results of operations in 2022.

Prior to November 4, 2021, the accompanying financial statements of Kyndryl were derived from the consolidated financial statements and accounting records of the Parent as if the Company operated on a standalone basis during the periods presented and were prepared in accordance with U.S.

during the periods presented and were prepared in accordance with U.S.

GAAP and pursuant to the rules and regulations of the SEC.

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The accompanying financial statements through the Separation date may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations and cash flows would have been had it operated as an independent company during the periods presented.

After the Separation on November 3, 2021, the Company’s financial statements for the periods from November 4, 2021, through December 31, 2021, are consolidated financial statements based on our reported results as a standalone company.

After the Separation on November 3, 2021, the Company’s financial statements for the periods from November 4, 2021, through March 31, 2023, are consolidated financial statements based on our reported results as a standalone company.

All significant transactions and accounts between Kyndryl entities were eliminated.

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federal and certain state and local and foreign income tax returns filed by IBM, where applicable.

The Company also files certain separate foreign income tax returns.

The Company also filed certain separate foreign income tax returns.

For purposes of the historical periods presented on a “carve-out” basis, the income tax provisions have been calculated using the separate return basis, as if we filed separate tax returns.

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Percentages presented are calculated from the underlying whole-dollar amounts.

Certain items have been recast to conform to current-period presentation.

Segment Results

As a result of the Separation, in the fourth quarter of 2021, the Company implemented a new operating model and reporting structure resulting in four reportable segments:

United States, Japan, Principal Markets and Strategic Markets.

Principal Markets consists of our operations in Australia/New Zealand, Canada, France, Germany, Italy, India, Spain/Portugal and United Kingdom/Ireland.

Strategic Markets consists of our operations in all other countries.

In addition to this change, the measures of segment operating performance changed to revenue and adjusted EBITDA.

The following table presents our reportable segments’ revenue and adjusted EBITDA for the years ended December 31, 2021, 2020 and 2019.

The following table presents our reportable segments’ revenue and adjusted EBITDA for the year ended March 31, 2023, the twelve months ended March 31, 2022, and the years ended December 31, 2021 and 2020.

Segment revenue and revenue growth in constant currency exclude any transactions between the segments.

Year Ended December 31,

Year-over-Year Change

(Dollars in millions)

2022 (unaudited)

United States

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(1) Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics.

See the information below for definitions of these metrics and a reconciliation of adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with GAAP.

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 GAAP.

We report our financial results in accordance with U.S.

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 improves visibility to underlying results and the impact of management decisions on operational performance and enables better comparison to peer companies.

We provide these non-GAAP financial measures as we believe it improves visibility to underlying results and the impact of management decisions on operational performance and enables better comparison to peer companies.

Revenue growth in constant currency is a non-GAAP measure that eliminates the effects of exchange rate fluctuations when translating from foreign currencies to the United States dollar.

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Additionally, management uses adjusted EBITDA to evaluate our performance.

Adjusted EBITDA is a non-GAAP measure and defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), pension costs other than pension servicing costs and multi-employer plan costs, early extinguishment of debt charges, workforce rebalancing and restructuring charges, transaction-related and integration-related items, goodwill and long-lived asset impairment charges, foreign currency impacts of highly inflationary countries, significant litigation costs, stock-based compensation expense and income taxes.

Adjusted EBITDA is a non-GAAP measure and defined as net income (loss) excluding net interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased/fixed assets, charges related to lease terminations, transaction-related costs, pension costs other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges, impairment expense, significant litigation costs and foreign currency impacts of highly inflationary countries.

We believe that adjusted EBITDA is a helpful supplemental measure to assist investors in evaluating our operating results as it excludes certain items whose fluctuation from period to period does not necessarily correspond to changes in the operations of our business.

We provide this non-GAAP financial measure as we believe it improves visibility to underlying results and the impact of management decisions on operational performance, enables better comparison to peer companies and allows us to provide a long-term strategic view of the business.

These disclosures are provided in addition to and not as a substitute for the percentage change in revenue and profit or loss measures on a GAAP basis compared to the corresponding period in the prior year.

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 this measure for comparative purposes.

The following table provides a reconciliation of GAAP net income (loss) to adjusted EBITDA:

The following table provides a reconciliation of U.S.

GAAP net income (loss) to adjusted EBITDA:

Year Ended December 31,

(Dollars in millions)

2022 (unaudited)

Net income (loss)

Provision for income taxes

Workforce rebalancing charges

Workforce rebalancing charges (benefits)

Charges related to ceasing to use leased/fixed assets and lease terminations

Transaction-related costs

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Interest expense

Depreciation expense

Depreciation of property, equipment and capitalized software

Amortization expense

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Adjusted EBITDA (non-GAAP)

* Other adjustments represents pension expense other than pension servicing costs and multi-employer plan costs, significant litigation costs and currency impacts of highly inflationary countries.

* Other adjustments represent pension expense other than pension servicing costs and multi-employer plan costs, significant litigation costs and currency impacts of highly inflationary countries.

United States

Year Ended December 31,

Year-over-Year

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

Adjusted EBITDA

Adjusted EBITDA year-over-year change

For the year ended March 31, 2023, United States revenue of $4.7 billion was unchanged compared to the twelve months ended March 31, 2022.

Adjusted EBITDA decreased $71 million from the prior twelve-month period, primarily driven by certain software agreements moving from prepaid and amortized agreements to monthly subscription agreements as well as investments made to support being an independent company, partially offset by progress on our key initiatives.

For the three months ended March 31, 2022 (transition period), United States revenue of $1.2 billion decreased 5 percent compared to the prior-year quarter, primarily driven by reduced signings in the prior year.

Adjusted EBITDA increased $68 million from the prior-year quarter, primarily driven by lower costs from our post-Separation commercial agreements with IBM, partially offset by lower revenues.

For the year ended December 31, 2021, United States revenue of $4.8 billion decreased 5 percent as compared to the prior year, primarily driven by lower contract volumes due to clients pausing activities during the pandemic and our planned Separation as well as lower pricing.

Adjusted EBITDA decreased $99 million from the prior year, primarily due to lower revenue, partially offset by cost reductions.

