Item 2.06 Material Impairments.
In February 2014, the Venezuelan government announced a new foreign exchange
system ("SICAD 2") which began operating on March 24, 2014. With the
implementation of SICAD 2, there are now three legal mechanisms in Venezuela for
From January 23, 2014 to the date of this report, MercadoLibre, Inc.(the
"Company') has used the exchange rate published by the Sistema Complementario de
AdministraciÓn de Divisas ("SICAD 1") as the exchange rate to re-measure its
bolivar-denominated monetary assets and liabilities and to re-measure the
revenues and expenses of its Venezuelan subsidiaries, since according to
regulations in effect in Venezuela, SICAD 1 is the primary foreign exchange
system to obtain foreign currencies to settle the types of transactions
conducted by the Company in Venezuela and for dividend distributions during this
time. As of May 16, 2014, the published SICAD 1 exchange rate was 10.0 bolivares
fuertes per U.S. dollar and the published SICAD 2 exchange rate was 49.98
bolivares fuertes per U.S. dollar.
Since implementation of the SICAD 1 system, however, the Company has been
unsuccessful in gaining access to U.S. dollars through SICAD 1. As a result of
this ongoing lack of access to the SICAD 1 auction system, on May 16, 2014, the
Company decided that it will begin using the SICAD 2 mechanism to settle
transactions conducted by the Company in Venezuela, and to request, in future
period, U.S. dollars for dividend distributions. The SICAD 2 system is an open
mechanism that permits any company to request
dollars for any purpose. Consequently, the Company is eligible for, and has
recently requested U.S. dollars through, the SICAD 2 mechanism. As a result, the
Company now expects to settle its transactions through SICAD 2 and has concluded
that the SICAD 2 exchange rate should be used to re-measure its
bolivar-denominated monetary assets and liabilities and to re-measure the
revenues and expenses of its Venezuelan subsidiaries effective as of May 16,
2014. Assuming the use of the current SICAD 2 exchange rate (49.98 bolivares
fuertes per U.S. dollar), the Company's adoption of SICAD 2 will cause a
reduction in the foreign exchange used for re-measurement purposes of
approximately 80% compared to the SICAD 1 rate used previously.
Considering this change in facts and circumstances and the lower U.S.
dollar-equivalent cash flows now expected from its Venezuelan business, the
Company is also reviewing its long-lived assets, goodwill and intangible assets
with indefinite useful life for impairment, including considering their current
expected use in the new context, and estimates that the carrying value of
certain real estate investments will not be recoverable. As a result, the
Company is estimating a one-time charge of approximately $47.0 million to
$57.0 million to be recorded in the second quarter of 2014.
As a consequence of the Company's plan to use the SICAD 2 system to obtain U.S.
dollars to settle its transactions in Venezuela, the Company also expects to
recognize a foreign exchange loss of between
$14.5 million and $21.5 million and a deferred income tax gain of between $6.5
million and $9.5 million derived from the loss on foreign exchange related to
the revaluation of it's U.S. dollar-denominated liabilities during the second
quarter of 2014. Outside of ordinary course operating expenses, the Company does
not expect to incur any significant cash expenditures in the next several years
with respect to its Venezuelan operations as a result of these charges.
Finally, the Company estimates that the impact of the use of the exchange rate
resulting from SICAD 2 published auctions will reduce second quarter 2014
revenues for its Venezuelan segment by approximately $12 million to $18 million
versus Venezuelan segment revenues for the same period had the change in
exchange rate not occurred.
The Company had previously provided in its Form 10-Q for the quarter ended March
31, 2014 specific sensitivity information of its Venezuelan segment reporting
for the quarter ended March 31, 2014,
assuming an exchange rate of 50 bolivares fuertes per U.S. dollar applied for
the period starting on January 1, 2014 and ended March 31, 2014. See "Item 3-
Qualitative and Quantitative Disclosure About Market Risk" in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 ("First
Quarter 2014 Form 10-Q"), filed with the U.S. Securities and Exchange Commission
("SEC") on May 9, 2014
It is not possible to predict how significantly the SICAD 2 exchange rate may
fluctuate in future periods.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made or implied in this report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "intend," "plan," "estimate," "target,"
"project," "should," "may," "could," "will" and similar words and expressions
are intended to identify forward-looking statements. Forward-looking statements
in this report include, but are not limited to, an expected second quarter 2014
charge related to a change in the foreign exchange used in Venezuela for
re-measurement purposes, the expected impact on the revenues of the Company's
Venezuelan segment for the second quarter 2014 and future access to foreign
exchange mechanisms in Venezuela. Such forward-looking statements reflect, among
other things, our current expectations, plans, projections and strategies,
anticipated financial results and economic conditions, and future events and
financial trends affecting our business, all of which are subject to known and
unknown risks, uncertainties and other important factors (in addition to those
discussed elsewhere in this report) that may cause our actual results to differ
materially from those expressed or implied by these forward- looking statements.
These risks and uncertainties include, among other things:
? our expectations regarding the continued growth of our business in Venezuela;
? government regulation;
? the strength of the U.S. dollar relative to foreign currencies and foreign
currency exchange rates;
? changes in currency restrictions and in foreign exchange rates;
? fluctuations in value of the bolivar fuerte;
? changes in estimates and assumptions underlying our critical accounting policies;
? the promulgation and adoption of new accounting standards and
interpretations, new government regulations and interpretations of existing
? political, social and economic conditions in Venezuela and possible future
currency devaluation and other changes to its exchange rate systems.
Many of these risks are beyond the Company's ability to control or predict. New
risk factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward- looking statements.
These statements are based on currently available information and management's
current assumptions, expectations and projections about future events. The
forward looking statements in this report are subject to future events, risks
and uncertainties as well as potentially inaccurate assumptions that could cause
actual results to differ materially from the Company's expectations and
projections. The material risks and uncertainties (in addition to those referred
to above) that could cause actual results to differ
materially from the Company's expectations and projections are described in
"Item 1A - Risk Factors" in Part I of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2013
filed with the SEC
on March 3, 2014
as updated by those described in "Item 1A - Risk Factors" in Part II of the
Company's First Quarter 2014 Form 10-Q. The Company notes such information for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements speak only as of the date they are made, and the
Company does not undertake to update these forward-looking statements, except as
required by law.