Kyndryl needs a much stronger second half to reach its cash target

Kyndryl kept its annual free-cash-flow target after using $434 million in the first half. Meeting that goal now requires substantially more cash generation in the remaining six months than in the comparable period last year.

Research by Ticker Byline shows that the unchanged $400 million to $500 million target requires $834 million to $934 million in the second half. The previous year's second half produced approximately $605 million on the same plain free-cash-flow definition, calculated from rounded annual and half-year figures.

Kyndryl's fiscal year runs through March. Its cash needs are usually highest in the first quarter, when software subscriptions and incentive payments fall due. The company reaffirmed the target rather than cutting it.

Why the first half consumed cash

Second-quarter operating cash flow was $172 million. After $206 million of net capital spending, free cash flow was negative $34 million, compared with positive $22 million a year earlier.

For the first half, operating cash flow was negative $137 million and net capital spending was $297 million. The resulting $434 million free-cash outflow compares with $200 million a year earlier. Free cash flow here means operating cash flow less capital expenditure, net of proceeds from property and equipment sales.

The current report attributes the operating-cash deterioration mainly to payment timing. Higher software payments, the timing of advance customer billings and higher workforce payments were partly offset by lower annual incentive payments.

Profit provides a counterpoint

Quarterly pretax income increased to $112 million from $98 million. Adjusted pretax income rose to $150 million from $123 million, even though workforce rebalancing charges remain inside that adjusted measure. Revenue fell to $3.651 billion from $3.721 billion.

Revenue included a $39 million increase for work fulfilled in earlier periods, mainly from resolving a commercial matter.

The company continues to manage the timing of customer receipts and supplier payments, including some payments deferred beyond vendor terms. Those practices were disclosed previously. Its SEC investigation into cash-management practices and related disclosures remains ongoing.

Financing and control work continue

September cash and cash equivalents of $1.659 billion preceded the repayment of $700 million of notes at maturity in October. Kyndryl also temporarily paused share repurchases after completing its Healthcare IT Leaders acquisition.

The current report says enhanced controls were designed and implemented during the quarter and are now being tested. Previously disclosed material weaknesses remain unremediated. The Kyndryl company profile follows the cash target, borrowing and operating results behind the comparison.