For the year ended December 31, 2020, United States

revenue of $5.1 billion decreased 5 percent as compared to the prior year, driven by declines across the contract portfolio and impacts from the COVID-19 pandemic.

Adjusted EBITDA increased $4 million from the prior year benefited from travel and discretionary cost reductions due to the COVID-19 pandemic as well as realizing benefits from structural actions taken in first quarter of 2020.

Year Ended December 31,

Year-over-Year

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

Revenue growth in constant currency

Adjusted EBITDA

Adjusted EBITDA year-over-year change

For the year ended March 31, 2023, Japan revenue of $2.5 billion decreased 13 percent compared to the twelve months ended March 31, 2022.

Revenue decreased due to an unfavorable currency exchange rate impact of 18 points, partially offset by recent signings of incremental business, including increased Kyndryl Consult revenues.

Adjusted EBITDA decreased $125 million from the prior twelve-month period, primarily driven by unfavorable currency impacts, partially offset by lower costs from our post-Separation commercial agreements with IBM and progress on our key initiatives.

For the three months ended March 31, 2022 (transition period), Japan revenue of $706 million decreased 7 percent as compared to the prior-year quarter.

Revenue decreased primarily due to unfavorable currency impacts, as well as a delay in the transfer of a joint venture from IBM that was finalized mid-quarter, which was captured in the operating results of the pre-Separation period under the carve-out assumptions of our former Parent.

Adjusted EBITDA increased $31 million from the prior-year quarter, primarily driven by lower costs from our post-Separation commercial agreements with IBM, partially offset by unfavorable currency impacts.

For the year ended December 31, 2021, Japan revenue of $2.9 billion decreased 4 percent as compared to the prior year.

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Adjusted EBITDA decreased $33 million from the prior year largely due to decreased revenue.

For the year ended December 31, 2020, Japan revenue of $3.0 billion increased 4 percent as compared to the prior year driven by strong performance in new client contracts.

Adjusted EBITDA increased $167 million from the prior year behind the strength of revenue growth mixed with lower travel and discretionary costs due to the COVID-19 pandemic.

Principal Markets

Year Ended December 31,

Year-over-Year

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

Revenue growth in constant currency

Adjusted EBITDA

Adjusted EBITDA year-over-year change

For the year ended March 31, 2023, Principal Markets revenue of $6.0 billion decreased 13 percent compared to the twelve months ended March 31, 2022.

Revenue decreased due to certain joint ventures not transferring to us in connection with the Separation as well as an unfavorable currency exchange rate impact of nine points, primarily driven by the strengthening of the U.S.

dollar against the Euro and British pound.

Adjusted EBITDA decreased $16 million from the prior twelve-month period, due to unfavorable currency exchange rates, partially offset by progress on our key initiatives.

For the three months ended March 31, 2022 (transition period), Principal Markets revenue of $1.6 billion decreased 14 percent as compared to the prior-year quarter.

Revenue decreased due to certain joint ventures not transferring to us in connection with the Separation as well as an unfavorable currency exchange rate impact of five points, primarily driven by the strengthening of the U.S.

dollar against the Euro and British pound.

Adjusted EBITDA increased $46 million from the prior-year quarter, primarily due to the benefit from cost-reduction actions taken in prior periods as well as lower costs from our post-Separation commercial agreements with IBM.

For the year ended December 31, 2021, Principal Markets revenue of $7.1 billion decreased 1 percent as compared to the prior year.

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dollar against the Euro and British pound.

Adjusted EBITDA decreased $18 million from the prior year, primarily due to lower revenue, partially offset by cost reductions from structural actions taken in the prior year.

For the year ended December 31, 2020, Principal Markets revenue of $7.2 billion decreased 5 percent as compared to the prior year, driven by declines across the contract portfolio and impacts from the COVID-19 pandemic.

Adjusted EBITDA decreased $268 million from the prior year, primarily due to revenue decline in these higher fixed-cost European countries.

Adjusted EBITDA decreased $34 million from the prior year, primarily due to lower revenue, partially offset by cost-reductions actions taken in the prior year.

Strategic Markets

Year Ended December 31,

Year-over-Year

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

Revenue growth in constant currency

Adjusted EBITDA

Adjusted EBITDA year-over-year change

For the year ended March 31, 2023, Strategic Markets revenue of $3.8 billion decreased 1 percent compared to the twelve months ended March 31, 2022 driven by a seven-point headwind from currency exchange rates, primarily the Euro, partially offset by signings of incremental business, including increased Kyndryl Consult revenues.

Adjusted EBITDA decreased $99 million from the prior twelve-month period, since the majority of Strategic Markets countries were not charged for IBM software pre-Separation and software cost allocations began post-Separation, partially offset by progress on our key initiatives.

For the three months ended March 31, 2022 (transition period), Strategic Markets revenue of $978 million increased 2 percent as compared to the prior-year quarter, despite a four-point headwind from currency exchange rates.

Revenue increased due to recent signings of incremental business.

Adjusted EBITDA decreased $4 million from the prior-year quarter, since the majority of Strategic Markets countries were not charged for IBM software pre-Separation and software cost allocations began post-Separation.

The increased software costs from IBM were partially offset by higher revenues.

For the year ended December 31, 2021, Strategic Markets revenue of $3.8 billion decreased 5 percent as compared to the prior year.

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dollar against the Euro.

Adjusted EBITDA increased $93 million from the prior year, primarily due to exiting low-margin accounts and realizing benefits from structural actions taken in the prior year.

For the year ended December 31, 2020, Strategic Markets revenue of $4.0 billion decreased 9 percent as compared to the prior year, driven primarily by strategic decisions to exit certain loss-making contracts to strengthen our go-forward profit position.

Adjusted EBITDA decreased $276 million from the prior year, primarily due

to lower revenue as a result of both client volumes and pause of small-deal signings after the announcement of our Separation in the higher fixed-cost European countries.

Adjusted EBITDA increased $52 million from the prior year, primarily due to exiting low-margin accounts and realizing benefits from cost-reduction actions taken in the prior year.

Corporate and Other

Corporate and other had an adjusted EBITDA loss of $154 million in 2021 compared to a loss of $153 million in 2020.

Corporate and other had an adjusted EBITDA loss of $144 million in 2019.

