MANAGEMENT DISCUSSION AND ANALYSIS | MarketScreener

OPERATING RESULTS AND FINANCIAL POSITION

             FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

Overview




                                 For the Three Months Ended                            For the Nine Months Ended
                                       September 30,                                        September 30,
(Dollars in millions)              2021               2020            Change            2021               2020          Change
Revenue                      $       4,579       $     4,856        (5.7) %        $     14,102       $   14,425        (2.2) %
Cost of services (1)                 4,182             4,332        (3.5)                12,727           12,876        (1.2)
Gross profit (1)             $         397       $       524       (24.2) %        $      1,375       $    1,549       (11.2) %
Gross profit margin (1)                8.7 %            10.8 %      (2.1) pts.              9.7 %           10.7 %      (1.0) pts.
Total expense and other
(income) (2)                 $         866       $       694         24.7 %        $      2,565       $    2,598        (1.2) %
Loss before income taxes
(3)                          $       (469)       $     (170)           NM          $    (1,191)       $  (1,050)           NM
Provision for income
taxes                                  223                68        230.4 %                 389              243         59.8 %
Net loss (3)                 $       (692)       $     (238)           NM          $    (1,579)       $  (1,293)           NM
Net loss margin                     (15.1) %           (4.9) %     (10.2) pts.           (11.2) %          (9.0) %      (2.2) pts.

(1) Includes the impact of $ 108 million and $ 168 million spin-off before tax

charges for the three and nine months ended September 30, 2021, respectively.

(2) Includes $ 165 million and $ 337 million pre-tax spinoff costs for

the three and nine months ended September 30, 2021, respectively.

(3) Includes $ 273 million and $ 505 million pre-tax spinoff costs for

the three and nine months ended September 30, 2021, respectively.

NM - not meaningful





                          At September 30,       At December 31,
(Dollars in millions)           2021                   2020
Assets                   $            12,063    $           11,205
Liabilities              $             6,581    $            6,274
Equity                   $             5,481    $            4,931




Organization of Information

Kyndryl 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.



Kyndryl utilized allocations and carve-out methodologies to prepare historic
combined financial statements. The combined financial statements 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 periods presented. For additional information, see "Basis of
Presentation" in note 1, "Background and Basis of Presentation" to the
accompanying unaudited Combined Financial Statements.

Summary of financial performance

Dynamic macro

With the unprecedented COVID-19 pandemic and macroeconomic uncertainty beginning
in March 2020, many clients experienced declines in their business volumes, and
client priorities shifted to maintaining operational stability, flexibility and
preservation of cash. While there was continued demand for offerings that
support their digital

                                       28

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Management discussion (continued)

transformation, clients have moved on to shorter-term assignments and prioritized operational spending over capital spending. This dynamic started to have an impact on our performance in 2020.

We expect the rate and pace of recovery from the pandemic to differ by geography
and industry. The underlying fundamentals of our business continue to remain
sound as we continue to manage through this macroeconomic uncertainty, since
large organizations' need for assistance in designing, building, managing and
modernizing technology systems is enduring.

Financial performance 2021

Three months ended September 30:

In the third quarter of 2021, we reported $4.6 billion in revenue, a decrease of
5.7 percent. This trend was consistent across all segments as some existing
clients paused on new project activity in advance of our Spin-off. Americas
revenue declined 5.6 percent, EMEA declined 5.2 percent, Japan declined 5.2
percent, and Asia Pacific declined 9.3 percent. Gross profit margin of 8.7
percent decreased 2.1 points versus the prior-year period, including $108
million of spin-off-related charges. Excluding these charges, gross profit
margin increased 0.2 points year-over-year, reflecting the benefits from the
workforce rebalancing actions taken in 2020. Total expense and other income of
$866 million increased 24.7 percent, primarily due to spin-off-related charges
of $165 million recorded in the third quarter of 2021. Net loss of $692 million
increased $454 million versus the prior-year period.

Nine months ended September 30:

In the first nine months of 2021, we reported $14.1 billion in revenue, a
decline of 2.2 percent when compared to the prior-year period. Americas revenue
declined 3.9 percent compared to the first nine months of 2020, EMEA declined
0.4 percent, Japan declined 0.9 percent, and Asia Pacific declined 4.9 percent.
Gross profit margin of 9.7 percent declined by 1 point versus the prior-year
period, including $168 million of spin-off-related charges. Excluding these
charges, gross profit margin increased 0.2 points year-over-year, reflecting the
benefits from the workforce rebalancing actions taken in 2020. Total expense and
other income of $2.6 billion decreased 1.2 percent year-over-year primarily
driven by lower workforce rebalancing charges, offset by spin-off-related
charges recorded in the first nine months of 2021. Net loss of $1.6 billion
increased by $287 million versus the prior-year period.

