Kyndryl Holdings, Inc. [KD] Filings

10-Q 1 kd-20230630x10q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________________ TO _________________

001-40853

(Commission file number)

Kyndryl Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware		86-1185492
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

One Vanderbilt Avenue, 15th Floor
New York, New York		10017
(Address of principal executive offices)		(Zip Code)

212-896-2098

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common stock, par value $0.01 per share		KD		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding at August 1, 2023 was 228,892,066.

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Index



	Page
Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):	3

Consolidated Income Statement for the three months ended June 30, 2023 and 2022	3

Consolidated Statement of Comprehensive Income (Loss) for the three months ended June 30, 2023 and 2022	4

Consolidated Balance Sheet at June 30, 2023 and March 31, 2023	5

Consolidated Statement of Cash Flows for the three months ended June 30, 2023 and 2022	6

Consolidated Statement of Equity for the three months ended June 30, 2023 and 2022	7

Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3. Quantitative and Qualitative Disclosures About Market Risk	34

Item 4. Controls and Procedures	34

Part II - Other Information:

Item 1. Legal Proceedings	35

Item 1A. Risk Factors	35

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	35

Item 3. Defaults Upon Senior Securities	35

Item 4. Mine Safety Disclosures	35

Item 5. Other Information	35

Item 6. Exhibits	36

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Part I - Financial Information

Item 1. Consolidated Financial Statements (Unaudited):

KYNDRYL HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
(Unaudited)


	Three Months Ended June 30,
	2023		2022
Revenues *	$	4,193	$	4,288

Cost of services **	$	3,449	$	3,677
Selling, general and administrative expenses		720		694
Workforce rebalancing charges		58		4
Transaction-related costs		42		103
Interest expense		29		20
Other expense (income)		5		(3)
Total costs and expenses	$	4,302	$	4,493

Income (loss) before income taxes	$	(109)	$	(205)
Provision for income taxes	$	32	$	45
Net income (loss)	$	(141)	$	(250)

Basic earnings (loss) per share	$	(0.62)	$	(1.11)
Diluted earnings (loss) per share	$	(0.62)	$	(1.11)

Weighted-average basic shares outstanding		227.9		225.3
Weighted-average diluted shares outstanding		227.9		225.3

* Including related-party revenue of $205 for the three months ended June 30, 2022

** Including related-party cost of services of $961 for the three months ended June 30, 2022

The accompanying notes are an integral part of the financial statements.

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KYNDRYL HOLDINGS, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

(Unaudited)


	Three Months Ended June 30,
	2023		2022
Net income (loss)	$	(141)	$	(250)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(15)		(267)
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) arising during the period		15		(5)
Reclassification of (gains) losses to net income		(1)		(1)
Total unrealized gains (losses) on cash flow hedges		14		(6)
Retirement-related benefit plans – amortization of net (gains) losses		2		10
Other comprehensive income (loss), before tax		1		(263)
Income tax (expense) benefit related to items of other comprehensive income (loss)		(1)		(1)
Other comprehensive income (loss), net of tax		—		(264)
Total comprehensive income (loss)	$	(141)	$	(514)

The accompanying notes are an integral part of the financial statements.

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KYNDRYL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEET

(In millions, except per share amount)

(Unaudited)


	June 30,		March 31,
	2023		2023
Assets:
Current assets:
Cash and cash equivalents	$	1,507	$	1,847
Restricted cash		14		12
Accounts receivable (net of allowances for expected credit losses of $29 at June 30, 2023 and $32 at March 31, 2023)		1,490		1,523
Deferred costs (current portion)		1,075		1,070
Prepaid expenses and other current assets		567		510
Total current assets	$	4,653	$	4,963

Property and equipment, net	$	2,750	$	2,779
Operating right-of-use assets, net		932		964
Deferred costs (noncurrent portion)		1,122		1,166
Deferred taxes		190		248
Goodwill		807		812
Intangible assets, net		187		171
Pension assets		100		94
Other noncurrent assets		245		267
Total assets	$	10,986	$	11,464

