Kyndryl Holdings, Inc.: Form 10-Q for the period ended Dec 31, 2022

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2022

Overview

(Dollars in millions)

(1) Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics. For definitions of these metrics and a reconciliation of adjusted EBITDA to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, see “⸺Segment Results.”

(Dollars in millions)

Organization of Information

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 is 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. As of September 30, 2022, IBM had transferred all of its 19.9% retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution.

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.

Financial Performance Summary

Macro Dynamics

In 2021, we saw a broad-based macroeconomic recovery in most regions of the world. Demand for technology services rebounded, as large organizations again demonstrated a need for assistance in designing, building, managing and modernizing their technology systems. In 2022, we have seen 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 2023.

Financial Performance

For the three months ended December 31, 2022, we reported $4.3 billion in revenue, a decline of 6 percent when compared to the prior-year period, primarily driven by a 9-point negative impact from currency. United States revenue increased 6 percent, Japan revenue declined 11 percent, Principal Markets revenue declined 12 percent and Strategic Markets revenue decreased 5 percent compared to the three months ended December 31, 2021. Net loss of $106 million improved by $625 million versus the prior year, primarily driven by lower transaction-related costs, lower impairment expense and lower cost of services as a percentage of revenue.

For the nine months ended December 31, 2022, we reported $12.8 billion in revenue, a decline of 8 percent when compared to the prior-year period, primarily driven by an 8-point negative impact from currency. United States revenue was unchanged, Japan revenue declined 14 percent, Principal Markets revenue declined 15 percent and Strategic Markets revenue decreased 1 percent compared to the nine months ended December 31, 2021. Net loss of $637 million improved by $1.2 billion versus the prior year, primarily driven by lower transaction-related costs, lower impairment expense, lower tax expense and lower cost of services as a percentage of revenue that reflects progress on our key initiatives.

Segment Results

In the fourth quarter of 2021, the Company implemented a new operating model and reporting structure resulting in four reportable segments: United States, Japan, Principal Markets and Strategic Markets. Principal Markets consists of our operations in Australia/New Zealand, Canada, France, Germany, Italy, India, Spain/Portugal and United Kingdom/Ireland. Strategic Markets consists of our operations in all other countries in which we operate. In addition to this change, the measures of segment operating performance changed to revenue and adjusted EBITDA. The Company has recast the prior-period results to reflect this change in segment structure. During the three months ended March 31, 2022, the Company updated certain allocation methodologies among segments related to its measure of adjusted EBITDA and has accordingly recast the prior-period information to reflect these updates, which did not change the aggregate amount of adjusted EBITDA. See Note 14 – Revision of Prior-Period Financial Statements regarding immaterial revisions we made to the historical periods.

The following table presents our reportable segments’ revenue and adjusted EBITDA for the three and nine months ended December 31, 2022 and 2021 and has incorporated the aforementioned updates in the historical periods presented. Segment revenue and revenue growth in constant currency exclude any transactions between the segments.

(Dollars in millions)

NM – not meaningful

(1) Revenue growth in constant currency and adjusted EBITDA are non-GAAP financial metrics. See the information below for definitions of these metrics and a reconciliation of adjusted EBITDA to net income (loss).

(2) Represents net amounts not allocated to segments.

We report our financial results in accordance with U.S. GAAP. 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.

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. It is calculated by using the average exchange rates that existed for the same period of the prior year. Constant-currency measures are provided so that revenue can be viewed without the effect of fluctuations in currency exchange rates, which is consistent with how management evaluates our revenue results and trends.

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 assets, charges related to lease termination, transaction-related costs, pension costs other than pension servicing costs and multi-employer plan costs, stock-based compensation, 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.

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. GAAP basis compared to the corresponding period in the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

The following table provides a reconciliation of U.S. GAAP net income (loss) to adjusted EBITDA:

(Dollars in millions)

* Other adjustments represent pension expense other than pension servicing costs and multi-employer plan costs, significant litigation costs and charges related to ceasing to use leased assets inherited from our former Parent.