Net cash used in operating activities in the first nine months of 2021 of $725
million includes $319 million of cash outflows driven by current-year payments
for our workforce rebalancing actions initiated in the fourth quarter of 2020.
Total assets of $12.1 billion increased by $858 million from December 31, 2020
primarily driven by an increase in cash and cash equivalents and restricted cash
of $713 million, an increase in deferred taxes of $421 million and an increase
in accounts receivable of $302 million, partially offset by a decrease in
property and equipment of $510 million. Total liabilities of $6.6 billion
increased by $307 million from year-end 2020 primarily as a result of an
increase in retirement and nonpension postretirement benefit obligations of $445
million, long-term debt of $141 million from a bank loan agreement to finance a
purchase of software licenses, and an increase in accrued compensation and
benefits of $121 million, partially offset by a decrease in workforce
rebalancing liabilities of $387 million. Total equity of $5.5 billion increased
$550 million from year-end 2020, mainly driven by total Net Parent investment of
$557 million.











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Management discussion (continued)

Review of the third quarter and the first nine months

Segment results

The following tables represent changes in reportable segments' revenue and gross
margin results in the third quarter and first nine months of 2021 versus the
same periods of 2020. Segment revenue, revenue growth at constant currency and
pretax income (losses) exclude any transactions between the segments.



Revenue growth at 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 rate
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
foreign currency exchange rates, which is consistent with how management
evaluates our revenue results and trends. These disclosures are provided in
addition to, and not as a substitute for, the percentage change in revenue on a
GAAP basis for the three and nine months ended September 30, 2021 compared to
the corresponding periods 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.





(Dollars in millions)                                                Year-over-Year
For the three months ended September 30:      2021        2020           Change
Americas
Revenue as reported                         $ 1,737     $ 1,841         (5.6) %
Revenue growth at constant currency                                     (6.6) %
Gross profit                                    250         290        (13.5) %
Gross profit margin                            14.4 %      15.2 %       (0.8) pts.
EMEA
Revenue as reported                         $ 1,741     $ 1,837         (5.2) %
Revenue growth at constant currency                                     (6.7) %
Gross profit                                   (23)          12            NM
Gross profit margin                           (1.3) %       0.9 %       (2.2) pts.
Japan
Revenue as reported                         $   729     $   769         (5.2) %
Revenue growth at constant currency                                     (1.6) %
Gross profit                                    133         154        (13.5) %
Gross profit margin                            18.3 %      20.3 %       (2.0) pts.
Asia Pacific
Revenue as reported                         $   372     $   410         (9.3) %
Revenue growth at constant currency                                    (11.1) %
Gross profit                                     37          68        (46.1) %
Gross profit margin                             9.9 %      16.2 %       (6.3) pts.
Total
Revenue as reported                         $ 4,579     $ 4,856         (5.7) %
Revenue growth at constant currency                                     (6.2) %
Gross profit                                    397         524        (24.2) %
Gross profit margin                             8.7 %      10.8 %       (2.1) pts.


NM - not meaningful

                                       30

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Management discussion (continued)



(Dollars in millions)                                                 

Year after year

For the nine months ended September 30:       2021         2020           Change
Americas
Revenue as reported                        $  5,334     $  5,553         (3.9) %
Revenue growth at constant currency                                      (5.3) %
Gross profit                                    823          847         (2.8) %
Gross profit margin                            15.4 %       15.2 %         0.2 pts.
EMEA
Revenue as reported                        $  5,370     $  5,394         (0.4) %
Revenue growth at constant currency                                      (6.6) %
Gross profit                                   (77)           46            NM
Gross profit margin                           (1.4) %        0.9 %       (2.3) pts.
Japan
Revenue as reported                        $  2,236     $  2,257         (0.9) %
Revenue growth at constant currency                                       
0.0 %
Gross profit                                    455          458         (0.6) %
Gross profit margin                            20.3 %       20.3 %         0.1 pts.
Asia Pacific
Revenue as reported                        $  1,161     $  1,222         (4.9) %
Revenue growth at constant currency                                     (10.5) %
Gross profit                                    174          198        (12.1) %
Gross profit margin                            15.0 %       16.2 %       (1.2) pts.
Total
Revenue as reported                        $ 14,102     $ 14,425         (2.2) %
Revenue growth at constant currency                                      (5.4) %
Gross profit                                  1,375        1,548        (11.2) %
Gross profit margin                             9.7 %       10.7 %       (1.0) pts.


