What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-05-30 compared with 2023-05-26 · 163 added, 252 removed, 295 unchanged (58% of the section changed)

1 unchanged sentence

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.

Included below are selected results and year-over-year comparisons for the years ended March 31, 2024 and 2023, and the twelve months ended March 31, 2022 (unaudited).

The Company is presenting results of operations for the year ended March 31, 2023 and 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 2024 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”.

For further information on (i) the comparisons between the year ended March 31, 2023 and the twelve months ended March 31, 2022 not covered in the “Segment Results” below, (ii) the comparison between the three months ended March 31, 2023 and the three months ended March 31, 2022 (the 2022 transition period) and (iii) the year ended December 31, 2021, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (the “2023 Form 10-K”).

Year Ended March 31,

(Dollars in millions)

9 unchanged sentences

Kyndryl Holdings, Inc.

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

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

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

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.

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 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.

In fiscal year 2024, we saw continuing demand for information technology services, despite concerns about economic growth, increased geopolitical tensions, inflationary pressures and government efforts to stem inflation.

Although government efforts to stem inflation are expected to suppress economic growth, most economists, including the International Monetary Fund, continue to expect positive global macroeconomic growth in calendar year 2024.

Fiscal 2024 Financial Performance

For the year ended March 31, 2024, we reported $16.1 billion in revenue, a decline of 6 percent compared to the year ended March 31, 2023.

The revenue decline was largely attributable to actions the Company has taken to reduce unprofitable and low-margin components of its customer relationships.

United States revenue declined 9 percent, Japan revenue declined 6 percent, Principal Markets revenue declined 2 percent and Strategic Markets revenue decreased 7 percent, compared to the year ended March 31, 2023.

Net loss of $340 million improved by $1.0 billion versus the prior-year period driven by progress on our key initiatives to drive operating efficiencies, increased margins and reduced transaction-related costs tied to our Separation.

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.

1 unchanged sentence

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

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.

United States revenue declined 5 percent, Japan declined 4 percent, Principal Markets declined 1 percent and Strategic Markets declined 5 percent compared to 2020.

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

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

2 unchanged sentences

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

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.

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

Historically, the Company consisted of the managed infrastructure services unit of the Parent’s Global Technology Services segment and did not operate as a separate standalone company.

Accordingly, the Parent had reported the financial position and results of operations, cash flows and changes in equity of the Company in the Parent’s consolidated financial statements.

The accompanying financial statements through the Separation date reflect allocations of certain IBM corporate, infrastructure and shared services expenses, including centralized research, legal, human resources, payroll, finance and accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury and other expenses.

Prior to November 3, 2021, the accompanying financial statements of Kyndryl were derived from the consolidated financial statements and accounting records of the former Parent as if the Company operated on a standalone basis during this period and reflect allocations of certain IBM corporate, infrastructure and shared services expenses, including centralized research, legal, human resources, payroll, finance and accounting, employee benefits, real estate, insurance, information technology, telecommunications, treasury and other expenses.

Where possible, these charges were allocated based on direct usage, with the remainder allocated on a pro rata basis of headcount, gross profit, asset or other allocation methodologies that are considered to be a reasonable reflection of the utilization of services provided or the benefit received by Kyndryl during the periods presented.

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.

All significant intercompany transactions between IBM and Kyndryl prior to the Separation were included within Net Parent investment on the accompanying Consolidated Financial Statements.

After the Separation on November 3, 2021, the Company’s financial statements for the periods from November 4, 2021, through March 31, 2024, are consolidated financial statements based on our reported results as a standalone company.

All significant transactions and accounts between Kyndryl entities were eliminated.

All significant intercompany transactions between IBM and Kyndryl prior to the Separation were included within Net Parent investment on the accompanying Consolidated Financial Statements.

Prior to the Separation, our operations were included in the consolidated U.S.

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

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.

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.

Post-Separation, the income tax provisions are calculated based on Kyndryl’s operating footprint, as well as tax return elections and assertions.

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, the income tax provisions are calculated based on Kyndryl’s operating footprint, as well as our tax return elections and assertions.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes.