United States

(Dollars in millions)

For the three months ended December 31, 2022, United States revenue of $1.3 billion increased 6 percent compared to the prior-year quarter and Adjusted EBITDA increased $69 million from the prior-year quarter, primarily driven by higher revenue, including increased revenue from contracts with minimum annual revenue commitments and increased seasonal variances in volume, and progress on our key initiatives.

For the nine months ended December 31, 2022, United States revenue of $3.6 billion was unchanged compared to the prior-year nine-month period. Adjusted EBITDA decreased $23 million from the prior-year nine-month period, primarily driven by certain software agreements moving from prepaid and amortized agreements to monthly subscription agreements.

Japan

(Dollars in millions)

For the three months ended December 31, 2022, Japan revenue of $606 million decreased 11 percent compared to the prior-year quarter. Revenue decreased due to an unfavorable currency exchange rate impact of 21 points, partially offset by recent signings of incremental business including increased Kyndryl Consult (advisory & implementation services) revenues. Adjusted EBITDA decreased $34 million from the prior-year quarter, reflecting unfavorable currency impacts.

For the nine months ended December 31, 2022, Japan revenue of $1.9 billion decreased 14 percent compared to the prior-year nine-month period. Revenue decreased due to an unfavorable currency exchange rate impact of 19 points, partially offset by recent signings of incremental business including increased Kyndryl Consult revenues. Adjusted EBITDA decreased $60 million from the prior-year period, primarily driven by unfavorable currency impacts, partially offset by lower costs from our post-Separation commercial agreements with IBM.

Principal Markets

(Dollars in millions)

For the three months ended December 31, 2022, Principal Markets revenue of $1.5 billion decreased 12 percent compared to the prior-year quarter. Revenue decreased due to an unfavorable currency exchange rate impact of 10 points, primarily driven by the strengthening of the U.S. dollar against the Euro and British pound. Adjusted EBITDA decreased $64 million from the prior-year period, driven by unfavorable currency exchange rate movements and higher energy costs, primarily in Europe.

For the nine months ended December 31, 2022, Principal Markets revenue of $4.5 billion decreased 15 percent compared to the prior-year nine-month period. 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 10 points, primarily driven by the strengthening of the U.S. dollar against the Euro and British pound. Adjusted EBITDA decreased $41 million from the prior-year period, primarily due to unfavorable currency exchange rates.

Strategic Markets

(Dollars in millions)

For the three months ended December 31, 2022, Strategic Markets revenue of $961 million decreased 5 percent compared to the prior-year quarter driven by a 7-point headwind from currency exchange rates, primarily the Euro. Adjusted EBITDA increased $11 million from the prior-year quarter, driven by progress on our key initiatives.

For the nine months ended December 31, 2022, Strategic Markets revenue of $2.9 billion decreased 1 percent compared to the prior-year nine-month period driven by an 8-point headwind from currency exchange rates, primarily the Euro, partially offset by signings of incremental business. Adjusted EBITDA decreased $92 million from the prior-year period, since the majority of Strategic Markets countries were not charged for IBM software pre-Separation and software cost allocations began post-Separation.

Corporate and Other

Corporate and other had an adjusted EBITDA loss of $16 million in the three months ended December 31, 2022, compared to a loss of $28 million in the three months ended December 31, 2021. Corporate and other had an adjusted EBITDA loss of $57 million in the nine months ended December 31, 2022, compared to a loss of $113 million in the nine months ended December 31, 2021. 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.

Costs and Expenses

(Dollars in millions)

NM – not meaningful

Cost of services was 83.6% of revenue in the three months ended December 31, 2022, compared to 87.8% in the three months ended December 31, 2021, driven by progress on our key initiatives, higher seasonal variances in volume and contracts with minimum annual revenue commitments. Selling, general and administrative expenses were 17.0% of revenue in 2022 compared to 14.1% in 2021, driven by costs associated with operating as an independent public company and the impact of currency on revenue compared to our U.S. dollar-denominated expenses. Transaction-related costs were 1.1% of revenue in 2022 compared to 2.8% in 2021, primarily driven by higher employee-retention expense and spin-related professional-services expense incurred in the prior-year quarter. Impairment expense was 0% in 2022 compared to 10.3% of revenue in 2021, driven by an impairment of goodwill in the former EMEA and Americas segments in the prior-year quarter. Interest expense was 0.6% of revenue in 2022 compared to 0.4% in 2021. Other expense (income) was 0.7% of revenue in 2022 compared to 0.4% in 2021, driven by hedging activity to partially offset the unfavorable impacts of currency movements of the U.S. dollar against other major currencies.