NM - not meaningful



Americas



(Dollars in millions)                                                Year-over-Year
For the three months ended September 30:      2021        2020           Change
Revenue                                     $ 1,737     $ 1,841         (5.6) %
Gross profit                                    250         290        (13.5) %
Gross profit margin                            14.4 %      15.2 %       (0.8) pts.
Pretax income (loss)                        $  (89)     $  (13)            NM
Pretax margin                                 (5.1) %     (0.7) %       (4.4) pts.


NM - not meaningful





(Dollars in millions)                                               Year-over-Year
For the nine months ended September 30:      2021        2020           Change
Revenue                                    $ 5,334     $ 5,553        (3.9) %
Gross profit                                   823         847        (2.8) %
Gross profit margin                           15.4 %      15.2 %        0.2 pts.
Pretax income (loss)                       $ (211)     $ (230)           NM
Pretax margin                                (4.0) %     (4.1) %        0.2 pts.


NM - not meaningful



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Management discussion (continued)

In the third quarter of 2021, Americas revenue of $1.7 billion declined by 5.6
percent when compared to the prior-year period. For the first nine months of
2021, Americas revenue of $5.3 billion decreased 3.9 percent as compared to the
prior-year period. Gross profit margin percent declined 0.8 points in the third
quarter and improved 0.2 points in the first nine months of 2021, respectively,
as compared to the prior-year period. Pretax loss of $89 million in the third
quarter of 2021 and $211 million in the first nine months of 2021 increased $76
million and decreased $19 million, respectively, when compared to the prior-year
periods. Pretax margin of (5.1) percent and (4.0) percent decreased by 4.4
points and increased 0.2 points in the three and nine months ended September 30,
2021, respectively, when compared to the prior-year periods.

Europe, the Middle East, and Africa (EMEA)



(Dollars in millions)                                                  

Year after year

For the three months ended September 30:       2021         2020           Change
Revenue                                     $  1,741     $  1,837        (5.2) %
Gross profit                                    (23)           12           NM
Gross profit margin                            (1.3) %        0.9 %      (2.2) pts.
Pretax income (loss)                        $  (381)     $  (280)           NM
Pretax margin                                 (21.9) %     (15.2) %      (6.6) pts.


NM - not meaningful



(Dollars in millions)                                                   Year-over-Year
For the nine months ended September 30:       2021          2020           
Change
Revenue                                    $   5,370     $   5,394        (0.4) %
Gross profit                                    (77)            46           NM
Gross profit margin                            (1.4) %         0.9 %      (2.3) pts.
Pretax income (loss)                       $ (1,126)     $ (1,101)           NM
Pretax margin                                 (21.0) %      (20.4) %      (0.6) pts.


NM - not meaningful



In the third quarter of 2021, EMEA revenue of $1.7 billion decreased 5.2 percent
when compared to the prior-year period. For the first nine months of 2021, EMEA
revenue of $5.4 billion decreased 0.4 percent as compared to the prior-year
period. Gross profit margin percent declined by 2.2 points and 2.3 points to
(1.3) percent and (1.4) percent, in the third quarter and first nine months of
2021, respectively, as compared to the prior-year periods. Overall, gross profit
margins within the EMEA segment are typically lower than those in other
reportable segments due to a higher labor resource cost profile. Pretax loss of
$381 million in the third quarter of 2021 and $1.1 billion in the first nine
months of 2021 increased $101 million and $25 million, respectively, compared to
the prior-year periods. Pretax margin of (21.9) percent and (21.0) percent
declined by 6.6 points in the three months ended September 30, 2021 and 0.6
points in the first nine months of 2021, when compared to the prior-year
periods.

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Management discussion (continued)

Japan



(Dollars in millions)                                              Year-over-Year
For the three months ended September 30:      2021       2020          Change
Revenue                                     $  729     $  769         (5.2) %
Gross profit                                   133        154        (13.4) %
Gross profit margin                           18.3 %     20.3 %       (2.0) pts.
Pretax income (loss)                        $   23     $   56        (58.9) %
Pretax margin                                  3.1 %      7.3 %       (4.1) pts.