1 unchanged sentence

Segment Results

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.

The following table presents our reportable segments’ revenue and adjusted EBITDA for the years ended March 31, 2024 and 2023, and the twelve months ended March 31, 2022.

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

Year Ended March 31,

Year-over-Year Change

18 unchanged sentences

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 they enhance 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.

2 unchanged sentences

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), 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.

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 and benefits, 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 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.

3 unchanged sentences

GAAP net income (loss) to adjusted EBITDA:

Year Ended December 31,

Year Ended March 31,

(Dollars in millions)

1 unchanged sentence

Net income (loss)

Provision for income taxes

Workforce rebalancing charges (benefits)

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

Transaction-related costs

Stock-based compensation expense

Impairment expense

Provision for (benefit from) income taxes

Interest expense

1 unchanged sentence

Amortization expense

Workforce rebalancing charges

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

Transaction-related costs (benefits)

Stock-based compensation expense

Impairment expense

Other adjustments*

Adjusted EBITDA (non-GAAP)

* 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.

* Other adjustments represent pension expenses other than pension servicing costs and multi-employer plan costs, significant litigation costs, currency impacts of highly inflationary countries, and an adjustment to reduce amortization expense for the amount already included in transaction-related costs (benefits) above.

United States

Year Ended March 31,

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

1 unchanged sentence

Adjusted EBITDA year-over-year change

For the year ended March 31, 2024, United States revenue of $4.3 billion decreased 9 percent compared to the year ended March 31, 2023, driven by the Company’s efforts to reduce certain low-margin revenues.

Adjusted EBITDA decreased $58 million from the prior year, primarily driven by an increase in software costs of $67 million resulting from an amendment of the contract with a software provider that re-allocated costs among our segments, partially offset by increased operating efficiencies and higher margins on recent signings.

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.

Year Ended March 31,

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

2 unchanged sentences

Adjusted EBITDA year-over-year change

For the year ended March 31, 2024, Japan revenue of $2.3 billion decreased 6 percent compared to the year ended March 31, 2023 , driven primarily by an unfavorable currency exchange rate impact of six points.

Adjusted EBITDA decreased $46 million from the prior year, primarily driven by unfavorable currency movements that impacted both non-yen-denominated costs and the translation of earnings into U.S.

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.

1 unchanged sentence

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.

Revenue decreased primarily as a result of currency exchange rates.

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

Principal Markets

Year Ended March 31,

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

2 unchanged sentences

Adjusted EBITDA year-over-year change

For the year ended March 31, 2024, Principal Markets revenue of $5.8 billion decreased 2 percent compared to the year ended March 31, 2023, including a favorable currency exchange rate impact of two points.

The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships.

Adjusted EBITDA increased $369 million from the prior year, primarily due to increased operating efficiencies, higher margins on recent signings and a decrease in software costs of $80 million resulting from an amendment of the contract with a software provider that re-allocated costs among our segments.

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.

2 unchanged sentences

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.

Revenue decreased due to certain joint ventures not transferring to us in connection with the Separation partially offset by a favorable currency exchange rate impact of 4 points, primarily driven by the weakening of the U.S.

dollar against the Euro and British pound.

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 March 31,

(Dollars in millions)

2022 (unaudited)

Revenue year-over-year change

2 unchanged sentences

Adjusted EBITDA year-over-year change

For the year ended March 31, 2024, Strategic Markets revenue of $3.6 billion decreased 7 percent compared to the year ended March 31, 2023, including a favorable currency exchange rate impact of three points.

The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships.

Adjusted EBITDA increased $143 million from the prior year, primarily due to increased operating efficiencies and higher margins on recent signings, partially offset by an increase in software costs of $23 million resulting from an amendment of the contract with a software provider that re-allocated costs among our segments.

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.

Revenue decreased due to certain joint-ventures not transferring to us in connection with the Separation and impacts from exiting low-margin accounts, partially offset by a favorable currency exchange rate impact of 2 points, primarily driven by the weakening of the U.S.

dollar against the Euro.