Corporate and other generated an adjusted EBITDA loss of $77 million in the year ended March 31, 2023, compared to a loss of $170 million in the twelve months ended March 31, 2022.

Corporate and other had an adjusted EBITDA loss of $56 million in the three months ended March 31, 2022 (transition period), compared to a loss of $40 million in the prior-year quarter.

The improvements were driven by lower executive expenses incurred by Kyndryl post-Separation compared to corporate expenses allocated by the former Parent in prior-year periods.

Corporate and other had an adjusted EBITDA loss of $154 million in the year ended December 31, 2021 compared to a loss of $153 million in the prior year.

Costs and Expenses

Percent of Revenue

(Dollars in millions)

2022 (unaudited)

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges (benefits)

Transaction-related costs

Impairment expense

Interest expense

Other expense

Income (loss) before income taxes

NM – not meaningful

Cost of services was 85.2% of revenue in the year ended March 31, 2023, compared to 87.7% in the twelve months ended March 31, 2022, primarily driven by progress on our key initiatives and lower costs from our post-Separation commercial agreements with IBM, offset in part by certain site-rationalization activities.

Selling, general and administrative expenses were 17.1% of revenue in the year ended March 31, 2023 compared to 15.0% in the twelve months ended March 31, 2022, driven by expenses associated with operating as an independent public company, the impact of currency on revenue compared to our U.S.

dollar-denominated expenses, and certain site-rationalization activities.

Workforce rebalancing charges arise from cost-reduction actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to employees terminated in the ongoing course of business.

Workforce rebalancing charges were 0.4% of revenue in fiscal 2023 compared to (0.1)% in the twelve months ended March 31, 2022, due to a workforce reduction in the fourth quarter of 2023.

Transaction-related costs were 1.5% of revenue in the year ended March 31, 2023 compared to 3.4% in the twelve months ended March 31, 2022, primarily driven by higher employee-retention expense and pre-spin consultancy expense incurred in the prior year.

Impairment expense was zero in the year ended March 31, 2023 compared to 2.6% of revenue in the twelve months ended March 31, 2022, driven by an impairment of goodwill in the former EMEA and Americas segments in the quarter ended December 31, 2021.

Interest expense was 0.5% of revenue in the year ended March 31, 2023 compared to 0.4% in the twelve months ended March 31, 2022, due to our average debt balance having been lower prior to the Separation.

Other expense was 0.2% of revenue in the year ended March 31, 2023 compared to 0.2% in the twelve months ended March 31, 2022.

Three Months Ended March 31,

Percent of Revenue

(Dollars in millions)

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges

Transaction-related costs

Interest expense

Other expense

Income (loss) before income taxes

Cost of services were 86.3% of revenue in the three months ended March 31, 2022 (transition period), compared to 90.5% in the three months ended March 31, 2021, primarily driven by benefits realized from cost-reduction actions taken in prior periods as well as lower costs from our post-Separation commercial agreements with IBM.

Selling, general and administrative expenses were 15.6% of revenue in the three months ended March 31, 2022 compared to 15.0% in the three months ended March 31, 2021, primarily driven by our stand-alone expense structure compared to pre-Separation allocations incurred in the prior year.

Workforce rebalancing charges were not incurred in the three months ended March 31, 2022 and were 1.1% of revenue in the three months ended March 31, 2021.

Transaction-related costs were 1.3% of revenue in the three months ended March 31, 2022 compared to 1.2% in the three months ended

March 31, 2021.

Interest expense was 0.5% of revenue in the three months ended March 31, 2022 compared to 0.3% in the three months ended March 31, 2021.

Interest expense for the three months ended March 31, 2022 included interest expense associated with the indebtedness we incurred in connection with our Separation.

Other expense was 0.6% of revenue in the three months ended March 31, 2022 compared to 0.5% in the three months ended March 31, 2021.

Year Ended December 31,

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Interest expense

Other (income) and expense

Other expense

Income (loss) before income taxes

NM – not meaningful

Costs of services were 88.8% of revenue in 2021 compared to 88.6% in 2020, primarily driven by the impact of revenue decrease of advisory & implementation services and price decreases embedded in certain new and renewed contracts mostly offset by benefits realized from prior-year structural actions.

Selling, general and administrative expenses were 14.9% of revenue in 2021 compared to 15.2% in 2020, primarily driven by benefits realized from prior-year structural actions, partially offset by additional legal liabilities recorded in the fourth quarter of 2021.

Workforce rebalancing charges arising from structural actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to employees terminated in the ongoing course of business.

Costs of services were 88.7% of revenue in the year ended December 31, 2021 compared to 88.6% in the year ended December 31, 2020, primarily driven by the impact of a revenue decrease related to advisory & implementation services and price decreases embedded in certain new and renewed contracts mostly offset by benefits realized from prior-year cost-reduction actions.

Selling, general and administrative expenses were 14.9% of revenue in 2021 compared to 15.2% in 2020, primarily driven by benefits realized from prior-year cost-reduction actions, partially offset by additional legal liabilities recorded in the fourth quarter of 2021.

Workforce rebalancing charges were 0.2% of revenue in 2021 compared to 4.7% in 2020, when the Company announced a significant workforce reduction, primarily in Europe, in the fourth quarter of 2020.

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Interest expense was 0.3% of revenue in 2021 compared to 0.3% in 2020, and includes interest expense associated with the indebtedness we incurred in connection with our Separation.

Other (income) and expenses were 0.2% of revenue in 2021 compared to 0.1% in 2020.

Other expense was 0.2% of revenue in 2021 compared to 0.1% in 2020.

Transaction-related Charges

The process of completing our Separation involves significant costs and expenses.

Transaction-related charges are primarily related to additional spend to establish certain standalone functions and information technology systems, professional services fees, employee retention expenses and other spend related to contract and supplier novation agreements.

These costs primarily include items that are incremental and one-time in nature.

Transaction-related charges totaled $627 million in 2021.

Transaction-related charges recorded for the year ended December 31, 2020 and 2019 were $21 million and $0, respectively.

The $498 million of transaction-related charges incurred in the periods prior to Separation had no tax effect due to the valuation allowances discussed in Note 5 – Taxes.