(Dollars in millions)                                               Year-over-Year
For the nine months ended September 30:      2021        2020           Change
Revenue                                    $ 2,236     $ 2,257         (0.9) %
Gross profit                                   455         458         (0.6) %
Gross profit margin                           20.3 %      20.3 %         0.1 pts.
Pretax income (loss)                       $    78     $   131        (40.4) %
Pretax margin                                  3.5 %       5.8 %       (2.3) pts.




In the third quarter of 2021, Japan revenue of $729 million decreased 5.2
percent when compared to the prior-year period. For the first nine months of
2021, Japan revenue of $2.2 billion decreased 0.9 percent when compared to the
prior-year period. Gross profit margin percent decreased 2.0 points and
increased 0.1 points, in the third quarter and first nine months of 2021,
respectively, as compared to the prior-year periods. Pretax income of $23
million in the third quarter of 2021 and $78 million in the first nine months of
2021 decreased $33 million and $53 million, respectively, when compared to the
prior-year periods. Pretax margin declined by 4.1 points and 2.3 points in the
three and nine months ended September 30, 2021, respectively, when compared
to
the prior-year periods.

Asia Pacific



(Dollars in millions)                                               Year-over-Year
For the three months ended September 30:      2021        2020          Change
Revenue                                     $   372     $  410         (9.3) %
Gross profit                                     37         68        (46.1) %
Gross profit margin                             9.9 %     16.2 %       (6.3) pts.
Pretax income (loss)                        $  (23)     $   66            NM
Pretax margin                                 (6.1) %     16.2 %      (22.3) pts.


NM - not meaningful



(Dollars in millions)                                               Year-over-Year
For the nine months ended September 30:      2021        2020           Change
Revenue                                    $ 1,161     $ 1,222         (4.9) %
Gross profit                                   174         198        (12.1) %
Gross profit margin                           15.0 %      16.2 %       (1.2) pts.
Pretax income (loss)                       $    68     $   149        (54.5) %
Pretax margin                                  5.8 %      12.2 %       (6.4) pts.



In the third quarter and first nine months of 2021, Asia Pacific revenue of $372
million and $1.2 billion, decreased 9.3 percent and 4.9 percent, respectively,
when compared to the prior-year periods. Gross profit margin percent declined by
6.3 points in the third quarter of 2021 as compared to the prior-year period and
decreased by 1.2 points in first nine months of 2021 as compared to the
prior-year period. The pretax loss of $23 million in the third quarter of 2021
and pretax income of $68 million in the first nine months of 2021 decreased $89
million and $81 million in the first nine months of 2021, respectively, when
compared to the prior-year periods. Pretax margin declined by 22.3 points and
6.4 points in the first nine months of 2021, respectively, when compared to
the
prior-year periods.

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Management discussion (continued)

Spin-off-related Charges




                                                   For the Three Months Ended      For the Nine Months Ended
(Dollars in millions)                                  September 30, 2021             September 30, 2021
Cost of services                                  $                        108    $                       168
Selling, general and administrative expenses                               162                            329
Workforce rebalancing charges                                                3                              7
Research, development and engineering expenses                             
 1                              1
Total costs and expenses                          $                        273    $                       505




The process of completing our Separation involves significant costs and
expenses. Spin-off-related charges are primarily related to costs to establish
certain standalone functions and information technology systems, professional
services fees and other transaction-related costs during the Company's
transition to being a standalone public company. These charges are primarily
recorded within Selling, general and administrative expenses and cost of
services in the Combined Income Statement. These costs primarily include
finance, IT, consulting and legal fees, facilities costs, and other items that
are incremental and one-time in nature. During the three and nine months ended
September 30, 2021, we recorded spin-off-related charges of $273 million and
$505 million, respectively. There were no spin-off-related charges recorded in
the third quarter and first nine months of 2020.

Total expenses and other income



(Dollars in millions)                                                  Year-over-Year
For the three months ended September 30:           2021       2020        

Switch

Expense and other (income)
Selling, general and administrative expenses      $  854 (1)  $ 654            30.6 %
Workforce rebalancing charges/(benefit)              (1) (2)    (1)        

NM

Research, development and engineering costs 14 17

 (21.6) %
Interest expense                                      17         16             5.5 %
Other (income) and expense                          (17)          8              NM
Total expense and other (income)                  $  866 (3)  $ 694        

24.7%

(1) Includes $ 162 million pre-tax impact charges.

