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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-23 compared with 2023-02-24 · 46 added, 60 removed, 74 unchanged (59% of the section changed)

1 unchanged sentence

We are exposed to market risks arising from our business operations.

These market risks arise mainly from the possibility that changes in interest rates and the U.S.

dollar exchange rate with local currencies, particularly the Brazilian Real, Argentine Peso and Mexican Peso due to those segments’ respective share of our revenues and assets, may affect the value of our financial assets and liabilities.

Latin American countries in which we operate have been negatively affected by the outbreak of COVID-19, which has generated macroeconomic instability and led to the depreciation of certain Latin American currencies.

We are also exposed to market risks arising from our long-term retention plans (“LTRPs”).

These market risks arise from our obligations to pay employees cash in amounts that vary based on the market price of our stock.

These market risks arise mainly from macroeconomic instability and the possibility that changes in interest rates and the U.S.

dollar exchange rate with local currencies, particularly the Brazilian Real, Argentine Peso and Mexican Peso due to Brazil’s, Argentina’s and Mexico’s respective share of our revenues, may affect the value of our financial assets and liabilities.

We are also exposed to market risks arising from our long-term retention programs (“LTRPs”).

These market risks arise from our obligations to pay employees cash payments in amounts that vary based on the market price of our stock.

Foreign currencies

5 unchanged sentences

These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign currency exchange rate movements.

We designate these contracts as cash flow or net investment hedges for accounting purposes.

The derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”).

We designate these contracts as cash flow, net investment and fair value hedges for accounting purposes.

The derivatives’ gain or loss for cash flow and net investment hedges is initially reported as a component of accumulated other comprehensive loss.

Cash flow hedges and net investment hedges are subsequently reclassified into the financial statement line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings.

The derivatives’ gain or loss for fair value hedges is reported in our consolidated statements of income in the same line items as the change in the value of the hedged item due to the hedged risks.

As of December 31, 2023, we hold cash and cash equivalents in local currencies in our subsidiaries, and have receivables denominated in local currencies in all of our operations.

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dollar due to the inflationary environment.

As of December 31, 2022, the total cash and cash equivalents, restricted cash and cash equivalents denominated in foreign currencies totaled $3,138 million, short-term investments denominated in foreign currencies totaled $1,491 million and accounts receivable, credit card receivables and other means of payments and loans receivable in foreign currencies totaled $4,812 million.

As of December 31, 2023, the total cash and cash equivalents, restricted cash and cash equivalent denominated in foreign currencies totaled $3,201 million, short-term investments denominated in foreign currencies totaled $2,466 million and accounts receivable, credit card receivables and other means of payments and loans receivable in foreign currencies totaled $6,482 million.

As of December 31, 2023, we had $79 million long-term investments denominated in foreign currencies.

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dollar-denominated long-term investments totaled $83 million.

For the year ended December 31, 2022, we had a consolidated loss on foreign currency of $198 million mainly related to higher foreign exchange losses attributable to the acquisition of our own common stock in the Argentine market at a price that reflects the additional cost of accessing U.S dollars through U.S.

dollar denominated securities due to restrictions imposed by the Argentine government for buying U.S.

dollars at the official exchange rate (refer to Note 25 of our audited consolidated financial statements for further detail and see also “Item 1A.

Risk Factors - Risk related to doing business in Latin America - Local currencies used in the conduct of our business are subject to depreciation, volatility and exchange controls”), and higher foreign exchange losses from our Brazilian subsidiaries.

(See “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Principal trends in results of operations—Other income (expenses), net” for more information).

See Note 2 to our audited consolidated financial statements for further detail on Argentina’s functional currency change.

Foreign Currency Sensitivity Analysis

The table below shows the impact on our net revenues, cost of net revenues, operating expenses, other income (expenses) and income tax, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to as of December 31, 2022 and for the year then ended:

For the year ended December 31, 2023, we had a consolidated loss on foreign currency of $615 million mainly related to higher foreign exchange losses attributable to our own common stock acquisition in the Argentine market at a price that reflects the additional cost of accessing U.S.

dollars through an indirect mechanism due to restrictions imposed by the Argentine government for buying U.S.

dollars at the official exchange rate, and higher foreign exchange losses from our Argentinian subsidiaries due to the devaluation of the Argentine peso during December 2023 and the acquisition of U.S.

dollars in the Argentine market at a price that reflects the additional cost of accessing U.S.

dollars through an indirect mechanism due to restrictions imposed by the Argentine government for buying U.S.

dollars at the official exchange rate.