The tax impact of the $129 million of transaction-related charges incurred post-Separation was $33 million.

The Company classifies certain expenses related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs” in the Consolidated Income Statement.

Transaction-related costs include expenditures incurred to prepare for and execute the Separation and establish Kyndryl as a standalone business, such as employee retention expenses, information technology costs, marketing expenses to establish the Kyndryl brand, legal, accounting, consulting and other professional services costs required to prepare for and execute the Separation.

Workforce Rebalancing and Site-Rationalization Charges

During the year ended March 31, 2023, management initiated certain actions to reduce the Company’s overall cost structure and increase our operating efficiency.

These actions include 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.

As a result, we disposed of these assets through abandonment or early termination.

During the year ended March 31, 2023, the Company recognized $55 million in workforce rebalancing charges (excluding individual terminations outside of this Company-wide workforce rebalancing program) and $80 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

Management expects total future charges for this program to be approximately $135 million, consisting of $95 million in workforce rebalancing charges and $40 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

The Company estimates that the program in aggregate will require a cash outlay of approximately $260 million, of which approximately $190 million will be paid in fiscal year 2024, and the remainder thereafter.

Management expects that these workforce rebalancing activities will reduce future payroll costs, rent expenses and depreciation of property and equipment by approximately $200 million in fiscal year 2024.

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 19 – Workforce Rebalancing and Site-Rationalization Charges in the accompanying Consolidated Financial Statements.

The Company’s consolidated provision for income taxes and effective tax rate were as follows:

Year Ended December 31,

Twelve Months

(Dollars in millions)

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Effective tax rate

In 2021 and 2020, we recorded income tax expense of $397 million and $246 million, respectively, on a pretax book loss, which resulted in a negative effective tax rate.

In the year ended March 31, 2023, the twelve months ended March 31, 2022 and the year ended December 31, 2021, we recorded income tax expense of $524 million, $350 million and $402 million, respectively, on pretax book losses, which resulted in negative effective tax rates.

Our income tax expense for the year ended March 31, 2023 was primarily related to the increases in valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized, taxes on foreign operations and uncertain tax positions.

Our income tax expense for the twelve months ended March 31, 2022 was primarily related to taxes on foreign operations, uncertain tax positions, tax charges related to the transfer of Kyndryl’s operations from Parent in contemplation of the Company’s separation from IBM and the establishment of valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

Our 2021 income tax expense was primarily related to taxes on foreign operations generating taxable income, uncertain tax positions and tax charges related to the transfer of Kyndryl’s operations from Parent in contemplation of the Company’s Separation from IBM.

The effective tax rate for 2021 was lower compared to 2020 due primarily to tax charges related to the transfer of Kyndryl’s operations from Parent in contemplation of the Company’s Separation and nondeductible goodwill impairment.

For more information, see Note 5 – Taxes.

The effective tax rate for the year ended March 31, 2023 was lower compared to the twelve months ended March 31, 2022 primarily due to increases in valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

For more information, see Note 5 – Taxes in the accompanying Consolidated Financial Statements.

Financial Position

Cash and cash equivalents at December 31, 2021, were $2.2 billion, an increase of $2.2 billion when compared to prior year-end since Kyndryl’s cash was managed by the Parent’s centralized treasury system in 2020.

Total assets of $13.2 billion increased by $2.0 billion from December 31, 2020 predominantly driven by an increase in cash and cash equivalents of $2.2 billion driven by proceeds from debt issuances net of payment made to former Parent;

an increase in accounts receivable of $835 million primarily driven by a reduction in factoring of receivables, new commercial activity with our former Parent, and receivables with the former Parent that are no longer settled immediately post-Separation;

and an increase in right-of-use assets of $230 million primarily due to entering into post-Separation leases with the former Parent for spaces that are partially occupied by Kyndryl employees.

These increases were partially offset by a decrease in property and equipment of $1.1 billion mainly driven by the disposal of certain properties with net book value of approximately $200 million, removal of property and equipment of approximately $300 million that were previously attributable to Kyndryl but did not transfer to Kyndryl upon Separation and depreciation outpacing capital expenditures in 2021, a decrease of goodwill of $497 million primarily due to an impairment charge of $469 million recorded in the fourth quarter of 2021 and a decrease of deferred costs of $460 million driven by lower revenue and joint ventures previously attributed to Kyndryl that did not transfer to Kyndryl upon Separation.

Total liabilities of $10.5 billion increased by $4.2 billion from December 31, 2020 primarily as a result of a $3.0 billion increase in indebtedness, an increase in value-added and income tax liabilities of $357 million because the Company’s tax liabilities were paid by the Parent through the Separation date, an increase of accounts payable of $221 million primarily due to commercial activity with our former Parent and balances owed to our former Parent that are no longer settled immediately post-Separation, an increase in right-of-use liabilities of $184 million primarily due to entering into post-Separation leases with the former Parent for spaces that are partially occupied by Kyndryl employees, and an increase in retirement and nonpension postretirement benefit obligations of $307 million driven by pension obligations transferred to Kyndryl after establishment of Kyndryl’s legal entities in the third quarter of 2021;

see Note 1 – Significant Accounting Policies for more details.

This was partially offset by a decrease in workforce rebalancing liabilities of $513 million driven by payments to employees.

Total equity of $2.7 billion decreased $2.2 billion from year-end 2020, mainly driven by our loss from operations of $2.3 billion.

Overall pension funded status as of December 31, 2021, was 64% of estimated pension benefit obligation, an increase from 55% at year-end 2020 .

Total assets of $11.5 billion decreased by $2.0 billion (and decreased by $1.5 billion adjusted for currency) from March 31, 2022, primarily driven by a decrease of $748 million in accounts receivable due to collections and sales of accounts receivables outpacing new billings and currency impacts;

a decrease in operating right-of-use assets of $348 million due to amortization of leases inherited from former Parent;

abandonment and early termination of leased assets and currency impacts;

a decrease in deferred tax assets of $308 million primarily due to the increases in valuation allowances in certain jurisdictions against deferred tax assets that are not more likely than not to be realized;

a decrease in cash and cash equivalents of $287 million with $100 million of the decline due to the effects of exchange rates on the Company’s cash balances;

a decrease in deferred costs of $151 million due to our business strategies to lower the volume of prepaid software and currency impacts;

and a decrease in property and equipment of $55 million primarily due to currency impacts.

