Kyndryl Holdings, Inc. — Form 10-Q Summary
Period note: Although the request metadata says “2020 Q3,” this filing reports the quarter and nine months ended September 30, 2021, with 2020 comparative results. Unless otherwise stated, figures are in U.S. dollars.
Business context and reporting period
Kyndryl provides managed infrastructure and technology services, serving more than 4,000 customers in over 100 countries with approximately 90,000 professionals. These statements are historical combined carve-out financials derived from IBM’s records, including allocations of IBM corporate and shared-service costs; Kyndryl cautions they may not reflect results as a standalone company. IBM distributed 80.1% of Kyndryl to its shareholders on November 3, 2021 and retained 19.9%; Kyndryl began NYSE trading as an independent company on November 4.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4.579bn | $4.856bn | $14.102bn | $14.425bn |
| Gross profit | $397m | $524m | $1.375bn | $1.549bn |
| Gross margin | 8.7% | 10.8% | 9.7% | 10.7% |
| Loss before income taxes | $(469)m | $(170)m | $(1.191)bn | $(1.050)bn |
| Net loss | $(692)m | $(238)m | $(1.579)bn | $(1.293)bn |
| Net loss margin | (15.1)% | (4.9)% | (11.2)% | (9.0)% |
Revenue declined 5.7% in Q3 and 2.2% year to date. Management attributed the quarterly decline across all regions partly to existing clients pausing new project activity ahead of the spin-off. Q3 gross margin fell 2.1 percentage points; for the nine months it fell 1.0 point. Management said gross margin, excluding spin-off-related charges, improved 0.2 points year over year in both periods. Net loss worsened by $454m in Q3 and $286m for the nine months.
Spin-off-related charges were $273m in Q3 and $505m year to date, primarily for establishing standalone functions and systems, professional services and transaction costs. They included $108m and $168m, respectively, in cost of services. The income tax provision was $223m in Q3 and $389m year to date despite pretax losses; management cited valuation allowances, losses in jurisdictions where benefits were unavailable, and tax charges related to the separation.
Regional performance was uneven. In Q3, revenue declined in every segment; Asia Pacific fell 9.3% and its pretax result turned to a $23m loss. EMEA reported a $381m Q3 pretax loss and a negative 1.3% gross margin; management cited its higher labor-resource cost profile as a factor in the segment’s generally lower margins.
Cash flow, balance sheet and liquidity
- Operating cash flow: $(725)m for the first nine months of 2021, versus $323m provided in 2020. The 2021 outflow included $319m of payments related to workforce rebalancing actions begun in 2020. Management also cited weaker receivables cash contribution versus strong prior-year collections.
- Investing and financing: Investing cash outflow was $425m versus $678m; financing provided $1.876bn versus $350m, including $1.794bn of net transfers from IBM and $140m of new debt proceeds. Cash, cash equivalents and restricted cash totaled $751m at September 30, up $713m from year-end 2020.
- Liquidity and working capital: Current assets were $3.856bn and current liabilities $3.709bn, yielding $147m of working capital, compared with negative $1.067bn at December 31, 2020. Management stated that cash and financing arrangements entered into after quarter-end were expected to meet anticipated cash needs for at least 12 months.
- Debt: At September 30, reported short-term debt was $112m and long-term debt was $280m; the long-term debt table includes finance lease obligations. After quarter-end, Kyndryl issued $2.4bn of senior notes and entered into a $500m term loan, fully drawn in November. About $0.9bn of net proceeds was transferred to IBM in connection with the separation. It also entered into a revolving facility of approximately $3.15bn. The credit agreements include a maximum indebtedness-to-consolidated-EBITDA ratio of 3.50 to 1.00.
- Other balance-sheet items: Total assets were $12.063bn and total liabilities $6.581bn at September 30. Retirement and nonpension postretirement benefit obligations rose to $995m from $550m at year-end, largely reflecting obligations assumed when Kyndryl legal entities were established.
Outlook, risks and unusual items
The filing provides no quantified operating or earnings guidance. Management said customer demand for assistance with designing, managing and modernizing technology systems remained durable, while pandemic-related recovery could differ by geography and industry. It also noted clients had shifted toward shorter-duration engagements and operating expenditures. Remaining performance obligations were $51.1bn at September 30; approximately 53% was expected to be recognized over the following two years and 36% in years three through five. Total signings fell 29.2% in Q3 to $2.8bn and 25.0% for the nine months to $9.1bn. Management cautioned signings are estimates, are not governed by third-party standards, and may convert to revenue at varying rates.
Key risks include the recent separation from IBM, competition, customer retention and spending, contract cost and delivery execution, cybersecurity and data privacy, skilled-worker retention, foreign exchange, pension exposure, and COVID-19 or other macroeconomic impacts. The company also plans to evaluate changes to geographic segment reporting; it said a segment change could trigger goodwill impairment testing. The BMC Software litigation concerning IBM’s managed infrastructure services business remained pending; in September 2021, some BMC damages claims were permitted to proceed after the court’s summary-judgment rulings. The filing does not provide a clear estimate of potential loss.
Important facts for investors to verify
- How revenue, signings and the $51.1bn RPO develop after the spin-off, including conversion timing and customer retention.
- Standalone margins and costs after IBM allocations and separation charges cease or change; historical carve-out results may not be representative.
- Post-separation cash generation, use of debt proceeds, revolver availability and compliance with credit-agreement covenants.
- Whether segment reporting changes lead to goodwill impairment testing or charges, particularly given weak EMEA profitability.
- Developments and potential financial exposure in the BMC litigation, for which the filing states no clear loss estimate.