59 | MercadoLibre, Inc.

Foreign currency sensitivity analysis

(In millions) -10% Actual +10%

The table below shows the impact on our net revenues, cost of net revenues, operating expenses, other income (expenses), income tax expense and equity in earnings of unconsolidated entity, net income and equity for a positive and a negative 10% fluctuation on all the foreign currencies to which we are exposed to as of December 31, 2023:

Actual ' +10% (2)

(In millions)

Net revenues $ 16,081 $ 14,473 $ 13,157

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Income from operations 2,089 1,823 1,606

Other income/(expenses) and income tax related to P&L items (381) (354) (331)

Other income (expenses), income tax expense and equity in earning of unconsolidated entity related to P&L items (243) (221) (213)

Foreign Currency impact related to the remeasurement of our Net Asset position (640) (615) (595)

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Total Shareholders’ Equity $ 3,435 $ 3,071 $ 2,763

$ 2,111 $ 1,827 $ 1,595

(1) Appreciation of the subsidiaries local currency against U.S.

(2) Depreciation of the subsidiaries local currency against U.S.

(1) Increase of the subsidiaries local currency against U.S.

(2) Decrease of the subsidiaries local currency against U.S.

(3) Includes cost of net revenues and operating expenses.

4 unchanged sentences

Brazilian segment

Considering a hypothetical devaluation of 10% of the Brazilian Real against the U.S.

Considering a hypothetical decrease of 10% of the Brazilian Real against the U.S.

dollar on December 31, 2023, the reported net assets in our Brazilian subsidiaries would have decreased by approximately $244 million with the related impact in Other Comprehensive Income.

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Argentina’s annual inflation rate for the years ended December 31, 2023, 2022 and 2021 was 211.4%, 94.8% and 50.9%, respectively.

We use the Argentina’s official exchange rate to account for transactions in our Argentine segment, which as of December 31, 2022, 2021 and 2020 was 177.16, 102.72 and 84.15, respectively, against the U.S.

Argentina’s annual depreciation of its local currency against the U.S.

dollar for the years ended December 31, 2022, 2021 and 2020 was 72.5%, 22.1% and 40.5%, respectively.

Considering a hypothetical devaluation of 10% of the Argentine Peso against the U.S.

dollar on December 31, 2022, the effect on non-functional currency net asset position in our Argentine subsidiaries would have been a foreign exchange loss amounting to approximately $16 million in our Argentine subsidiaries.

In the second half of 2019, the Argentine government instituted exchange controls restricting the ability of companies and individuals to exchange Argentine Pesos for foreign currencies and their ability to remit foreign currency out of Argentina.

An entity’s authorization request to the CBA to access the official exchange market to make foreign currency payments may be denied depending on the circumstances.

As a result of these exchange controls, markets in Argentina developed trading mechanisms in which an entity or individual buys U.S.

dollar denominated securities in Argentina (i.e.

shares, sovereign debt) using Argentine peso, and subsequently sells the securities for U.S.

dollars, in Argentina, to access U.S.

dollars locally, or outside Argentina, by transferring the securities abroad, prior to being sold (the latter commonly known as Blue Chip Swap Rate).

The Blue Chip Swap Rate has diverged significantly from Argentina’s official exchange rate (commonly known as exchange spread).

In recent years, the Blue Chip Swap Rate has been higher than Argentina’s official exchange rate.

As of December 31, 2022, 2021 and 2020, the spread of the Blue Chip Swap Rate was 94.2%, 96.8% and 66.7%, respectively (see Notes 2 “Summary of significant accounting policies – Argentine currency status” and 25 “Share repurchase program” of our audited consolidated financial statements) .

We use Argentina’s official exchange rate to account for transactions in our Argentine segment, which as of December 31, 2023, 2022 and 2021 was 808.45, 177.16 and 102.72, respectively, against the U.S.

For the years ended December 31, 2023, 2022 and 2021, Argentina’s official exchange rate against the U.S.

dollar increased 356.3%, 72.5% and 22.1%, respectively.

Considering a hypothetical decrease of 10% of the Argentine Peso against the U.S.

dollar on December 31, 2023, the effect on non-functional currency net liability position in our Argentine subsidiaries would have been a foreign exchange gain amounting to approximately $4 million in our Argentine subsidiaries.

See Note 2 – Summary of significant accounting policies - Foreign currency translation - Argentine currency status and macroeconomic outlook of our audited consolidated financial statements for further detail on the currency status and the exchange regulations of our Argentine segment.