Liabilities:
Current liabilities:
Accounts payable	$	1,626	$	1,774
Value-added tax and income tax liabilities		359		347
Current portion of long-term debt		134		110
Accrued compensation and benefits		473		533
Deferred income (current portion)		785		820
Operating lease liabilities (current portion)		307		316
Accrued contract costs		351		346
Other accrued expenses and liabilities		556		624
Total current liabilities	$	4,591	$	4,868

Long-term debt	$	3,149	$	3,111
Retirement and nonpension postretirement benefit obligations		501		504
Deferred income (noncurrent portion)		334		362
Operating lease liabilities (noncurrent portion)		672		707
Other noncurrent liabilities		401		450
Total liabilities	$	9,648	$	10,002
Commitments and contingencies

Equity:
Stockholders’ equity
Common stock, par value $0.01 per share, and additional paid-in capital (shares authorized: 1,000.0; shares issued: June 30, 2023 – 231.0, March 31, 2023 – 229.6)	$	4,451	$	4,428
Accumulated deficit		(2,120)		(1,978)
Treasury stock, at cost (shares: June 30, 2023 – 2.4, March 31, 2023 – 1.9)		(30)		(23)
Accumulated other comprehensive income (loss)		(1,062)		(1,062)
Total stockholders’ equity before non-controlling interests	$	1,240	$	1,365
Non-controlling interests		99		97
Total equity	$	1,338	$	1,462
Total liabilities and equity	$	10,986	$	11,464

The accompanying notes are an integral part of the financial statements.

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KYNDRYL HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in millions)

(Unaudited)


	Three Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	(141)	$	(250)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization
Depreciation of property, equipment and capitalized software		210		228
Depreciation of right-of-use assets		91		85
Amortization of transition costs and prepaid software		325		293
Amortization of capitalized contract costs		138		111
Amortization of acquisition-related intangible assets		8		14
Stock-based compensation		22		26
Deferred taxes		26		46
Net (gain) loss on asset sales and other		29		2
Change in operating assets and liabilities:
Deferred costs (excluding amortization)		(418)		(369)
Right-of-use assets and liabilities (excluding depreciation)		(103)		(84)
Workforce rebalancing liabilities		(23)		6
Receivables		53		222
Accounts payable		(143)		(14)
Taxes		(25)		12
Other assets and other liabilities		(222)		(224)
Net cash provided by (used in) operating activities	$	(173)	$	104

Cash flows from investing activities:
Capital expenditures	$	(100)	$	(213)
Proceeds from disposition of property and equipment		6		7
Other investing activities, net		(19)		(13)
Net cash used in investing activities	$	(113)	$	(218)

Cash flows from financing activities:
Debt repayments	$	(30)	$	(28)
Common stock repurchases for tax withholdings		(7)		(13)
Other financing activities, net		(1)		—
Net cash provided by (used in) financing activities	$	(38)	$	(41)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	(15)	$	(111)
Net change in cash, cash equivalents and restricted cash	$	(339)	$	(266)

Cash, cash equivalents and restricted cash at beginning of period	$	1,860	$	2,154
Cash, cash equivalents and restricted cash at end of period	$	1,521	$	1,888

Supplemental data
Income taxes paid, net of refunds received	$	65	$	8
Interest paid on debt	$	46	$	38

The accompanying notes are an integral part of the financial statements.

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KYNDRYL HOLDINGS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In millions)

(Unaudited)


	Common Stock and				Accumulated
	Additional				Other						Non-
	Paid-In Capital				Comprehensive		Treasury		Accumulated		Controlling		Total
	Shares		Amount		Income (Loss)		Stock		Deficit		Interests		Equity
Equity – April 1, 2023		227.7	$	4,428	$	(1,062)	$	(23)	$	(1,978)	$	97	$	1,462
Net income (loss)										(141)				(141)
Other comprehensive income (loss), net of tax						—								—
Common stock issued under employee plans		1.4		22										22
Purchases of treasury stock		(0.5)						(7)						(7)
Changes in non-controlling interests												2		2
Equity – June 30, 2023		228.6	$	4,451	$	(1,062)	$	(30)	$	(2,119)	$	99	$	1,338