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 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.

Corporate and other generated an adjusted EBITDA loss of $95 million in the year ended March 31, 2024, compared to a loss of $77 million in the year ended March 31, 2023.

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, driven by lower executive expenses incurred by Kyndryl post-Separation compared to corporate expenses allocated by the former Parent in the prior-year period.

Costs and Expenses

Year Ended March 31,

Percent of Revenue

(Dollars in millions)

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges

Transaction-related costs (benefits)

Interest expense

Other expense

Income (loss) before income taxes

NM – not meaningful

Cost of services was 82.2% of revenue in the year ended March 31, 2024, compared to 85.2% in the year ended March 31, 2023, driven by increased operating efficiencies, higher margins on recent signings and actions the Company has taken to reduce low-margin components of its customer relationships.

Selling, general and administrative expenses were 17.3% of revenue in the year ended March 31, 2024 compared to 17.1% in the year ended March 31, 2023, driven by lower revenue, partially offset by reduced expenses.

Workforce rebalancing charges were 0.9% of revenue in the year ended March 31, 2024 versus 0.4% of revenue in the prior-year period, due to increased workforce rebalancing actions taken in fiscal 2024.

Transaction-related costs (benefits) were (0.3)% of revenue in the year ended March 31, 2024 compared to 1.5% in the prior-year, driven by reduced rebranding and employee-retention costs and the favorable

resolution of certain pre-Separation and Separation-related matters with our former Parent.

Interest expense was 0.8% of revenue in the year ended March 31, 2024 compared to 0.5% in the prior year due to higher interest rates in fiscal 2024.

Percent of Revenue

(Dollars in millions)

2022 (unaudited)

1 unchanged sentence

Selling, general and administrative expenses

Workforce rebalancing charges (benefits)

Workforce rebalancing charges

Transaction-related costs

13 unchanged sentences

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,

Percent of Revenue

(Dollars in millions)

Cost of services

Selling, general and administrative expenses

Workforce rebalancing charges

Transaction-related costs

Impairment expense

Interest expense

Other expense

Income (loss) before income taxes

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 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 0.2% 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.

Transaction-related costs were 3.4% of revenue in 2021 compared to 0.1% in 2020, primarily driven by costs related to our Separation, including legal, consulting, audit and other professional fees, information technology transition costs, and employee retention expenses.

Impairment expenses were 2.5% of revenue in 2021, primarily driven by an impairment of goodwill we recorded in the fourth quarter of 2021.

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

Transaction-related Charges

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

Transaction-related costs include expenditures incurred to prepare for and execute the Separation and establish Kyndryl as a standalone business, 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.

Transaction-Related Costs (Benefits)

The Company classifies certain expenses and benefits related to the Separation, acquisitions and divestitures (if any) as “transaction-related costs (benefits)” 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

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

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 fiscal year ended March 31, 2024.

These actions include workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations.

1 unchanged sentence

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.

As a result, we disposed of these assets through

abandonment or early termination.

During the year ended March 31, 2024, the Company recognized $135 million in workforce rebalancing charges (excluding individual terminations outside of this Company-wide workforce rebalancing program) and $39 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.

Total cash outlays for this program are expected to be approximately $300 million, of which approximately $210 million has been paid through March 31, 2024 (including approximately $40 million of contractual payments toward leased assets we have ceased to use) and approximately $60 million is expected to be paid in fiscal year 2025.

Management expects 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.

6 unchanged sentences

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.

In the years ended March 31, 2024 and 2023, and the twelve months ended March 31, 2022, we recorded income tax expense of $172 million, $524 million and $350 million, respectively, on pretax losses, which resulted in negative effective tax rates.

Our income tax expense for the year ended March 31, 2024 was primarily related to taxes on foreign operations and uncertain tax positions.

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 the year ended March 31, 2024 was lower (more negative) compared to the year ended March 31, 2023 primarily due to the Company’s pretax loss being significantly lower in fiscal year 2024.

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.

1 unchanged sentence

Financial Position

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.