(Dollars in millions)

NM – not meaningful

Cost of services was 85.2% of revenue in the nine months ended December 31, 2022, compared to 88.1% in the nine months ended December 31, 2021, primarily driven by progress on our key initiatives. Selling, general and administrative expenses were 16.7% of revenue in 2022 compared to 14.9% in 2021, driven by costs associated with operating as an independent public company and the impact of currency on revenue compared to our U.S. dollar-denominated expenses. Transaction-related costs were 1.7% of revenue in 2022 compared to 4.1% in 2021, primarily driven by higher employee-retention expense and pre-spin consultancy expense incurred in the prior year. Impairment expense was 0% in 2022 compared to 3.4% of revenue in 2021, driven by an impairment of goodwill in the EMEA and Americas segments in the prior-year period. Interest expense was 0.5% of revenue in 2022 compared to 0.4% in 2021. Other expense (income) was 0.1% of revenue in 2022 compared to 0.1% in 2021, driven by hedging activity to partially offset the unfavorable impacts of currency movements of the U.S. dollar against other major currencies.

Stock-Based Compensation

In the nine months ended December 31, 2022, the Company granted equity and cash-based compensation awards to employees. These awards included 4.0 million restricted stock units that will vest ratably over four years; 2.4 million performance-conditioned stock units that are based on the attainment of operational milestones; and 0.7 million market-conditioned performance stock units that are based on the performance of the Company’s stock relative to that of its peers. Both types of performance-based awards will cliff vest based on the extent to which the performance criteria have been achieved as soon as practicable following the completion of the performance period on March 31, 2025. The total grant date fair value of the RSUs was determined using the stock price at the grant dates and will be recognized as stock-based compensation expense on a straight-line basis net of estimated forfeitures over the vesting period. The fair value of the performance-conditioned performance stock units ($10.62 per unit) was determined using the stock price at the grant date and will be adjusted and recognized as stock-based compensation expense based upon the probability of achievement of performance targets at each reporting period over the vesting period. The fair value of the market-conditioned performance stock units ($12.51 per unit) was determined at the grant date using a Monte Carlo simulation model and will be recognized as stock-based compensation expense on a straight-line basis net of estimated forfeitures over the vesting period. Dividend equivalents are not paid on the stock awards described above. The expense associated with these awards was $4 million during the nine months ended December 31, 2022.

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. These costs include employee retention expenses, information technology costs, marketing expenses to establish the Kyndryl brand, legal, accounting, consulting and other professional service costs required to prepare for and execute the Separation.

Income Taxes

The provision for income taxes for the three months ended December 31, 2022 was a $32 million benefit, compared to $11 million of expense for the three months ended December 31, 2021. The provision for income taxes for the nine months ended December 31, 2022 was $74 million of expense, compared to $311 million of expense for the nine months ended December 31, 2021. Our income tax benefit for the three months ended December 31, 2022 was primarily related to the benefit resulting from return-to-provision adjustments related to the filing of certain 2021 income tax returns. Our income tax expense for the nine months ended December 31, 2022 was primarily due to taxes on foreign operations and the increase in valuation allowances, primarily in the United States, against deferred tax assets that are not more likely than not to be realized, partially offset by the benefit resulting from return-to-provision adjustments related to the filing of certain 2021 income tax returns. Our income tax expense for the three months ended December 31, 2021 was primarily due to the geographic mix of pretax income and nondeductible goodwill impairment. Our income tax expense for the nine months ended December 31, 2021, was primarily due to the geographic mix of pretax income, changes in valuation allowances, and tax charges related to the transfer of Kyndryl’s operations from IBM in contemplation of the Company’s Separation.

In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction, including past operating results, estimates of future taxable income, the reversal of existing temporary differences and the feasibility of ongoing tax planning strategies and actions. Estimates of future taxable income and loss could change, perhaps materially, which may require us to revise our assessment of the recoverability of the deferred tax asset at that time.

Financial Position

Dynamics

Total assets of $11.9 billion decreased by $1.6 billion (and decreased by $1.1 billion adjusted for currency) from March 31, 2022, primarily driven by: a decrease of $731 million in accounts receivable due to collections and sales of accounts receivables outpacing new billings and currency impacts; a decrease in deferred costs of $274 million due to currency impacts and amortization outpacing additions as higher vendor billings for prepaid software typically occurred in the first calendar quarter; a decrease in operating right-of-use assets of $197 million due to expiration of leases inherited from former Parent, accelerated amortization from ceasing to use leased assets and currency impacts; a decrease in cash and cash equivalents of $132 million primarily due to payments toward accrued liabilities and currency impacts; a decrease in deferred tax assets of $77 million primarily due to tax effects of certain components of year-to-date pretax income and currency impacts; and a decrease in property and equipment of $72 million due to currency impacts.

Total liabilities of $9.9 billion decreased by $810 million (and decreased by $484 million adjusted for currency) from March 31, 2022, primarily as a result of: a decrease in accrued contract costs of $275 million due to timing of vendors billing Kyndryl for the first time as an independent company; a decrease in operating lease liabilities of $184 million due to payments and currency impacts; a decrease in deferred income of $141 million mainly due to the Company’s advanced annual billing with certain customers and currency impacts; and a decrease in accrued compensation and benefits of $121 million mainly due to bonus payments and currency impacts; partially offset by an increase of accounts payables $165 million due to the timing of payments. Total equity of $1.9 billion decreased $781 million from March 31, 2022 due to comprehensive loss in the period.

Working Capital

(Dollars in millions)

Working capital decreased $674 million from March 31, 2022. Current assets decreased $1.1 billion (and decreased $900 million adjusted for currency) primarily driven by: a decrease of $731 million in accounts receivable due to collections and sales of accounts receivables outpacing new billings and currency impacts; a decrease in deferred costs of $216 million due to currency impacts and amortization outpacing additions as higher vendor billings for prepaid software typically occurred in the first calendar quarter; and a decrease of $132 million in cash and cash equivalents primarily due to currency impacts. Current liabilities decreased $450 million (and decreased $238 million adjusted for currency) primarily driven by: a decrease in current accrued contract costs of $275 million; a decrease in accrued compensation and benefits of $121 million; and a decrease in current deferred income of $65 million; partially offset by an increase in accounts payable of $165 million.

Noncurrent Assets and Liabilities

Noncurrent assets of $6.9 billion at December 31, 2022 decreased by $466 million (and decreased by $164 million adjusted for currency) compared to March 31, 2022, primarily driven by a decline in right-of-use assets of $197 million; a decrease in deferred tax assets of $77 million primarily due to tax effects of certain components of year-to-date pretax income and currency impacts; and a decline in property and equipment of $72 million.

Noncurrent liabilities of $5.3 billion at December 31, 2022 decreased $360 million (and decreased by $246 million adjusted for currency) compared to March 31, 2022, mainly driven by a decrease in operating lease liabilities (noncurrent portion) of $138 million and a decrease in noncurrent deferred income of $76 million.

Cash Flow

Our cash flows from operating, investing and financing activities are summarized in the table below.

(Dollars in millions)

Net cash provided by operating activities was $769 million in the nine months ended December 31, 2022, compared to net cash provided by operating activities of $209 million in the prior-year period. This change was driven by our reduced net loss.

Net cash used by investing activities was $699 million in the nine months ended December 31, 2022, compared to a net cash use of $472 million in the prior-year period due to increased capital expenditures compared to the pre-Separation period in 2021. Capital expenditures consist of payments for property and equipment, and purchased and internally-developed software.