	Common Stock and				Accumulated
	Additional				Other						Non-
	Paid-In Capital				Comprehensive		Treasury		Accumulated		Controlling		Total
	Shares		Amount		Income (Loss)		Stock		Deficit		Interests		Equity
Equity - April 1, 2022		224.5	$	4,315	$	(1,089)	$	(4)	$	(605)	$	94	$	2,711
Net income (loss)										(250)				(250)
Other comprehensive income (loss), net of tax						(264)								(264)
Common stock issued under employee plans		3.3		26										26
Purchases of treasury stock		(1.1)						(13)						(13)
Changes in non-controlling interests												1		1
Equity - June 30, 2022		226.7	$	4,341	$	(1,353)	$	(17)	$	(855)	$	95	$	2,211

The accompanying notes are an integral part of the financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Kyndryl Holdings, Inc. (“we”, “the Company” or “Kyndryl”) is a leading technology services company and the largest IT infrastructure services provider in the world, serving as a partner to thousands of enterprise customers whose operations span over 100 countries. Prior to November 3, 2021, the Company was wholly owned by International Business Machines Corporation (“IBM” or “former Parent”).

In November 2021, our former Parent effected the spin-off (the “Separation” or the “Spin-off”) of the infrastructure services unit of its Global Technology Services (“GTS”) segment through the distribution of shares of Kyndryl’s common stock to IBM stockholders. In connection with the Separation, the Company entered into several agreements with IBM that govern the relationship of the parties following the Separation. Kyndryl’s stock began trading as an independent company on November 4, 2021.

Basis of Presentation

The accompanying Consolidated Financial Statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management believes the accompanying financial statements include all adjustments necessary to present fairly the Company’s financial position and its results of operations for all the periods presented. The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report for the fiscal year ended March 31, 2023.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.

Principles of Consolidation

The accompanying financial statements are presented on a consolidated basis. All significant transactions and intercompany accounts between Kyndryl entities were eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts that are reported in the consolidated financial statements and accompanying disclosures. Estimates are used in determining the following, among others: revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets including goodwill and intangible assets, the depreciable and amortizable lives of long-lived assets, loss contingencies, allowance for credit losses and deferred transition costs.

The Company uses the estimated annual effective tax rate method in computing its interim tax provision in accordance with U.S. GAAP. The estimated annual effective tax rate is applied to the year-to-date ordinary income, exclusive of discrete items, to arrive at the reported interim tax provision.

NOTE 2. ACCOUNTING PRONOUNCEMENTS

New Standards to be Implemented

In September 2022, the FASB amended its guidance related to supplier finance programs. The amended guidance requires additional disclosures surrounding the use of supplier finance programs to purchase goods or services, including disclosing the key terms of the programs, the amount of obligations outstanding at the end of the reporting period, and a roll-forward of those obligations. The new guidance, except the roll-forward information, is effective for

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Notes to Consolidated Financial Statements (continued)

fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The roll-forward information is effective for fiscal years beginning after December 15, 2023. The Company has evaluated the impact of the amended guidance and concluded that the guidance has no impact on the Company’s consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842) – Common-Control Arrangements. This guidance amends the accounting for leasehold improvements in common-control arrangements by requiring a lessee in a common-control arrangement to amortize leasehold improvements that it owns over the improvements’ useful life to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease. The Company has evaluated the impact of the amended guidance and concluded that the guidance does not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. The FASB issued temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of markets transitioning from the use of LIBOR and other interbank offered rates to alternative reference rates. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, deferring the sunset date of Topic 848 to December 31, 2024. In June 2023, the Company modified its contracts that use LIBOR, transitioning from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The use of SOFR became effective in modified contracts beginning on July 1, 2023.

NOTE 3. REVENUE RECOGNITION

Disaggregation of Revenue

The Company views its segment results to be the best view of disaggregated revenue. Refer to Note 4 – Segments.

Remaining Performance Obligations

The remaining performance obligation (“RPO”) represents the aggregate amount of contractual deliverables yet to be recognized as revenue at the end of the reporting period. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts for which the customer is not committed. The customer is not considered committed when it is able to terminate for convenience without payment of a substantive penalty. The RPO also includes estimates of variable consideration. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency.

At June 30, 2023, the aggregate amount of RPO related to customer contracts that are unsatisfied or partially unsatisfied was $36.7 billion. Approximately 60 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 34 percent in the subsequent three through five years, and the balance thereafter.

During the three months ended June 30, 2023 and June 30, 2022, revenue was increased by $11 million and $1 million, respectively for performance obligations satisfied (or partially satisfied) in previous periods, mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

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Notes to Consolidated Financial Statements (continued)

Contract Balances

The following table provides information about accounts receivable, contract assets and deferred income balances:


	June 30,		March 31,
(Dollars in millions)	2023		2023
Accounts receivable (net of allowances for expected credit losses of $29 at June 30, 2023 and $32 at March 31, 2023) *	$	1,490	$	1,523
Contract assets **		31		30
Deferred income (current)		785		820
Deferred income (noncurrent)		334		362

*	Included unbilled receivable balances of $410 million at June 30, 2023 and $384 million at March 31, 2023.

**	Contract assets represent goods or services delivered by the Company which give the Company the right to consideration that is typically subject to milestone completion or client acceptance and are included within prepaid expenses and other current assets in the Consolidated Balance Sheet.

The amount of revenue recognized during the three months ended June 30, 2023 and June 30, 2022 that was included within the deferred income balance at March 31, 2023 and March 31, 2022 was $188 million and $246 million, respectively.

The following table provides roll-forwards of the accounts receivable allowance for expected credit losses for the three months ended June 30, 2023 and 2022:


	Three Months Ended June 30,
(Dollars in millions)	2023		2022
Beginning balance	$	32	$	44
Additions (releases)		(1)		(2)
Write-offs		(3)		(1)
Other *		1		(7)
Ending balance	$	29	$	34

*	Primarily represents currency translation adjustments.

The contract assets allowance for expected credit losses was not material in any of the periods presented.

Major Clients

No single client represented more than 10 percent of the Company’s total revenue during the three months ended June 30, 2023 and 2022. Other than receivables due from our former Parent, no single client represented more than 10 percent of the Company’s total accounts receivable balance as of June 30, 2023 and March 31, 2023, respectively.

Deferred Costs

Costs to acquire and fulfill customer contracts are deferred and amortized over the contract period or expected customer relationship life. The expected customer relationship period is determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from three to six years. For contracts with an estimated amortization period of less than one year, we elected the practical expedient to expense incremental costs immediately.

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Notes to Consolidated Financial Statements (continued)

The following table provides amounts of capitalized costs to acquire and fulfill customer contracts at June 30, 2023 and March 31, 2023:


	June 30,		March 31,
(Dollars in millions)	2023		2023
Deferred transition costs	$	828	$	856
Prepaid software costs		828		782
Capitalized costs to fulfill contracts		240		285
Capitalized costs to obtain contracts		301		313
Total deferred costs *	$	2,196	$	2,236

*	Of the total deferred costs, $1,075 million was current and $1,122 million was noncurrent at June 30, 2023, and $1,070 million was current and $1,166 million was noncurrent at March 31, 2023.

The amount of total deferred costs amortized for the three months ended June 30, 2023, was $463 million, composed of $241 million of amortization of prepaid software, $85 million of amortization of deferred transition costs and $138 million of amortization of capitalized contract costs.

NOTE 4. SEGMENTS

Our reportable segments correspond to how the chief operating decision maker (“CODM”) reviews performance and allocates resources. Our four reportable segments consist of the following:

United States: This reportable segment is comprised of Kyndryl’s operations in the United States.

Japan: This reportable segment is comprised of Kyndryl’s operations in Japan.

Principal Markets: This reportable segment represents the aggregation of our operations in Australia / New Zealand, Canada, France, Germany, India, Italy, Spain / Portugal, and the United Kingdom / Ireland.

Strategic Markets: This reportable segment is comprised of our operations in all other countries in which we operate.

The measure of segment operating performance used by Kyndryl’s CODM is adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) excluding net interest expense, income taxes, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased and owned 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. The use of revenue and adjusted EBITDA aligns with how the CODM assesses performance and allocates resources for the Company’s segments.

Our geographic markets frequently work together to sell and implement certain contracts. The resulting revenues and costs from these contracts may be apportioned among the participating geographic markets. The economic environment and its effects on the industries served by our geographic markets affect revenues and operating expenses within our geographic markets to differing degrees. Currency fluctuations also tend to affect our geographic markets differently, depending on the geographic concentrations and locations of their businesses.

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Notes to Consolidated Financial Statements (continued)

The following table reflects the results of the Company’s segments:


	Three Months Ended June 30,
(Dollars in millions)	2023		2022
Revenue
United States	$	1,164	$	1,168
Japan		610		634
Principal Markets		1,484		1,516
Strategic Markets		935		970
Total revenue	$	4,193	$	4,288
Segment adjusted EBITDA
United States	$	236	$	200
Japan		100		115
Principal Markets		167		100
Strategic Markets		133		96
Total segment adjusted EBITDA	$	636	$	511

The following table reconciles segment adjusted EBITDA to consolidated pretax income (loss):


	Three Months Ended June 30,
(Dollars in millions)	2023		2022
Segment adjusted EBITDA	$	636	$	511
Workforce rebalancing charges		(58)		(4)
Charges related to ceasing to use leased/fixed assets and lease terminations		(10)		—
Transaction-related costs		(42)		(103)
Stock-based compensation expense		(22)		(26)
Interest expense		(29)		(20)
Depreciation of property, equipment and capitalized software		(210)		(228)
Amortization expense		(333)		(308)
Corporate expense not allocated to the segments		(24)		(20)
Other adjustments*		(16)		(9)
Pretax income (loss)	$	(109)	$	(205)

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

NOTE 5. TAXES

For the three months ended June 30, 2023, the Company’s effective tax rate was (29.6%), compared to (22.1%) for the three months ended June 30, 2022. The Company’s negative effective tax rates in 2023 and 2022 reflect a tax expense on a pretax book loss in both periods.

The Company’s effective tax rate for the three months ended June 30, 2023 was lower than the Company’s statutory tax rate primarily due to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

The Company’s effective tax rate for the three months ended June 30, 2022 was lower than the Company’s statutory tax rate primarily due to taxes on foreign operations and the increase in valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized. For the period ended June 30, 2022, the addition to valuation allowances primarily relates to a partial valuation allowance established against certain deferred tax assets in the United States.

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Notes to Consolidated Financial Statements (continued)

NOTE 6. NET LOSS PER SHARE

We did not declare any stock dividends in the periods presented. The following table provides the computation of basic and diluted earnings per share of common stock for the three months ended June 30, 2023 and 2022.



	Three Months Ended June 30,
(In millions, except per share amounts)	2023		2022
Net income (loss) on which basic and diluted earnings per share is calculated	$	(141)	$	(250)
Number of shares on which basic and diluted earnings per share is calculated		227.9		225.3

Basic earnings (loss) per share	$	(0.62)	$	(1.11)
Diluted earnings (loss) per share		(0.62)		(1.11)

For the three months ended June 30, 2023 and 2022, the Company’s basic and diluted weighted-average shares outstanding were the same. The following securities were not included in the computation of diluted net loss per share because they would have been anti-dilutive:


	Three Months Ended June 30,
(In millions)	2023	2022
Nonvested restricted stock units	8.9	7.1
Nonvested performance-conditioned stock units	1.5	—
Nonvested market-conditioned stock units	2.3	1.8
Stock options issued and outstanding	3.7	3.8
Total	16.4	12.6

NOTE 7. FINANCIAL ASSETS AND LIABILITIES

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following fair value hierarchy:

●

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date.

●

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

●

Level 3 – Unobservable inputs for the asset or liability.

The level of an asset or liability within the fair value hierarchy is determined based on the lowest level of any input that is significant to the fair value measurement.

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Notes to Consolidated Financial Statements (continued)

In determining the fair value of certain financial instruments, the Company considers certain market valuation adjustments to the “base valuations” using the methodologies described below for several parameters that market participants would consider in determining fair value:

●

Counterparty credit risk adjustments are applied to certain financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

●

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing certain liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s credit risk as observed in the credit default swap market.