Total liabilities of $10.0 billion at March 31, 2023 decreased by $729 million (and decreased by $458 million adjusted for currency) from March 31, 2022, primarily as a result of a decrease in accrued contract costs of $331 million due to timing of vendors billing Kyndryl for the first time as an independent company in the prior year;

a decrease in operating lease liabilities of $280 million due to payments and currency impacts;

a decrease in retirement and nonpension postretirement benefit obligations of $212 million mainly due to remeasurement primarily driven by higher discount rates;

and a decrease in deferred income of $152 million mainly due to lower volumes and currency impacts;

partially offset by an increase of accounts payables of $220 million due to the timing of payments.

Total equity at March 31, 2023 of $1.5 billion decreased $1.2 billion from March 31, 2022 due to comprehensive loss in the period.

Overall pension funded status as of March 31, 2023 was 74% of estimated pension benefit obligation, an increase from 68% at March 31, 2022.

Cash and cash equivalents at March 31, 2022 (transition period) were $2.1 billion, down $89 million compared to December 31, 2021.

Total assets of $13.4 billion increased by $228 million from December 31, 2021, primarily driven by an increase in deferred costs of $201 million due to billings for prepaid software that typically occur in the first calendar quarter of the year, an increase of $188 million in prepaid expenses and other current assets due to increased spending on cloud-computing arrangements, an increase in goodwill of $91 million and an increase in intangible assets of $108 million primarily from the transfer of a majority interest (51%) of a joint venture in Japan from our former Parent that could not be completed prior to the Separation due to local regulatory approvals, partially offset by a decrease in deferred tax assets of $120 million and a decrease in property and equipment of $89 million due to depreciation outpacing capital expenditures.

Total liabilities of $10.7 billion at March 31, 2022 increased by $284 million from December 31, 2021, primarily as a result of an increase in accounts payable of $415 million due to timing of invoice receipts from vendors, an increase in accrued contract costs of $178 million that was established with our former Parent and certain other vendors for the first time as an independent entity post-Separation, and an increase in accrued compensation and benefits of $128 million due to semi-annual incentive-compensation accruals in certain regions and the timing of salary payments.

This was partially offset by a decrease in retirement obligations of $140 million primarily due to higher discount rates used in the March 2022 remeasurement of pension obligations.

Total equity at March 31, 2022 of $2.7 billion decreased $56 million from December 31, 2021, principally due to our net loss in the period, partially offset by the change in pension obligations.

Overall pension funded status as of March 31, 2022, was 68% of estimated pension benefit obligation, an increase from 64% at December 31, 2021.

Working Capital

At December 31,

(Dollars in millions)

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Working capital

Working capital increased $2.3 billion from the year-end 2020 position.

Current assets increased $2.9 billion due to an increase of $2.2 billion in cash and cash equivalents primarily driven by proceeds from our debt issuance and an increase of $835 million in accounts receivable primarily driven by a reduction in factoring of receivables, new commercial activity with our former Parent, and receivables with the former Parent that are no longer settled immediately post-Separation.

Current liabilities increased $633 million as a result of an increase in value-added and income taxes of $357 million, and an increase in accounts payable of $221 million primarily due to commercial activity with our former Parent and balances owed to our former Parent that are no longer settled immediately post-Separation.

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows are summarized in the table below.

For the year ended December 31:

Working capital at March 31, 2023 decreased $940 million from March 31, 2022.

Current assets decreased $1.1 billion (and decreased $928 million adjusted for currency) primarily driven by a decrease of $748 million in accounts receivable;

a decrease of $287 million in cash and cash equivalents;

and a decrease in deferred costs (current portion) of $72 million.

Current liabilities decreased $190 million (and decreased $8 million adjusted for currency) primarily driven by a decrease in current accrued contract costs of $331 million and a decrease in deferred income (current portion) of $62 million, partially offset by an increase in accounts payable of $220 million.

Working capital at March 31, 2022 (transition period) decreased $285 million from December 31, 2021.

Current assets increased $315 million due to an increase of $223 million in deferred costs (current portion) and an increase of $188 million in prepaid expenses and other current assets, partially offset by a decrease of cash of $89

Current liabilities increased $601 million as a result of an increase in accounts payable of $415 million and an increase in accrued contract costs of $178 million.

Noncurrent Assets and Liabilities

Noncurrent assets of $6.5 billion at March 31, 2023 decreased by $849 million (and decreased by $604 million adjusted for currency) compared to March 31, 2022, primarily driven by a decline in right-of-use assets of $348 million and a decrease in deferred tax assets of $307 million.

Noncurrent liabilities of $5.1 billion at March 31, 2023 decreased $539 million (and decreased by $450 million adjusted for currency) compared to March 31, 2022, mainly driven by a decrease in operating lease liabilities (noncurrent portion) of $221 million;

a decrease in retirement and nonpension postretirement benefit obligations of $212 million;

and a decrease in deferred income (noncurrent portion) of $90 million.

Noncurrent assets of $7.3 billion at March 31, 2022 (transition period) decreased by $87 million (and decreased by $9 million adjusted for currency) compared to December 31, 2021, primarily driven by a decline in deferred tax assets of $120 million, a decline in property and equipment of $89 million and a decline in noncurrent right-of-use assets of $49 million, partially offset by an increase in goodwill of $91 million and intangible assets of $108 million due to the business combinations in the quarter (see Note 10 – Intangible Assets Including Goodwill).

Noncurrent liabilities of $5.7 billion at March 31, 2022 (transition period) decreased $317 million (and decreased by $277 million adjusted for currency) compared to December 31, 2021, mainly driven by a decrease in retirement and nonpension postretirement benefit obligations of $140 million, a decrease in operating lease liabilities (noncurrent portion) of $78 million and a decrease in other noncurrent liabilities of $73 million related to lower deferred tax liabilities.

Our cash flows from operating, investing and financing activities are summarized in the table below.