(2) Includes $ 3 million pre-tax impact charges.

(3) Includes $ 165 million pre-tax impact charges.

NM- not meaningful




(Dollars in millions)                                                     Year-over-Year
For the nine months ended September 30:            2021         2020       

Switch

Expense and other (income)
Selling, general and administrative expenses      $ 2,421 (1)  $ 2,123            14.1 %
Workforce rebalancing charges                          40 (2)      355          (88.9) %
Research, development and engineering expenses         42           56     
    (24.6) %
Interest expense                                       46           47           (1.2) %
Other (income) and expense                             16           17           (5.2) %
Total expense and other (income)                  $ 2,565 (3)  $ 2,598     

(1.2)%

(1) Includes $ 329 million pre-tax impact charges.

(2) Includes $ 7 million pre-tax impact charges.

(3) Includes $ 337 million pre-tax impact charges.




Total expense and other (income) increased 24.7 percent in the third quarter of
2021 versus the prior year primarily driven by spin-off-related charges recorded
in the quarter.

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Management discussion (continued)

Total expenses and other (income) decreased by 1.2% in the nine months ended September 30, 2021 compared to the previous year, mainly due to a weaker workforce rebalancing offset by the charges related to the split recorded in 2021.

For more information on total expenses and other (income) for the two periods, see the following analyzes by category.

Selling, general and administrative expenses

(Dollars in millions)                                                      

Year after year

For the three months ended September 30:                     2021     2020 

Switch

Selling, general and administrative expense
Allocation of corporate expenses                             $ 292    $ 266             9.8 %
Spin-off-related charges                                       162        -              NM
Related party intangible assets fee                             12       12             0.2 %
Stock-based compensation                                        12       11            14.9 %
Advertising and promotional expense                              7        8          (10.6) %
Provision for (benefit from) expected credit loss expense      (4)      (4)              NM
Amortization of acquired intangible assets                       5        5           (3.8) %
Other selling, general and administrative expenses             368      356             3.3 %
Total selling, general and administrative expense            $ 854    $ 654
           30.6 %


NM - not meaningful




(Dollars in millions)                                                              Year-over-Year
For the nine months ended September 30:                       2021       2020          Change
Selling, general and administrative expense
Allocation of corporate expenses                             $   922    $   860             7.2 %
Spin-off-related charges                                         329          -              NM
Related party intangible assets fee                               37         37             1.5 %
Stock-based compensation                                          32         28            14.9 %
Advertising and promotional expense                               20         26          (21.9) %
Provision for (benefit from) expected credit loss expense       (27)         24              NM
Amortization of acquired intangible assets                        14         15           (4.1) %
Other selling, general and administrative expenses             1,094      1,134           (3.5) %
Total selling, general and administrative expense            $ 2,421    $ 2,123            14.1 %


NM - not meaningful

Total selling, general and administrative (SG&A) expenses increased by 30.6% in the third quarter of 2021 compared to the previous year, mainly due to the charges related to the spin-off during the period of the year being $ 162 million.

Total SG&A expenses increased by 14.1 percent in the first nine months of 2021 compared to the previous year, mainly due to expenses related to the spin-off during the current year period. $ 329 million.

Provisions for expected credit loss expense decreased $51 million year-over-year
in the first nine months of 2021, primarily driven by decreases in both specific
and general reserves in the current year compared with increases in the
prior-year period. In the prior year, the global pandemic resulted in some
deterioration in customer credit quality and/or bankruptcies which had an impact
to provisions in the first nine months of 2020. Total provision as percentage of
receivables was 3.2 percent at September 30, 2021, compared to 5.9 percent at
December 31, 2020 primarily driven by lower customer-specific provisions.

                                       35

Contents

Management discussion (continued)

Workforce rebalancing

Workforce rebalancing charges decreased $316 million year-over-year in the first
nine months ended September 30, 2021 when compared to the prior-year period.
Workforce rebalancing charges are recorded in the Combined Income Statement for
severance and employee-related benefits in accordance with the accounting
guidance for ongoing benefit arrangements. The impact to pretax income by
segment for the nine months ended September 30, 2020 was as follows: EMEA
$236 million, Americas $84 million, Asia Pacific $19 million, and Japan
$15 million.