Mexican segment

Considering a hypothetical devaluation of 10% of the Mexican peso against the U.S.

Considering a hypothetical decrease of 10% of the Mexican peso against the U.S.

dollar on December 31, 2023, the reported net assets in our Mexican subsidiaries would have decreased by approximately $103 million with the related impact in Other Comprehensive Income.

Additionally, we would have recorded a foreign currency loss amounting to approximately $23 million in our Mexican subsidiaries.

60 | MercadoLibre, Inc.

Our earnings and cash flows are also affected by changes in interest rates.

These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our credit card receivables and on the financial debt that we use to fund our Mercado Pago and Mercado Credito’s operations.

As of December 31, 2022, Mercado Pago’s funds receivable from credit cards and other means of payments totaled $2,946 million.

These changes could have an impact on the interest rates that financial institutions charge us prior to the time we sell our Mercado Pago receivables and on the financial debt that we use to fund Mercado Pago and Mercado Credito’s operations.

As of December 31, 2023, Mercado Pago’s receivables totaled $3,632 million.

Interest rate fluctuations could also impact interest earned through our Mercado Credito solution.

As of December 31, 2022, loans receivable net of the allowance for doubtful accounts under our Mercado Credito solution totaled $1,736 million.

As of December 31, 2023, loans receivable net of the allowance for doubtful accounts from our Mercado Credito solution totaled $2,694 million.

Interest rate fluctuations could also negatively affect certain of our fixed rate and floating rate investments comprised primarily of time deposits, money market funds and sovereign debt securities.

2 unchanged sentences

As of December 31, 2023, our short-term investments amounted to $3,480 million and our long-term investments amounted to $162 million.

Our short-term investments, except for the $1,219 million related to the Central Bank of Brazil mandatory guarantee, can be readily converted at any time into cash or into securities with a shorter remaining time to maturity.

Our short-term investments can be readily converted at any time into cash or into securities with a shorter remaining time to maturity.

We determine the appropriate classification of our investments at the time of purchase and re-evaluate such designations as of each balance sheet date.

See Note 3 – Fintech Regulations and Note 5 – Cash, cash equivalents, restricted cash and cash equivalents and investments of our audited consolidated financial statements for further detail on our restricted investments.

Fluctuations of the interest rate could also have a negative impact on interest expense related to our Loans payable and other financial liabilities, as a portion of these instruments is subject to variable interest rates.

As of December 31, 2022, our loans payable and other financial liabilities which accrue interest based on variable rates amounted to $2,615 million.

See Notes 17 and 21 of our audited consolidated financial statements for further detail.

As of December 31, 2023, our loans payable and other financial liabilities which accrue interest based on variable rates amounted to $2,810 million, while our loans payable and other financial liabilities, which accrue interest based on fixed rates, amounted to $1,685 million.

See Note 17 – Loans payable and other financial liabilities and Note 21 – Securitization transactions of our audited consolidated financial statements for further detail.

Considering a hypothetical increase of 100 basis points in the interest rates, the reported Loans payable and other financial liabilities as of December 31, 2023 would have increased by approximately $16 million with the related impact in Interest expense and other financial losses.

We have entered into swap contracts to hedge the interest rate fluctuation of $489 million notional amount, $244 million of which have been designated as hedging instruments.

See Note 24 of our audited consolidated financial statements for further detail on derivatives instruments.

See Note 24 – Derivative instruments of our audited consolidated financial statements for further detail on derivatives instruments.

Equity price risk

Our board of directors, upon the recommendation of the compensation committee, approved the 2018 Long Term Retention Plan (the “2018 LTRP”).

In order to receive an award under the 2018 LTRP, each eligible employee must satisfy the performance conditions established by the board of directors for such employee.

If these conditions are satisfied, the eligible employee will, subject to his or her continued employment as of each applicable payment date, receive the full amount of his or her 2018 LTRP award, payable as follows:

• the eligible employee will receive a fixed payment, equal to 8.333% of his or her 2018 LTRP bonus once a year for a period of six years starting no later than April 30, 2019 respectively (the “2018 Annual Fixed Payment”);

• on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2018 Variable Payment”) equal to the product of (i) 8.333% of the applicable 2018 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b) the denominator, equals the 2017 Stock Price, defined as $270.84, which was the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2017.

The “Applicable Year Stock Price” shall equal the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of the year preceding the applicable payment date.

Our board of directors, upon the recommendation of the compensation committee, approved the 2019, 2020, 2021 and 2022 Long Term Retention Program (the “2019, 2020, 2021 and 2022 LTRPs”), respectively, under which certain eligible employees have the opportunity to receive cash payments annually for a period of six years (with the first payment occurring no later than April 30, 2020 and 2021 for the 2019 and 2020 LTRPs, respectively, and no later than January 31, 2022 and 2023 for the 2021 and 2022 LTRPs, respectively).

Our board of directors, upon the recommendation of the compensation committee, approved the 2019, 2020, 2021, 2022 and 2023 Long Term Retention Programs (the “2019, 2020, 2021, 2022 and 2023 LTRPs”), respectively, under which certain eligible employees have the opportunity to receive cash payments annually for a period of six years (with the first payment occurring no later than April 30, 2020, 2021, 2022, 2023 and 2024 for the 2019, 2020, 2021, 2022 and 2023 LTRPs, respectively).

In order to receive the full target award under the 2019, 2020, 2021, 2022 and/or 2023 LTRPs, each eligible employee must remain employed as of each applicable payment date.

The 2019, 2020, 2021, 2022 and 2023 LTRP awards are payable as follows:

• the eligible employee will receive 16.66% of half of his or her target 2019, 2020, 2021 and/or 2022 LTRP bonus once a year for a period of six years, with the first payment occurring no later than April 30, 2020 and 2021, and no later than January 31, 2022 and 2023, respectively (the “2019, 2020, 2021 or 2022 Annual Fixed Payment”, respectively);

■ the eligible employee will receive 16.66% of half of his or her target 2019, 2020, 2021, 2022 and/or 2023 LTRP bonus once a year for a period of six years, with the first payment occurring no later than April 30, 2020, 2021, 2022, 2023 and 2024, respectively (the “2019, 2020, 2021, 2022 or 2023 Annual Fixed Payment”, respectively);

■ on each date we pay the respective Annual Fixed Payment to an eligible employee, he or she will also receive a payment (the “2019, 2020, 2021, 2022 or 2023 Variable Payment”) equal to the product of (i) 16.66% of half of the target 2019, 2020, 2021, 2022 or 2023 LTRP award and (ii) the quotient of (a) divided by (b), where (a), the numerator, equals the Applicable Year Stock Price (as defined below) and (b), the denominator, equals the average closing price of our common stock on the NASDAQ Global Select Market during the final 60 trading days of 2018, 2019, 2020, 2021 and 2022 defined as $322.91, $553.45, $1,431.26, $1,391.81 and $888.69 for the 2019, 2020, 2021, 2022 and 2023 LTRPs, respectively.

1 unchanged sentence

As of December 31, 2023, the total contractual obligation fair value of our outstanding LTRP Variable Award Payment obligation subject to equity price risk amounted to $418 million.

As of December 31, 2022, the accrued liability related to the outstanding Variable Award Payment of the LTRP included in Salaries and social security payable and Non-current other liabilities in our consolidated balance sheet amounted to $58 million.

As of December 31, 2023, the accrued liability related to the outstanding Variable Award Payment of the LTRP included in Salaries and social security payable in our consolidated balance sheet amounted to $104 million.

The following table shows a sensitivity analysis of the risk associated with our total contractual obligation fair value related to the outstanding LTRP Variable Award Payment subject to equity price risk if our common stock price per share were to increase or decrease by up to 40%:

As of December 31, 2022

61 | MercadoLibre, Inc.

Change in equity price in percentage As of December 31, 2023

MercadoLibre, Inc

Equity Price 2019, 2020, 2021, 2022 and 2023 LTRP Variable contractual obligation

(In millions, except equity price)

Change in equity price in percentage

40% 2,210.74 585

2 unchanged sentences

10% 1,737.01 460

Static (*) 850.47 157

-10% 1,421.19 376

3 unchanged sentences

(1) Present value of average closing stock price for the last 60 trading days of the year preceding the applicable payment date.

In November 2021, we acquired Kangú Participações S.A.

Former Kangú’s shareholders who after the acquisition became the Company’s employees will receive cash payments annually over a three-year period subject to certain performance and stay conditions.

In November 2021, we acquired Kangu Participações S.A.

Former Kangu’s shareholders who after the acquisition became the Company’s employees will receive cash payments annually over a three-year period subject to certain performance and stay conditions.

The payments will be indexed based on changes in equity price of our Common Stock.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk