8-KFinancial Events

MERCADOLIBRE INC 8-K Report, Material Impairment (May 16, 2014)

Filed May 16, 2014For Securities:MELI

Summary

MercadoLibre, Inc. (MELI) filed an 8-K on May 16, 2014, to report a significant change in its foreign exchange practices in Venezuela and the related financial implications. Due to persistent difficulties in accessing U.S. dollars through the SICAD 1 exchange rate mechanism, the company is shifting to the SICAD 2 mechanism, which became operational in March 2014. This change reflects an acknowledgment that the SICAD 2 rate, significantly weaker than SICAD 1, will now be used for re-measuring its bolivar-denominated assets and liabilities and its Venezuelan subsidiary's revenues and expenses. This strategic shift is expected to result in a substantial one-time charge in the second quarter of 2014, estimated between $47.0 million and $57.0 million, primarily related to the impairment of long-lived assets, goodwill, and intangible assets that are no longer deemed recoverable under the new economic conditions. Additionally, the company anticipates a foreign exchange loss of $14.5 million to $21.5 million, partially offset by a deferred income tax gain. The revaluation is also projected to reduce Venezuelan segment revenues by approximately $12 million to $18 million for the second quarter of 2014.

Key Highlights

  • 1MercadoLibre is changing its Venezuelan foreign exchange settlement mechanism from SICAD 1 to SICAD 2 due to unsuccessful access to SICAD 1.
  • 2The company will now use the SICAD 2 exchange rate (49.98 bolivares fuertes per U.S. dollar) for re-measuring bolivar-denominated monetary assets/liabilities and Venezuelan subsidiary revenues/expenses, effective May 16, 2014.
  • 3A significant one-time charge between $47.0 million and $57.0 million is expected in Q2 2014 due to impairment of long-lived assets, goodwill, and intangible assets.
  • 4The company anticipates a foreign exchange loss of $14.5 million to $21.5 million in Q2 2014, with a related deferred income tax gain of $6.5 million to $9.5 million.
  • 5Second quarter 2014 revenues for the Venezuelan segment are expected to be reduced by approximately $12 million to $18 million due to the SICAD 2 exchange rate impact.
  • 6No significant cash expenditures are expected in the next several years related to these Venezuelan operations charges, outside of ordinary course operating expenses.

Frequently Asked Questions

MercadoLibre is changing its foreign exchange mechanism in Venezuela because it has been unsuccessful in accessing U.S. dollars through the SICAD 1 auction system. The company will now utilize the SICAD 2 system, which is an open mechanism that allows any company to request dollars for any purpose, to settle its transactions and request dividend distributions.

The company expects a significant one-time charge of approximately $47.0 million to $57.0 million in the second quarter of 2014, primarily due to impairments of assets. It also anticipates a foreign exchange loss of $14.5 million to $21.5 million and a reduction in Venezuelan segment revenues for Q2 2014 by $12 million to $18 million, partially offset by a deferred income tax gain.

The company states that, outside of ordinary course operating expenses, it 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.

SICAD 1 was the primary foreign exchange system used by MercadoLibre to obtain foreign currencies for its transactions. SICAD 2 is a newer system announced in February 2014 and operational from March 24, 2014. The key difference highlighted is that the SICAD 2 exchange rate (49.98 bolivares fuertes per U.S. dollar at the time of the filing) is significantly weaker than the SICAD 1 rate (10.0 bolivares fuertes per U.S. dollar), leading to a substantial reduction in the U.S. dollar equivalent of bolivar-denominated transactions and assets.