Research, development and engineering costs



(Dollars in millions)                                              Year-over-Year

For the three months ended September 30: 2021 2020 Change research, development and engineering costs $ 14 $ 17 (21.6)%





(Dollars in millions)                                              

Year after year

For the nine months ended September 30: 2021 2020 Change research, development and engineering costs $ 42 $ 56 (24.6)%




Research, development and engineering (RD&E) expense was $14 million and $42
million in the three and nine months ended September 30, 2021, a decrease of $3
million and $14 million compared to the prior-year periods. Within these
amounts, software-related expense was $12 million and $35 million in the third
quarter and first nine months of 2021, respectively.

Other (Income) and Expense




(Dollars in millions)                                           Year-over-Year

For the three months ended September 30: 2021 2020 Change Other (income) and expenses Retirement expenses (income)

            $    7    $   7           (6.7) %
Allocation of corporate expenses (income)         2        2          (12.8) %
Net(gain) loss from derivatives                 (5)      (1)              

NM

Net(gain) loss from property disposition       (20)        -              

NM

Other (income) and expense                      (1)        1              

NM

Total other (income) and expense             $ (17)    $   8              NM %


NM- not meaningful




(Dollars in millions)                                             Year-over-Year
For the nine months ended September 30:       2021      2020          Change
Other (income) and expense
Retirement-related costs (income)            $   21    $   20             4.6 %
Allocation of corporate expenses (income)        10         5           106.0 %
Net(gain) loss from derivatives                   3      (10)             

NM

Net(gain) loss from property disposition       (17)         -             

NM

Other (income) and expense                      (1)         2             

NM

Total other (income) and expense             $   16    $   17           (5.2) %


NM- not meaningful
Total other (income) and expense was $17 million of income and $16 million of
expense in the third quarter and first nine months of 2021. Other (income) and
expense decreased by $25 million in the third quarter when compared to the
prior-year period driven by a gain on property disposition. Other (income) and
expense decreased by $1 million in the first nine months of 2021 when compared
to the prior-year period primarily driven by a gain on property disposition,

                                       36

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Management discussion (continued)

offset by net foreign exchange losses (including impacts of IBM derivatives) during the current year period versus net foreign exchange gains (including impacts of IBM derivatives) during the period of the previous year.

Interest Expense




(Dollars in millions)                                          Year-over-Year

For the three months ended September 30: 2021 2020 Change Total interest expense

                      $  17    $  16            5.2 %
Allocation of corporate expenses               17       16





(Dollars in millions)                                         Year-over-Year

For the nine months ended September 30: 2021 2020 Change Total interest expense

                     $  46    $  47           (1.2) %
Allocation of corporate expenses              46       47




Interest expense increased $1 million in the third quarter of 2021 compared to
the prior-year period and decreased $1 million in the first nine months of 2021
versus prior-year period. We share in a portion of the interest expense incurred
by Parent as Parent's debt balance is considered to support the operations of
our business. Such interest expense was allocated on a pro rata basis based on
our portion of total assets compared to Parent. In addition, we incurred
interest expense on a loan transferred over to the Company in the third quarter
of 2021.

Income Taxes

The provision for income taxes for the third quarter of 2021 was $223 million,
compared to $68 million in the third quarter of 2020. The provision for income
taxes for the first nine months of 2021 was $389 million, compared to $243
million for the first nine months of 2020. The provision for income taxes for
the periods presented was attributable to jurisdictions generating taxable
income as well as jurisdictions in which losses do not generate a benefit for
the Company. The increase in the provision for income taxes was primarily driven
by tax charges related to the transfer of Kyndryl's operations from Parent in
contemplation of the Company's separation from IBM.

Financial situation

Dynamic

Cash, restricted cash and marketable securities at September 30, 2021 were $751
million, up $713 million when compared to prior year end. Total assets of $12.1
billion increased by $858 million from December 31, 2020 predominantly driven by
increases in deferred taxes of $421 million and accounts receivables of $302
million, partially offset by a decrease in property and equipment of $510
million. Total liabilities of $6.6 billion increased by $307 million from
year-end 2020 primarily as a result of an increase in retirement and nonpension
postretirement benefit obligations of $445 million in connection with
establishment of certain Kyndryl legal entities, as a result of which the
Company was required to assume certain retirement and nonpension postretirement
benefit obligations. This was partially offset by a decrease in workforce
rebalancing liabilities of $387 million. Total equity of $5.5 billion increased
$550 million from year-end 2020, mainly driven by an increase in Net Parent
investment of $557 million.

