Kyndryl Holdings, Inc. — 8-K Summary
Business context and reporting period
Filed May 26, 2022, the filing updates selected portions of Kyndryl’s 2021 Form 10-K, including revised segment adjusted EBITDA allocations and an immaterial correction for accrued contract costs. The financial information principally covers the years ended December 31, 2021, 2020 and 2019. Kyndryl became an independent public company following IBM’s November 3, 2021 spin-off of 80.1% of its common stock. Pre-spin-off results are carve-out financial statements based partly on IBM allocations and may not represent standalone performance.
Kyndryl provides managed infrastructure, cloud, security, resiliency, application, data and network services to more than 4,000 customers in over 100 countries, with approximately 90,000 employees.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $18.657 billion | $19.352 billion | Down 4% |
| Revenue growth, constant currency | Down 5% | Down 5% | |
| Net loss | $2.304 billion | $2.007 billion | Loss increased $297 million |
| Adjusted EBITDA | $2.069 billion | $2.185 billion | Down 5% |
| Adjusted EBITDA margin | 11.1% | 11.3% | Down approximately 20 basis points |
| Operating cash flow | $(119) million | $628 million | Down $747 million |
| Investing cash flow | $(572) million | $(953) million | Use decreased $381 million |
| Financing cash flow | $2.915 billion | $312 million | Increase driven by debt issuance |
| Capital expenditures | $752 million | $1.036 billion | Down $284 million |
Cost of services was $16.550 billion, or 88.7% of revenue, compared with 88.6% in 2020. SG&A was $2.776 billion, or 14.9% of revenue, compared with 15.2%. Pretax loss was $1.903 billion and income tax expense was $402 million, producing a negative effective tax rate of 21.1%.
Significant 2021 items included $627 million of separation-related transaction costs, a $469 million goodwill impairment charge and $52 million of litigation charges. Workforce rebalancing charges declined to $39 million from $918 million in 2020.
Segment performance
| Segment | 2021 revenue | Revenue change | 2021 adjusted EBITDA | EBITDA change |
|---|---|---|---|---|
| United States | $4.805 billion | Down 5% | $842 million | Down 10% |
| Japan | $2.923 billion | Down 4% | $501 million | Down 6% |
| Principal Markets | $7.085 billion | Down 1% | $341 million | Down 9% |
| Strategic Markets | $3.844 billion | Down 5% | $540 million | Up 11% |
Revenue declines were attributed to client pauses during the separation process, lower contract volumes, pricing declines, unfavorable business mix and joint ventures that did not transfer to Kyndryl. Strategic Markets benefited from exiting low-margin accounts and prior structural actions.
Liquidity, debt and financial position
- Cash and cash equivalents were $2.223 billion at December 31, 2021, compared with $24 million at December 31, 2020.
- Working capital improved to $1.320 billion from negative $995 million, primarily because of debt-funded cash and higher receivables.
- Total assets were $13.213 billion, total liabilities were $10.446 billion and total equity was $2.767 billion.
- Debt included $2.4 billion of senior unsecured notes, a fully drawn $500 million term loan and finance lease obligations. Reported total debt was $3.128 billion after discounts, issuance costs and current maturities.
- The company had a $3.15 billion multi-currency revolving credit facility, expiring in October 2026 unless extended. The $500 million term loan matures in November 2024 unless extended.
- The credit agreements include a maintenance covenant requiring indebtedness for borrowed money to consolidated EBITDA not exceed 3.50 to 1.00 for any four-quarter period.
- A receivables purchase agreement permits sales of up to $1.1 billion of trade receivables on a revolving basis.
- Management stated that available cash and the revolving credit agreement should meet anticipated cash needs for at least the next twelve months.
Material changes, revisions and unusual items
- During the quarter ended March 31, 2022, Kyndryl identified an $87 million over-accrual of accrued contract costs related principally to a majority-owned joint venture. The correction reduced accrued contract costs and increased equity by $65 million at December 31, 2021, after tax effects.
- The 2021 net loss was revised from $2.319 billion to $2.304 billion; 2020 net loss was revised from $2.011 billion to $2.007 billion.
- The revised filing reduced 2021 cost of services by $20 million and increased 2021 net income by $15 million. Management concluded the correction was immaterial to prior annual and interim periods but will revise affected interim periods in subsequent Form 10-Q filings.
- Kyndryl recast prior-period segment adjusted EBITDA for updated allocation methodologies. The changes did not affect consolidated adjusted EBITDA.
- The company changed its fiscal year prospectively from a calendar year to a year ending March 31. It planned to file a transition report for the three months ended March 31, 2022.
- Goodwill declined to $732 million from $1.230 billion following the $469 million impairment, consisting of $293 million in the former EMEA reporting unit and $176 million in the U.S. reporting unit.
Outlook, commentary and risks
Management described a broad-based macroeconomic recovery in 2021 and expected global economic growth to continue in 2022, while warning that COVID-19 could continue to affect demand, economic activity and results. No specific revenue, profit or adjusted EBITDA guidance is provided in the filing.
Key risks include execution of the IBM separation, retaining and attracting customers and skilled employees, contract cost estimation and service delivery, competition, supplier dependence, economic and customer-spending downturns, foreign currency movements, cybersecurity and data privacy, tax matters, pensions, litigation, customer credit and the company’s higher standalone debt burden.
Future purchase commitments totaled $3.4 billion, comprising $0.8 billion due in 2022, $1.5 billion in 2023 and 2024, and $1.1 billion thereafter. Pension plans were 64% funded at year-end 2021, and estimated 2022 contributions to defined benefit and multi-employer plans were approximately $29 million.
Investor verification checklist
- Reconcile the $87 million accrued contract cost correction across the 2021 and prior-period financial statements and subsequent Form 10-Q filings.
- Confirm the effect of the revised segment allocation methodology on segment-level adjusted EBITDA and assess comparability with future reporting periods.
- Review standalone operating cash generation, receivables growth, factoring activity and the conversion of signings into revenue.
- Assess debt covenant compliance, term-loan maturity, note maturities and available revolver capacity.
- Evaluate whether separation-related costs, goodwill impairment and litigation charges are nonrecurring or indicate continuing profitability pressure.
- Review IBM-related revenue, costs, software purchase arrangements, lease guarantees and other transition dependencies.
- Monitor COVID-19, foreign exchange, cybersecurity, litigation, pension funding and tax-indemnification exposures.