(Dollars in millions)

2022 (unaudited)

Net cash provided by (used in):

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Net change in cash, cash equivalents and restricted cash

The change in net cash used of $119 million compared to a net cash provided by operating activities of $628 million in prior year was driven by payments of workforce rebalancing liabilities of $370 million arising from restructuring actions taken by the former Parent in the fourth quarter of 2020 and cash used due to an increase in accounts receivable of $1.1 billion primarily driven by a reduction in factoring of receivables, new commercial activity with our former Parent, and receivables with the former Parent that are no longer settled immediately post-Separation;

partially offset by an increase in operating liabilities and accrued costs of approximately $400 million that were established by the Company for the first time as an independent entity.

Net cash used by investing activities decreased $381 million in 2021 when compared to the prior year driven by sales of two data centers and lower capital expenditures than in 2020.

Net cash provided by financing activities increased $2.6 billion in 2021 when compared to the prior year driven by debt issuances of $3.0 billion, partially offset by a reduction in transfer from former Parent of $408 million.

Net cash provided by operating activities was $781 million for the year ended March 31, 2023, compared to net cash provided by operating activities of $398 million for the twelve months ended March 31, 2022.

This change was driven by our reduced net loss, partially offset by changes in working capital.

Net cash used by investing activities was $835 million for the year ended March 31, 2023, compared to a net cash use of $697 million for the twelve months ended March 31, 2022 due to lower capital expenditures in the pre-Separation period.

Capital expenditures consist of payments for property and equipment, and purchased and internally-developed software.

Net cash used by financing activities totaled $141 million for the year ended March 31, 2023, compared to net cash provided by financing activities of $2.4 billion for the twelve months ended March 31, 2022.

This change was primarily driven by the proceeds from debt issuance partially offset by transfers to former Parent in the prior-year period.

Net cash provided by operating activities of $189 million in the three months ended March 31, 2022 (transition period) compared to a net cash use of $328 million in the prior-year period, driven by a decrease in net loss and cash provided by accounts payables, accrued compensation and benefits and accrued contract costs.

Net cash used by investing activities of $225 million in the three months ended March 31, 2022 (transition period) compared to a net cash use of $100 million in the prior-year period, driven by the sale of a data center in the quarter ended March 31, 2021, that provided net cash proceeds of $90 million and cash used for business combinations in the quarter ended March 31, 2022.

Net cash used by financing activities of $43 million in the three months ended March 31, 2022 (transition period) compared to net cash provided by financing activities of $443 million in the prior-year period, driven by a decrease in net transfers from former Parent of $460 million, as transfers from former Parent did not continue post-Separation.

Liquidity and Capital Resources

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In October 2021, in preparation for our Spin-off, we completed the offering of $2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes as follows:

$700 million aggregate principal amount of 2.05% Senior Notes due 2026, $500 million aggregate principal amount of 2.70% Senior Notes due 2028, $650 million

aggregate principal amount of 3.15% Senior Notes due 2031 and $550 million aggregate principal amount of 4.10% Senior Notes due 2041 (the “Notes”).

$700 million aggregate principal amount of 2.05% Senior Notes due 2026, $500 million aggregate principal amount of 2.70% Senior Notes due 2028, $650 million aggregate principal amount of 3.15% Senior Notes due 2031 and $550 million aggregate principal amount of 4.10% Senior Notes due 2041 (the “Notes”).

The Notes were offered and sold to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to non-U.S.

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The Notes are subject to customary affirmative covenants, negative covenants and events of default for financings of this type and are redeemable at our option in a customary manner.

In connection with the issuance of the Notes, we entered into a registration rights agreement with the initial purchasers of the Notes, pursuant to which we will use commercially reasonable efforts to file and have declared effective a registration statement with respect to a registered offer to exchange each series of Notes for new notes with substantially identical terms by October 15, 2022.

If the exchange offer is not completed on or before October 15, 2022, and under certain other circumstances, we are required to use commercially reasonable efforts to file and have declared effective a shelf registration statement relating to the resale of the Notes.

In connection with the issuance of the Notes, we entered into a registration rights agreement with the initial purchasers of the Notes, pursuant to which we completed a registered offering to exchange each series of Notes for new notes with substantially identical terms during the quarter ended September 30, 2022.

Term Loan and Revolving Credit Facility

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The Revolving Credit Agreement expires, unless extended, in October 2026, and the Term Loan Credit Agreement matures, unless extended, in November 2024.

Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, plus a margin, as further described in the Credit Agreements.

Interest rates on borrowings under the Credit Agreements are based on prevailing market interest rates, plus a margin, as further described in the Credit Agreements.

As of March 31, 2023, there has been no drawdown on the Revolving Credit Agreement.

The Notes and the Credit Agreements were initially guaranteed by IBM.

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Following the completion of the Separation, the guarantee was released, and the Notes and the Credit Agreements are no longer obligations of IBM.

We expect to be able to voluntarily prepay borrowings under the Credit Agreements without premium or penalty, subject to customary “breakage” costs.

We may voluntarily prepay borrowings under the Credit Agreements without premium or penalty, subject to customary “breakage” costs.

The Credit Agreements include certain customary mandatory prepayment provisions.

In addition, the Credit Agreements include customary events of default and affirmative and negative covenants as well as a maintenance covenant that will require that the ratio of our indebtedness for borrowed money to consolidated EBITDA (as defined in the Credit Agreements) for any period of four consecutive fiscal quarters be no greater than 3.50 to 1.00.

Receivables Purchase Agreement

A portion of our receivables with extended payment terms were historically assigned to IBM’s Global Financing business.

In connection with the assignment, these receivables were not recognized on the Company’s Consolidated Balance Sheet.

In October 2021, in preparation for the Separation, we entered into a receivables purchase agreement with an unaffiliated bank with similar volumes to the amounts historically financed by IBM (the “Receivables Agreement”).

Pursuant to the Receivables Agreement, we may sell at any one time, on a revolving basis, up to $1.1 billion of our trade receivables.

Under the Receivables Agreement, from time to time, we sell certain customers’ trade receivables with extended payment terms at a discount on a non-recourse basis.

These transactions are accounted for as sales.

The initial term of the Receivables Agreement is 18 months.

The Company is in compliance with its debt covenants.

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 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.