Net cash used in operating activities of $ 725 million understand $ 319 million cash outflows induced by payments for the current year for our workforce rebalancing actions initiated in the fourth quarter of 2020.

The overall pension funding status at the end of September was substantially consistent with that of the end of 2020.

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Management discussion (continued)

Working Capital




                          At September 30,      At December 31,
(Dollars in millions)           2021                  2020
Current assets           $             3,856    $           2,843
Current liabilities                    3,709                3,910
Working capital          $               147    $         (1,067)



Improved working capital $ 1.2 billion from the end of year 2020 position. The main changes are described below:

Current assets increased $ 1.0 billion ($ 1.1 billion adjusted for currency) due to:

? An augmentation of $ 713 million in cash and cash equivalents and in restricted cash,

and

? An augmentation of $ 302 million in accounts receivable.

Current liabilities have decreased $ 202 million ($ 43 million adjusted for currency) due to:

? A decrease in workforce rebalancing commitments by $ 381 million mainly due

payments related to the action initiated in 2020, partially offset by

? An increase in compensation and benefits $ 121 million, and

? An increase in value-added tax debts of $ 62 million.

Receivables and provisions

Carry forward of the provision for accounts receivable for credit losses



(Dollars in millions)
   January 1, 2021         Additions / (Releases)      Write-offs      Other*     September 30, 2021
$                   91    $                   (27)    $        (5)    $    (1)    $                58

* Mainly represents conversion adjustments and reclassifications.

The total provision as a percentage of receivables was 3.2% at
September 30, 2021, fell 5.9 percent to December 31, 2020 mainly due to the decrease in customer specific provisions.

Good will

As discussed in Note 4, "Segments", we will be evaluating the recasting of our
geographic segments to reflect management's updated view of the business. The
annual goodwill impairment test cycle is normally scheduled for the fourth
quarter and will be conducted in the context of any recast in the reporting
units. It is possible that the carrying value of a new reporting unit will
exceed its estimated fair value, in which case the difference would result in a
non-cash impairment charge.

Non-current assets and liabilities

Non-current assets of $8.2 billion at September 30, 2021 decreased by $155
million (increased by $189 million adjusted for currency) when compared to
December 31, 2020, primarily driven by a decline in property and equipment of
$510 million which includes the impact from the sale of a datacenter in Japan of
$101 million, offset by an increase in

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Management discussion (continued)

deferred taxes of $ 421 million. The increase in deferred taxes mainly reflects the transfer of activities from the parent company with a view to our demerger.

Non-current liabilities of $2.9 billion at September 30, 2021 increased $509
million ($617 million adjusted for currency) when compared to December 31, 2020,
mainly driven by an increase in retirement and nonpension postretirement benefit
obligations of $445 million in connection with establishment of certain Kyndryl
legal entities, as a result of which the Company was allocated pension assets
and required to assume certain retirement and nonpension postretirement benefit
obligations.

Equity

Total equity of $ 5.5 billion To September 30, 2021 increased by $ 550 million
of December 31, 2020 mainly due to the total Net parent investment of $ 557 million.

Cash flow

Our cash flows from operating, investing and financing activities, as reflected in the Combined Statement of Cash Flows, are summarized in the table below.




(Dollars in millions)
For the nine months ended September 30:                     2021          

2020

Net cash provided by/(used in) continuing operations
Operating activities                                     $    (725)    $      323
Investing activities                                          (425)         (678)
Financing activities                                          1,876           350
Effect of exchange rate changes on cash, cash
equivalents and restricted cash                                (12)        

(3)

Net change in cash, cash equivalents and restricted
cash                                                     $      713    $      (7)



Decrease in net cash flow from operating activities $ 1.0 billion in the first nine months of 2021 compared to the previous year period due to the following key factors:

? A decrease in the cash provided by receivables from $ 610 million pushed by a strong

the performance of the collections during the period of the previous year, and

? A decrease in workforce rebalancing commitments by $ 426 million principally

driven by payments.


Net cash used by investing activities decreased $253 million in the first nine
months of 2021 when compared to the prior-year period driven by sales of data
centers and higher spending in prior periods.

Net cash provided by financing activities increased $1.5 billion in the first
nine months of 2021 when compared to the prior-year period driven by an increase
in net transfers from IBM of $1.4 billion and an increase in third-party debt of
$140 million.