Total assets of $10.6 billion at March 31, 2024 decreased by $873 million (and decreased by $737 million adjusted for currency) from March 31, 2023, primarily driven by:

a decrease in cash and cash equivalents of $295 million mainly due to our net loss in the period;

a decrease in deferred costs of $236 million due to amortization outpacing additions;

and a decrease in fixed assets of $105 million due to depreciation outpacing new capital expenditures.

Total liabilities of $9.5 billion at March 31, 2024 decreased by $533 million (and decreased by $384 million adjusted for currency) from March 31, 2023, primarily as a result of:

a decrease in accounts payable of $366 million due

to lower costs and the timing of payments;

a decrease in other liabilities (non-current) of $118 million due in part to the decrease of deferred taxes;

and a decrease in other accrued expenses and liabilities (current) of $102 million due in part to workforce rebalancing payments and partially offset by an increase in accrued contract costs of $142 million due to the timing of vendors’ billings.

Total equity of $1.1 billion at March 31, 2024 decreased $340 million from March 31, 2023, principally due to our comprehensive loss in the period.

Overall pension funded status as of March 31, 2024 was 75% of estimated pension benefit obligation, an increase from 74% at March 31, 2023.

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

(Dollars in millions)

Current assets

Current liabilities

Working capital

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.

Year Ended March 31,

(Dollars in millions)

2022 (unaudited)

Net cash provided by (used in):

4 unchanged sentences

Net change in cash, cash equivalents and restricted cash

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.

Net cash provided by operating activities was $454 million for the year ended March 31, 2024, compared to net cash provided by operating activities of $781 million for the year ended March 31, 2023.

This change was driven by lower cash from working capital, partially offset by our reduced net loss.

Net cash used by investing activities was $553 million for the year ended March 31, 2024, compared to a net cash use of $835 million for the year ended March 31, 2023 due to lower capital expenditures and the sale of certain fixed assets.

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.

Net cash used by financing activities totaled $170 million for the year ended March 31, 2024, compared to net cash used by financing activities of $141 million for the year ended March 31, 2023 mainly driven by higher repayments of finance lease obligations.

Liquidity and Capital Resources

2 unchanged sentences

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

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

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

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.

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 completed a registered offering to exchange each series of Notes for new notes with substantially identical terms during the quarter ended September 30, 2022.

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, which were capitalized as a reduction to the carrying value of debt and are being amortized as interest expense over the term of the notes.

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.

Term Loan and Revolving Credit Facility

In October 2021, we entered into a $500 million three-year variable rate term loan credit agreement (the “Term Loan Credit Agreement”).

In October 2021, we entered into a $500 million three-year variable rate term loan credit agreement (the “Term Loan Credit Agreement”), which was scheduled to mature in November 2024.

In November 2021, we drew down the full $500 million available under the Term Loan Credit Agreement.

In October 2021, we entered into a $3.15 billion multi-currency revolving credit agreement (the “Revolving Credit Agreement” and, together with the Term Loan Credit Agreement, the “Credit Agreements”) for our future liquidity needs.

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

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

The interest rate on this term loan was equal to one-month U.S.

Dollar London Interbank Offered Rate (“LIBOR”) plus a margin of 1.125%.

In June 2023, we amended the Term Loan Credit Agreement by replacing LIBOR with the Secured Overnight Financing Rate (“SOFR”).

The first repricing date using SOFR was in July 2023.

In February 2024, the Company used the net proceeds from the offering of the 2034 Notes, together with cash on hand, to prepay the full amount outstanding under the Term Loan Credit Agreement, at no penalty.

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 LIBOR with 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.

The total facility fees recorded by the Company for the Revolving Credit Agreement were $5 million for the years ended March 31, 2024 and 2023.

Facility fees were immaterial for the three months ended March 31, 2022 and the year ended December 31, 2021.

As of March 31, 2024, there has been no drawdown on the Revolving Credit Agreement.

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

Approximately $900 million of the net proceeds from the term loan and the sale of the Notes was transferred to IBM in conjunction with the Separation.

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

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

The Credit Agreements include certain customary mandatory prepayment provisions.