Net cash used by financing activities totaled $100 million in the nine months ended December 31, 2022, compared to net cash provided by financing activities of $2.5 billion in the prior-year period. This change was driven by net transfers to former Parent of $490 million in the prior-year period, which did not continue post-Separation, and proceeds of $3.0 billion from debt incurred in conjunction with our Separation in the prior-year period.

Other Information

Signings

The following table presents the Company’s signings for the three and nine months ended December 31, 2022 and 2021.

(Dollars in billions)

The following table presents the total contract value for the Company’s signings greater than $100 million for new and existing customers for the three and nine months ended December 31, 2022 and 2021.

(Dollars in millions)

Signings decreased by $1.2 billion, or 27%, for the three months ended December 31, 2022 compared to the prior-year period, including a 5-point negative impact from currency. Signings decreased by $2.4 billion, or 22%, for the nine months ended December 31, 2022 compared to the prior-year nine-month period, in part because currency had a 6-point negative impact on signings for the nine months ended December 31, 2022. Signings have 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.

Management uses signings as a tool to monitor the performance of the business including the business’ ability to attract new customers and sell additional scope into our existing customer base. There are no third-party standards or requirements governing the calculation of signings. We define signings as an initial estimate of the value of a customer’s commitment under a contract. The calculation involves estimates and judgments to gauge the extent of a customer’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger outsourcing contracts as well as the length of those contracts. The conversion of signings into revenue may vary based on the types of services and solutions, customer decisions and other factors, which may include, but are not limited to, the macroeconomic environment or external events.

Liquidity and Capital Resources

We believe that our existing cash and cash equivalents and the Revolving Credit Agreement entered into in October 2021 will be sufficient to meet our anticipated cash needs for at least the next twelve months.

Senior Unsecured Notes

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

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 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 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.

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 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 third-party financial institutions 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. In the quarter ended June 30, 2022, the Company entered into a separate agreement, 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 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 this program were $930 million and $2.3 billion for the three and nine months ended December 31, 2022, respectively. Gross proceeds from receivables sold to third parties and the financing division of our former Parent were $472 million and $1.7 billion for the three and nine months ended December 31, 2021, respectively. The fees associated with the transfers of receivables were $14 million and $34 million for the three and nine months ended December 31, 2022, respectively, and immaterial for the three and nine months ended December 31, 2021, respectively.

Critical Accounting Estimates

The application of U.S. GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. There have been no changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (see Amendment No. 1 to our Current Report on Form 8-K/A filed with the SEC on May 27, 2022 (the “8-K/A”) for more information; 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 “Form 10-K”).

In conjunction with our annual review of goodwill for impairment, we prepared qualitative and quantitative valuation analysis as of October 1, 2022. This analysis determined that the fair value of the Canada reporting unit within the Principal Markets segment exceeded book value by 51%. 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 100-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.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 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;
• competition;
• impacts of relationships with critical suppliers;
• inability to attract and retain key personnel and other skilled employees;
• impact of local legal, economic, political, health and other conditions, including the COVID-19 pandemic;
• a downturn in economic environment and customer spending budgets;
• damage to the Company’s reputation;
• inability to accurately estimate the cost of services and the timeline for completion of contracts;
• 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 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;
• risks relating to cybersecurity and data privacy;
• adverse effects from tax matters and environmental matters;
• legal proceedings and investigatory risks;
• impact of changes in market liquidity conditions and customer credit risk on receivables;
• the Company’s pension plans;
• the impact of foreign currency fluctuations; and
• 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 our Form 10-K, 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.

Website and Social Media Disclosure

The Company may use its website and/or social media outlets, such as Facebook, LinkedIn and Twitter, as distribution channels of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at https://investors.kyndryl.com, its Facebook page at https://www.facebook.com/kyndryl, its LinkedIn page at https://linkedin.com/company/kyndryl and its Twitter account (@Kyndryl) at https://twitter.com/Kyndryl. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Investor Email Alerts” section under the “Resources” section at https://investors.kyndryl.com.

For our disclosures about market risk, see the information under the heading “Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K. There have been no material changes to the Company’s disclosure about market risk in the Form 10-K.

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in the Form 10-K. There have been no material changes with respect to the risk factors disclosed in the Form 10-K.