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Management discussion (continued)

Other Information

Signings


The following tables present the signatures of the Company for the three and nine months ended. September 30, 2021.


(Dollars in billions)                                         

Year after year

For the three months ended September 30:    2021     2020         Change
Total signings                              $ 2.8    $ 4.0        (29.2) %





(Dollars in billions)                                         Year-over-Year

For the nine months ended September 30: 2021 2020 Change Total signatures

                             $ 9.1    $ 12.1        (25.0) %




The following tables present 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 September 30, 2021.




                  Three Months Ended     Nine Months Ended
($ in millions)      September 30,         September 30,
2021
New               $                 -   $               218
Existing          $               564   $             2,942

2020
New               $                 -   $               558
Existing          $             1,805   $             5,715



Signings were historically used by IBM's management as an initial estimate of
the value of a customer's commitment under a contract. Our management continues
to evaluate the metrics that we will utilize to assess business performance
moving forward as an independent company.

We believe that the estimated values of signings provide insight into the
Company's potential future revenue and that IBM management historically used
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, as well as viewed signings as useful decision-making
information for investors. There are no third-party standards or requirements
governing the calculation of signings. The calculation historically used by
IBM's management, which is the same calculation we have used in this report,
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. 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, macroeconomic environment or external events.

Liquidity and capital resources

We believe that our existing cash and cash equivalents and the subsequent Notes,
Term Loan Credit Agreement and Revolving Credit Agreement each entered into in
October 2021 will be sufficient to meet our anticipated cash needs for at least
the next 12 months.

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Management discussion (continued)

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
(the "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 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
will use commercially reasonable efforts to file and have declared effective a
registration statement with respect to a registered offer to exchange each
series of Notes for new notes with substantially identical terms by October 15,
2022. If the exchange offer is not completed on or before October 15, 2022 and
under certain other circumstances, we are required to use commercially
reasonable efforts to file and have declared effective a shelf registration
statement relating to the resale of the Notes.



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 will be based on prevailing
market interest rates, plus a margin, as further described in the Credit
Agreements.

The Notes, revolving credit facility and term loan 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 on November 3, 2021, the guarantee
was released, and the Notes, term loan and revolving credit facility are no
longer obligations of IBM.

We expect to be able to 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.

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Management discussion (continued)

Debt purchase contract

A portion of our receivables with extended payment terms were historically
assigned to IBM's Global Financing business. These receivables were not
recognized on the Company's Combined Balance Sheet. In October 2021, in
preparation for the Separation, we entered into a receivables purchase agreement
with an unaffiliated bank with similar volumes to the amounts historically
financed by IBM (the "Receivables Agreement"). Pursuant to the Receivables
Agreement, we may sell at any one time, on a revolving basis, up to $1.1 billion
of our trade receivables. Under the Receivables Agreement, from time to time, we
sell certain customers' trade receivables with extended payment terms at a
discount on a non-recourse basis. These transactions are accounted for as sales.
The initial term of the Receivables Agreement is 18 months.



Caution 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 associated with the recent spin-off of the Company from IBM;

? the inability to attract new customers, retain existing customers or sell

customer services;

? technological developments and the Company’s response to these developments;

? failure to meet growth and productivity targets;

? competetion;

? impacts of relationships with critical suppliers;

? the inability to attract and retain key personnel and other qualified employees;

? impact of local legal, economic, political, health and other conditions,

including the COVID-19 pandemic;

? a deterioration in the economic environment and customer spending budgets;

? damage to the reputation of the Company;

? inability to accurately estimate the cost of services and timing of

   completion of contracts;


 ? service delivery issues;


the Company’s ability to successfully manage acquisitions, alliances and

? arrangements, including integration challenges, inability to achieve goals,

the assumption of liabilities and higher debt levels;

? the impact of our activities with government customers;

? failure of the Company’s intellectual property rights to prevent competition

the offers and failure of the company to obtain the necessary licenses;

? cybersecurity and data privacy risks;

? the negative effects of fiscal and environmental issues;

? the risks of legal proceedings and investigations;

? 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 associated with the Company’s ordinary shares and the securities market.



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Management discussion (continued)

Additional risks and uncertainties include, among others, those risks and
uncertainties described in the "Risk Factors" section of the Company's Form 10
included as Exhibit 99.1 to Amendment No. 1 filed with the Securities and
Exchange Commission (the "SEC") on October 12, 2021, 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.







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