Kyndryl Holdings, Inc. — FY2021 Form 10-K
Period clarification: The filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019. It is not a 2020 Q4 filing, despite the request metadata.
Business context and reporting period
Kyndryl provides advisory, implementation and managed IT infrastructure services, including cloud, enterprise infrastructure, applications and data, digital workplace, security, resiliency, and network services. It reported approximately 90,000 employees, more than 4,000 customers, operations in over 60 countries, and FY2021 revenue of $18.7 billion.
IBM distributed 80.1% of Kyndryl’s shares on November 3, 2021, retaining 19.9%. Financial statements before separation are carve-out statements using allocations from IBM and may not reflect the costs or results Kyndryl would have had as a standalone company. The filing’s segments are United States, Japan, Principal Markets and Strategic Markets.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $18.657 billion | $19.352 billion |
| Revenue change | -4% reported; -5% constant currency | -5% reported |
| Net loss | $2.319 billion | $2.011 billion |
| Adjusted EBITDA (non-GAAP) | $2.049 billion | $2.179 billion |
| Operating cash flow | -$119 million | $628 million |
| Investing cash flow | -$572 million | -$953 million |
| Financing cash flow | $2.915 billion | $312 million |
FY2021 adjusted EBITDA margin was approximately 11.0%, down from 11.3%. Cost of services was 88.8% of revenue versus 88.6%; SG&A was 14.9% versus 15.2%. Net loss was approximately 12.4% of revenue. Interest expense was $64 million. The company recorded a $397 million tax provision despite a pretax loss, producing a negative effective tax rate of 20.6%.
At year-end, cash and cash equivalents were $2.223 billion; working capital was $1.233 billion, compared with negative $1.067 billion in 2020. Total assets were $13.213 billion, liabilities $10.511 billion, and equity $2.702 billion. Debt carrying value was $3.128 billion, plus $222 million of finance lease obligations; total debt and finance lease obligations were $3.251 billion. Kyndryl issued $2.4 billion of senior notes and drew $500 million on a term loan. It also established a $3.15 billion revolving facility; the filing does not state a year-end draw amount for that facility. Management said cash and the revolving facility should meet anticipated needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue declined $695 million, or 4%, year over year. Management attributed the decrease mainly to lower contract volumes as customers paused activity around the planned separation, as well as pricing declines in some new and renewed contracts.
- Net loss widened by $308 million. FY2021 included a $469 million non-cash goodwill impairment, $627 million of separation-related transaction costs, and litigation charges described as $52 million in the MD&A.
- Adjusted EBITDA decreased $130 million, or 6%. By segment, revenue fell 5% in the United States, 4% in Japan, 1% in Principal Markets and 5% in Strategic Markets. Strategic Markets adjusted EBITDA rose 24%, while the other three segments declined.
- Operating cash flow moved from $628 million provided to $119 million used, reflecting workforce-rebalancing payments and higher receivables, among other factors. Financing cash flow rose substantially, principally due to $3.0 billion of debt proceeds.
- Total signings fell to $13.5 billion from $17.8 billion. The company said the comparison was affected by large renewals in the first and third quarters of 2020.
Outlook, commentary, risks and unusual items
- Management described a broad-based recovery in technology-services demand during 2021 and cited expectations for continued global macroeconomic growth in 2022. The filing provides no specific company revenue, earnings or cash-flow guidance.
- Management expects COVID-19 and related economic uncertainty to continue affecting demand and results in 2022. It also cited customer spending priorities, project delays, inflation, foreign exchange, competition, contract pricing and delivery-cost estimation as risks.
- The $469 million goodwill impairment followed impairment testing in the fourth quarter; management cited margin challenges in EMEA and geographic re-segmentation. Goodwill was $732 million at year-end.
- The filing reports $62 million of estimated liabilities recorded in the fourth quarter for potential resolution of ongoing disputes, while the MD&A separately refers to $52 million of litigation charges. The filing text does not clearly reconcile these amounts.
- Kyndryl remains operationally and commercially connected to IBM through transition services, software purchases, subcontracting, other commercial arrangements and customer revenue. In 2021, IBM-related revenue was $704 million and related-party cost of services was approximately $4.0 billion. IBM’s 19.9% retained stake and potential future sales were also identified as stock-price risks.
- Other notable exposures include a $49.7 billion remaining performance obligation estimate, $3.4 billion of noncancellable software and cloud-partner purchase commitments, pension obligations, cybersecurity and data-privacy risks, and potential tax indemnities relating to the spin-off. The company recorded no cybersecurity incident with a material adverse effect to date.
- Kyndryl changed its fiscal year-end prospectively to March 31, effective after a three-month transition period ending March 31, 2022. It did not plan to pay cash dividends. The auditor issued an unqualified opinion on the financial statements; the filing notes the company was exempt from management and auditor internal-control effectiveness reports as a newly public company.
Important facts for investors to verify
- How much of the revenue decline and lower signings reflects separation-related pauses, lost or non-transferred joint ventures, contract exits, and ongoing customer demand.
- Whether operating cash flow can recover after FY2021’s negative result, and how receivables factoring and working-capital movements affect reported cash generation.
- The composition, maturity, interest cost and covenant headroom of debt, including actual availability under the revolving credit facility and the leverage test.
- The assumptions behind the goodwill valuation and the scope of any further impairment risk; also reconcile the $52 million and $62 million litigation disclosures.
- The level and durability of IBM-related revenue, costs, transition services and software arrangements, and the effects of IBM’s retained-share disposition.
- How the $49.7 billion remaining performance obligations convert into revenue, and the related cancellation, renewal, margin and execution risks.