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are recorded at fair value or at cost, as appropriate, in the period they are initially recognized, and such balances may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. The impairment models used for non-financial assets depend on the type of asset. The fair value measurements, in such instances, would be classified in Level 3 of the fair value hierarchy. We perform a qualitative assessment of asset impairments on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value is less than carrying value. There were no impairments of non-financial assets recognized for the three months ended June 30, 2023 and 2022.

Financial Assets and Liabilities Measured at Fair Value

The following table presents the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2023 and March 31, 2023.


	Fair Value
	Hierarchy	At June 30, 2023						At March 31, 2023
(Dollars in millions)	Level	Assets		Liabilities		Fair Value		Assets		Liabilities		Fair Value
Derivatives designated as hedging instruments:
Foreign exchange contracts	2	$	19	$	6	$	13	$	4	$	3	$	1
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		17		11		6		11		5		6
Total		$	36	$	17	$	19	$	15	$	9	$	6

The gross balances of derivative assets are contained within prepaid expenses and other current assets, and the gross balances of derivative liabilities are contained within other accrued expenses and liabilities in the Consolidated Balance Sheet. The Company may enter into master netting agreements with certain counterparties that allow for netting of exposures. There was no netting of derivative assets against liabilities in the Consolidated Balance Sheet at June 30, 2023 and March 31, 2023. The Company manages counterparty risk by seeking counterparties of high credit quality and by monitoring credit ratings, credit spreads and other relevant public information about its counterparties. The Company does not anticipate nonperformance by any of the counterparties.

Financial Assets and Liabilities Not Measured at Fair Value

Accounts receivable are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. If measured at fair value in the consolidated financial statements, these financial assets and liabilities would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

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Notes to Consolidated Financial Statements (continued)

The Company also has time deposits that have maturities of 90 days or less, and their carrying values approximate fair value. They are measured for impairment on a recurring basis by comparing their fair value with their amortized cost basis. There were no impairments of financial assets recognized for any of the periods presented. The balances of these time deposits with maturities of 90 days or less contained within cash and cash equivalents in the Consolidated Balance Sheet at June 30, 2023 and March 31, 2023 were $690 million and $814 million, respectively. If measured at fair value in the consolidated financial statements, time deposits with maturities of 90 days or less would be categorized as Level 2 in the fair value hierarchy.

The fair value of our outstanding debt (excluding finance lease obligations) is based on various methodologies, including quoted prices in active markets for identical debt instruments, which is a Level 1 measurement, and calculated fair value using an expected present value technique that uses rates currently available to the Company for debt in active markets with similar terms and remaining maturities, which is a Level 2 measurement. Our outstanding debt (excluding finance lease obligations) had a carrying value of $3.0 billion as of June 30, 2023 and March 31, 2023, with an estimated fair value of $2.5 billion as of June 30, 2023 and March 31, 2023, which consisted of quoted prices for identical debt instruments (Level 1) and expected present value calculated using observable inputs (Level 2).

Transfers of Financial Assets

The Company has entered into agreements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company 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.

The net proceeds from these agreements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under this program were $1.2 billion for the three months ended June 30, 2023 and $613 million for the three months ended June 30, 2022. The fees associated with the transfers of receivables were $16 million for the three months ended June 30, 2023 and $8 million for the three months ended June 30, 2022.

Derivative Financial Instruments

Derivatives Designated as Hedging Instruments

The Company has foreign exchange derivative financial instruments designated as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain currencies. Changes in fair value of derivatives designated as cash flow hedges are recorded, net of applicable taxes, in other comprehensive income and subsequently reclassified into the same income statement line item as the hedged exposure when the underlying hedged item is recognized in earnings. The cash flows associated with derivatives designated as cash flow hedges are reported in cash flows from operating activities in the Consolidated Statement of Cash Flows.

At June 30, 2023 and March 31, 2023, the total gross notional amount of forward contracts designated as cash flow hedges of forecasted foreign currency cost transactions was $919 million and $283 million, respectively. The notional amounts of derivative instruments do not necessarily represent the amounts exchanged by the Company with third parties and are not necessarily a direct measure of the financial exposure. The maximum remaining length of time over which the Company hedged its exposure is approximately one year. At June 30, 2023 and March 31, 2023, the weighted-average remaining maturity of these instruments was approximately 0.4 years and 0.5 years, respectively.

At June 30, 2023 and March 31, 2023, in connection with cash flow hedges of foreign currency cost transactions, the Company had net deferred gains of $15 million and $1 million (each before taxes), respectively, in accumulated other comprehensive income (“AOCI”). The Company estimates that $15 million (before taxes) of deferred net gains on derivatives in AOCI at June 30, 2023 will be reclassified to net income within the next twelve months, providing an offsetting economic impact against the underlying anticipated transactions.

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Notes to Consolidated Financial Statements (continued)

Derivatives Not Designated as Hedging Instruments

The Company enters into currency forward and swap contracts to hedge exposures related to assets, liabilities and earnings across its subsidiaries. These contracts are not designated as hedging instruments, and therefore changes in fair value of these contracts are reported in earnings in other expense (income) in the Consolidated Income Statement. The gains and losses on these contracts generally offset the gains and losses in the underlying hedged exposures, which are also reported in other expense (income) in the Consolidated Income Statement. Cash flows from derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. The terms of these swap contracts are generally less than one year. At June 30, 2023 and March 31, 2023, the total gross notional amount of derivative instruments in economic hedges of foreign currency exposure was $2.0 billion and $1.5 billion, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

The effects of derivatives designated as hedging instruments on the Consolidated Income Statement and Other Comprehensive Income are as follows:


	Unrealized Gain (Loss)				Consolidated	Gain (Loss) Reclassified
(Dollars in millions)	Recognized in OCI				Income Statement	from AOCI to Income
Three months ended June 30:	2023		2022		Line Item	2023		2022
Foreign exchange contracts	$	15	$	(5)	Cost of services	$	1	$	1
Total	$	15	$	(5)		$	1	$	1

For the three months ended June 30, 2023 and 2022, there were no gains or losses excluded from the assessment of hedge effectiveness for cash flow hedges, or associated with an underlying exposure that did not or was not expected to occur, nor are there any anticipated in the normal course of business.

The effects of derivatives not designated as hedging instruments on the Consolidated Income Statement are as follows:


	Consolidated	Gain (Loss)
(Dollars in millions)	Income Statement	Recognized on Derivatives
Three months ended June 30:	Line Item	2023		2022
Foreign exchange contracts	Other expense (income)	$	(17)	$	(2)
Total		$	(17)	$	(2)

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Notes to Consolidated Financial Statements (continued)

NOTE 8. INTANGIBLE ASSETS INCLUDING GOODWILL

Intangible Assets

The following tables present the Company’s intangible asset balances by major asset class.


	At June 30, 2023						At March 31, 2023
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount		Amount		Amortization		Amount
Capitalized software	$	117	$	(19)	$	98	$	83	$	(15)	$	68
Customer relationships*		224		(146)		78		232		(141)		91
Completed technology		20		(20)		—		20		(20)		—
Patents and trademarks*		18		(6)		11		18		(6)		13
Total	$	379	$	(191)	$	187	$	353	$	(182)	$	171

*	Amounts include effects from foreign currency translation.

The net carrying amount of intangible assets increased by $16 million during the three months ended June 30, 2023, primarily due to additions in capitalized software, partially offset by amortization and foreign currency translation. The aggregate intangible asset amortization expense was $11 million and $14 million for the three months ended June 30, 2023 and 2022, respectively. This included amortization of capitalized software of $4 million for the three months ended June 30, 2023, which was reported in “Depreciation of property, equipment and capitalized software” on the Consolidated Statement of Cash Flows.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at June 30, 2023:


	Capitalized		Customer		Patents and
(Dollars in millions)	Software		Relationships		Trademarks		Total
Year ending March 31:
2024 (remaining nine months)	$	21	$	20	$	2	$	44
2025		29		22		3		55
2026		27		18		3		48
2027		21		15		3		39
2028		—		1		—

Kyndryl Holdings, Inc. [KD] Filings
10-Q	[2023-08-08]
10-K	[2023-05-26]
10-Q	[2023-02-09]
10-Q	[2022-11-04]
10-Q	[2022-08-09]
10-K	[2022-03-10]
10-Q	[2021-11-22]