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

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.

1 unchanged sentence

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 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.

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 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.

The second agreement was executed in June 2022 with a separate third-party financial institution and renews automatically on its anniversary date.

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.

Gross proceeds from receivables sold to third parties under the aforementioned programs were $3.6 billion for the year ended March 31, 2024 and $3.1 billion for the year ended March 31, 2023.

The fees associated with the transfers of receivables were $49 million for the year ended March 31, 2024 and $47 million for the year ended March 31, 2023.

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 at March 31, 2024 were immaterial.

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 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.

At March 31, 2024 and March 31, 2023, 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.

3 unchanged sentences

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.

The Company has determined that these commitments may exceed the Company’s needs over the next two to three 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.

At March 31, 2024, we had short-term (April 2024 through March 2025), mid-term (April 2025 through March 2027) and long-term (April 2027 onward) purchase commitments in the amount of $0.6 billion, $0.4 billion and $0.4 b illion, respectively.

Other Information

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.

The following table presents the Company’s signings for the years ended March 31, 2024 and 2023, and the twelve months ended March 31, 2022.

Year Ended March 31,

(Dollars in billions)

Total signings

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

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 increased by $332 million, or 3%, in the year ended March 31, 2024, compared to the prior year.

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 six-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.

18 unchanged sentences

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 judgments and estimates.

The estimation of future costs, which is updated as the project progresses, is complex and requires us to make judgments.

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.

5 unchanged sentences

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.

If at any time these estimates indicate that the contract will be unprofitable on a gross-margin basis, 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.

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

Capitalization of Contract Costs

7 unchanged sentences

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.

Changes in the discount rate assumptions would impact the actuarial (gain)/loss amortization and interest cost components of the net periodic benefit cost calculation and the projected benefit obligation (PBO).

Changes in the discount rate assumptions would impact the actuarial (gain)/loss amortization, service cost and interest cost components of the net periodic benefit cost calculation and the projected benefit obligation (PBO).

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

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.

defined benefit pension plans had increased or decreased by 25-basis-points from 3.30% on March 31, 2024, this would not result in a material change to pretax net periodic benefit cost recognized in fiscal 2025.

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.

13 unchanged sentences

The Company also filed certain separate foreign income tax returns.

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.

For purposes of the financial statements presented on a “carve-out” basis, the income tax provisions were calculated as if we filed separate tax returns and include transactions related to our Separation attributed to us, even if the related tax liabilities were our former Parent’s responsibility.

Prior to the Separation, the Company recorded deferred tax assets for stock-based compensation awards that result in tax deductions in the consolidated financial statements calculated using the separate return basis, the amount of compensation cost recognized and the relevant statutory tax rates.

Post-Separation, the differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Company’s income tax return are recorded as a benefit or expense to the provision for income taxes in the Consolidated Income Statement.

Post-Separation, our income tax provisions are calculated based on Kyndryl’s operating footprint, as well as our tax return elections and assertions.

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.

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.

1 unchanged sentence

In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust the valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

Prior to the Separation, the Company recorded deferred tax assets for stock-based compensation awards that result in tax deductions in the consolidated financial statements calculated using the separate return basis based on the amount of compensation cost recognized and the relevant statutory tax rates.

Valuation of Assets

7 unchanged sentences

We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable by first assessing qualitative factors to determine if it is more likely than not that fair value is less than carrying value.

The fair values of the reporting units were determined using a discounted cash flow model.

Significant assumptions inherent in the valuation methodologies include estimates of future projected business results, long-term growth rates and the weighted-average cost of capital.

We assess qualitative factors in each of our reporting units that carry goodwill including relevant events and circumstances that affect the fair value of reporting units.

7 unchanged sentences

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.

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.

If a quantitative test is required, 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.

Fair value estimates employed in our annual impairment review of goodwill involve using various assumptions.

3 unchanged sentences

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

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.

In conjunction with our annual review of goodwill for impairment, we prepared qualitative and quantitative valuation analysis as of January 1, 2024.

For the reporting units subject to quantitative tests, we determined that their fair values exceeded their book values by over 100%.

We also performed a sensitivity analysis on the calculation of fair value using discounted cash flows.

A hypothetical 100-basis-point increase in the discount rate or a hypothetical 100-basis-point decline in revenue growth rate, combined with no other changes to other inputs and assumptions used in the analysis, would not result in a potential impairment.

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

7 unchanged sentences

These revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

Cybersecurity

While cybersecurity risk can never be completely eliminated, our approach draws on the depth and breadth of our global capabilities, both in terms of our offerings to clients and our internal approaches to risk management.

In cooperation with partners, we offer commercial security solutions that deliver capabilities in areas such as identity and access management, data security, application security, network security and endpoint security.

These solutions include pervasive encryption, threat intelligence, analytics, cognitive and artificial intelligence and forensic capabilities that analyze client security events, yielding insights about attacks, threats and vulnerabilities facing the client.

We also offer professional consulting and technical services solutions for security from assessment and incident response to deployment and resource augmentation.

In addition, we offer managed and outsourced security solutions from multiple security operations centers around the world.

Finally, security is embedded in a multitude of our offerings through secure engineering and operations and by critical functions (e.g., encryption, access control) in servers, storage, software, services and other solutions.

From an enterprise perspective, we implement a multi-faceted risk-management approach based on the National Institute of Standards and Technology Cybersecurity Framework to identify and address cybersecurity risks.

In addition, we have established policies and procedures that provide the foundation upon which our infrastructure and data are managed.

We regularly assess and adjust our technical controls and methods to identify and mitigate emerging cybersecurity risks.

We use a layered approach with overlapping controls to defend against cybersecurity attacks and threats on networks, end-user devices, servers, applications, data and cloud solutions.

We also have threat intelligence and security monitoring programs, as well as a global incident response process to respond to cybersecurity threats and attacks.

In addition, we utilize a combination of online training, educational tools, videos and other awareness initiatives to foster a culture of security awareness and responsibility among our workforce.

Change in Accounting Estimate

In March 2024, we completed our assessment of the useful lives of our property, plant and equipment.

Based on our usage experience and data analysis, we determined we should increase the estimated useful lives of our information technology equipment from five to six years.

This change in accounting estimate will be effective beginning April 1,

2024 and applied on a prospective basis to the assets on our balance sheet as of March 31, 2024, as well as future asset purchases.

Based on the carrying value of information technology equipment included in property, plant and equipment, net in our Consolidated Balance Sheet as of March 31, 2024, we estimate this change will decrease non-cash depreciation expense in fiscal year 2025 by approximately $180 million.

Cautionary Note Regarding Forward-Looking Statements

1 unchanged sentence

All statements other than statements of historical fact included in this report, including statements concerning the Company’s plans, objectives, goals, beliefs, business strategies, future events, business condition, results of operations, financial position, business outlook and business trends and other non-historical statements in this report are forward-looking statements.

Such forward-looking statements often contain words such as “will,” “anticipate,” “predict,” “project,” “contemplate,” “plan,” “forecast,” “estimate,” “expect,” “intend,” “target,” “may,” “should,” “would,” “could,” “seek,” “aim” and other similar words or expressions or the negative thereof or other variations thereon.

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:

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

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

● technological developments and the Company’s response to such developments;

● failure to meet growth and productivity objectives;

1 unchanged sentence

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

● a downturn in economic environment and customer spending budgets;

● impact of economic, political, public health and other conditions;

● damage to the Company’s reputation;

1 unchanged sentence

● service delivery issues;

● the Company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities and higher debt levels;

● the 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 necessary licenses;

● 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 and data privacy;

● risks relating to cybersecurity, data governance and privacy;

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

4 unchanged sentences

● the impact of currency fluctuations;

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

● risks related to deficiencies identified in our information technology general control;

● 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 this report, as such factors may be updated from time to time in the Company’s periodic filings with the SEC.

Any forward-looking statement in this report speaks only as of the date on which it is made.

Except as required by law, the Company assumes no obligation to update or revise any forward-looking statements.

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.

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