An agreement with a third-party financial institution executed in November 2021 enabled us to sell, at any one time, on a revolving basis, up to $1.1 billion of our trade receivables with payment terms from three to nine months and was subsequently amended to decrease such amount to $1.0 billion.

This agreement was further amended during the quarter ended December 31, 2022 to provide that we may sell an additional amount of trade receivables with payment terms of less than three months, contingent on the approval of the counterparty to purchase such receivables with no defined limit on such sales.

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 one of the parties elects not to extend.

Beginning in June 2022, the Company entered into an agreement with a separate third-party financial institution in which the sale of receivables is contingent on the approval of the counterparty with no defined facility limit.

The initial term of this agreement is 12 months.

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 the aforementioned programs were $3.1 billion for the year ended March 31, 2023.

Gross proceeds from receivables sold to third parties and the financing division of our former Parent were $2.2 billion for the twelve months ended March 31, 2022.

The fees associated with the transfers of receivables were $47 million for the year ended March 31, 2023, and $11 million for the twelve months ended March 31, 2022.

Off-Balance Sheet Arrangements and Contractual Obligations

From time to time, we may enter into (i) off-balance sheet arrangements as defined by SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations” or (ii) purchase commitments, which we expect to use in the ordinary course of business.

At December 31, 2021, and December 31, 2020, we had no such off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

At March 31, 2023, March 31, 2022 and December 31, 2021, we had no such off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We do not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.

At December 31, 2021, the Company’s material future contractual obligations were related to tax indemnifications, leases, debt and pension liabilities.

See Note 5 – Taxes, Note 9 – Leases, Note 11 – Borrowings, Note 12 – Other Liabilities and Note 16 – Retirement-Related Benefits of Notes to the Company’s consolidated financial statements.

Additionally, the Company uses several software and cloud partners to provides services to its customers.

The majority of the Company’s purchase obligations relate to noncancelable commitments to those third parties.

At December 31, 2021, we had short-term (in 2022), mid-term (in 2023 and 2024) and long-term (after 2024) purchase commitments in the amount of $0.8 billion, $1.5 billion and $1.1 billion, respectively.

At March 31, 2023, the Company’s material future contractual obligations were primarily related to leases, debt and pension liabilities.

See Note 9 – Leases, Note 11 – Borrowings, Note 12 – Other Liabilities and Note 16 – Retirement-Related Benefits of Notes to the Company’s consolidated financial statements.

Additionally, the Company has contractual commitments that are noncancellable with certain software, hardware and cloud partners used in the delivery of services to customers.

Certain of these commitments were allocated to the Company as part of the Separation from its former Parent.

The Company has determined that these commitments may exceed the Company’s needs over the next four to six years.

If the Company is unable to satisfy, reduce or amend its contractual commitments, it will record the future charges for any payments related to excess commitments as cost of services.

At March 31, 2023, we had short-term (April 2023 through March 2024), mid-term (April 2024 through March 2026) and long-term (April 2026 onward) purchase commitments in the amount of $0.7 billion, $1.0 billion and $1.1 billion, respectively.

Other Information

The following table presents the Company’s signings for the years ended December 31, 2021 and 2020.

Year Ended December 31,

($ in billions)

The following table presents the Company’s signings for the year ended March 31, 2023, the twelve months ended March 31, 2022, and the year ended December 31, 2021.

(Dollars in billions)

Total signings

A significant portion of the year-over-year decline in signings was driven by large renewals of existing client contracts in the first and third quarters of 2020.

The following table presents the total contract value for the Company’s signings greater than $100 million for new and existing customers for the years ended December 31, 2021 and 2020.

Year Ended December 31,

($ in millions)

The following table presents the total contract value for the Company’s signings greater than $100 million for new and existing customers for the year ended March 31, 2023, the twelve months ended March 31, 2022 and the year ended December 31, 2021.

(Dollars in billions)

New customers

Existing customers

We believe that the estimated values of signings provide insight into the Company’s potential future revenue and a tool to monitor trends in the business, including the business’ ability to attract new customers and sell additional scope into our existing customer base, and we believe signings are helpful information for investors.

Signings decreased by $2.0 billion, or 14%, for the year ended March 31, 2023 compared to the twelve months ended March 31, 2022, in part due to a 6-point negative currency impact on signings.

Signings also declined as a result of an increased focus on higher-margin services, which tend to be shorter in length and therefore smaller in value than historical agreements.

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.

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Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value.

Signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger outsourcing contracts.

The conversion of signings into revenue may vary based on the types of services and solutions, customer decisions and other factors, which may include, but are not limited to, macroeconomic environment or external events.

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.

Critical Accounting Estimates

The application of GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition.

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.

The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to our financial statements.

Our significant accounting policies are described in Note 1 – Significant Accounting Policies to our consolidated financial statements.

The inputs into certain of our critical accounting estimates considered the macroeconomic impacts of the ongoing COVID-19 pandemic.

These estimates included but were not limited to, the allowances for credit losses, the carrying values of goodwill and intangible assets and other long-lived assets, valuation allowances for tax assets and revenue recognition.

The macroeconomic impacts of the COVID-19 pandemic did not have a material impact on our critical accounting estimates reflected in our 2021 results.

Given the inherent uncertainty of the magnitude of future impacts from and/or the duration of the pandemic, our estimates may change materially in future periods.

A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors.

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Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates.

Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance obligations.

In certain arrangements, revenue is recognized based on progress toward completion of the performance obligation using a cost-to-cost measure of progress.

The estimation of cost at completion is complex and requires us to make judgements and estimates.

The estimation of cost at completion is complex and requires us to make judgments and estimates.

Other significant judgments include determining whether we are acting as the principal in a transaction and whether separate contracts should be combined and considered part of one arrangement.

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Evaluations are conducted each quarter to assess the adequacy of the estimates.

If the estimates were changed by 10 percent in 2021, the impact on net income would have been immaterial.

Costs to Complete Service Contracts

During the contractual period, revenue, cost and profits may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which we use cost-to-cost method to measure progress.

If at any time these estimates indicate the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost.

We perform ongoing profitability analyses of these services contracts in order to determine whether the latest estimates require updating.

The Company performs ongoing profitability analyses of its design-and-build services contracts accounted for using a cost-to-cost measure of progress to determine whether the latest estimates of revenues, costs and profits require updating.

If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

For other types of services contracts, any losses are recorded as incurred.

Key factors reviewed to estimate the future costs to complete each contract are future labor costs and product costs and expected productivity efficiencies.

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A significant change in an estimate or assumption on one or more contracts could have a material effect on our results of operations.

Pension Assumptions

Retirement-related Benefit Plan Assumptions

For Company-sponsored and co-sponsored defined benefit pension plans, the measurement of the benefit obligation to plan participants and net periodic benefit cost requires the use of certain assumptions, including, among others, estimates of discount rates and expected return on plan assets.

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If the average discount rate assumption for the non-U.S.

defined benefit pension plans had increased or decreased by 25 basis points from 1.19 percent on December 31, 2021, this would not result in a material change to pretax income recognized in 2022.

defined benefit pension plans had increased or decreased by 25-basis-points from 3.57 percent on March 31, 2023, this would not result in a material change to pretax income recognized in fiscal 2024.

Further changes in the discount rate assumptions would impact the PBO which, in turn, may impact our funding decisions if the PBO exceeds plan assets.

A 25 basis point increase or decrease in the discount rate would result in an approximate corresponding decrease or increase, respectively, of $85 million in the Plans’ estimated PBO and accumulated postretirement benefit obligation (APBO) based upon December 31, 2021 data.

A 25-basis-point increase or decrease in the discount rate would result in an approximate corresponding decrease or increase, respectively, of approximately $42 million in the Plans’ estimated PBO and accumulated postretirement benefit obligation (APBO) based upon March 31, 2023 data.

The expected long-term return on plan assets assumption is used in calculating the net periodic benefit cost.

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The differences between the actual return on plan assets and the expected long-term return on plan assets are recognized over five years in the expected return on plan assets line in net periodic benefit cost and also as a component of actuarial (gains)/losses, which are recognized over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets, as provided by accounting standards.

To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets assumption, a 50 basis point increase or decrease in the expected long-term return on plan assets assumption would not have a material estimated decrease or increase on the following year’s pretax net periodic benefit cost (based upon plan assets at December 31, 2021 and expected contributions and benefit payments for 2022).

To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets assumption, a 25-basis-point increase or decrease in the expected long-term return on plan assets assumption would not have a material estimated decrease or increase on the following year’s pretax net periodic benefit cost (based upon plan assets at March 31, 2023 and expected contributions and benefit payments for fiscal 2024).

We may voluntarily make contributions or be required, by law, to make contributions to our pension plans.

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Current income tax liabilities including amounts for unrecognized tax benefits related to our activities included in IBM’s income tax returns were deemed to be immediately settled with IBM through the Net Parent investment account in the Consolidated Balance Sheet and reflected in Net transfers from Parent in the financing activities section in the Consolidated Statement of Cash Flows.

Post-Separation, liabilities related to unrecognized tax

benefits for which the Company is liable are reported within the Consolidated Balance Sheet based upon tax authorities’ ability to assert the Company may be the primary obligor for historical taxes, among other factors.

Post-Separation, liabilities related to unrecognized tax benefits for which the Company is liable are reported within the Consolidated Balance Sheet based upon tax authorities’ ability to assert the Company may be the primary obligor for historical taxes, among other factors.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.

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This quantitative test is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.

After performing the annual goodwill impairment qualitative analysis during the fourth quarter of 2021, the Company determined it was necessary to perform the quantitative goodwill impairment test.

We use an income-based approach where fair value is determined using a discounted cash flow model that requires significant judgment with respect to revenue and growth rates, based upon annual budgets and long-term strategic plans.

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The use of different assumptions would increase or decrease discounted cash flows or earnings projections and therefore, could change impairment determinations.

As a result of the impairment testing performed in the fourth quarter, we determined that $293 million of the goodwill balance was impaired in our legacy EMEA segment and $176 million of the goodwill was impaired in our new United States segment.

As of October 1, 2021, the estimated fair value of the Strategic Markets reporting unit, which had goodwill of $176 million, exceeded its carrying amount by greater than 50 percent.

Management’s cash flow projections for this reporting unit included significant judgments and assumptions relating to expected revenue growth and projected EBITDA margins.

A decline in the expected revenue growth rate of 50 basis points or projected EBITDA margins of 50 basis points would not have resulted in an impairment of the Strategic Market reporting unit.

In conjunction with our annual review of goodwill for impairment, we prepared qualitative and quantitative valuation analysis as of October 1, 2022 and January 1, 2023.

The annual goodwill impairment assessment date was changed from October 1 to January 1 to better align the assessment date with the change in our annual planning and budgeting process for the new fiscal year-end.

As a result of the January 1 analysis, we determined that the fair value of the Canada reporting unit within the Principal Markets segment exceeded book value by 93%.

We performed a sensitivity analysis on the discounted cash flow valuation that was prepared to estimate the enterprise value of the

Canada reporting unit.

A hypothetical 200-basis-point increase in the discount rate or decline in revenue growth, combined with no other changes to other inputs and assumptions used in the analysis, would not result in a potential impairment for the Canada reporting unit.

See Note 10 – Intangible Assets Including Goodwill for further discussion.

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The Company’s actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others:

● risks related to the Company’s recent Spin-off from IBM;

● risks related to the Company’s spin-off from IBM;

● failure to attract new customers, retain existing customers or sell additional services to customers;

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● competition;

● impacts of relationships with critical suppliers;

● impacts of relationships with critical suppliers and partners;

● inability to attract and retain key personnel and other skilled employees;

● impact of local legal, economic, political, health and other conditions, including the COVID-19 pandemic;

● impact of local legal, economic, political, health and other conditions;

● a downturn in economic environment and customer spending budgets;

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● failure of the Company’s intellectual property rights to prevent competitive offerings and the failure of the Company to obtain necessary licenses;

● the impairment of our goodwill or long-lived assets;

● risks relating to cybersecurity and data privacy;

● risks relating to non-compliance with legal and regulatory requirements;

● adverse effects from tax matters and environmental matters;

● legal proceedings and investigatory risks;

● 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 foreign currency fluctuations;

● the impact of currency fluctuations;

● risks related to the Company’s common stock and the securities market .

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis