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MERCADOLIBRE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward-Looking Statements Certain statements regarding our future performance 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 generally relate to information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Such forward-looking statements reflect, among other things, our current expectations, plans, projections and strategies, anticipated financial results, 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 online commerce and Internet usage in Latin America; • our ability to expand our operations and adapt to rapidly changing technologies; • government regulation; • litigation and legal liability; • systems interruptions or failures; • our ability to attract and retain qualified personnel; • consumer trends; • security breaches and illegal uses of our services; • competition; • reliance on third-party service providers; • enforcement of intellectual property rights; • our ability to attract new customers, retain existing customers and increase revenues; • seasonal fluctuations; and • political, social and economic conditions in Latin America in general, and Venezuela and Argentina in particular, including Venezuela's status as a highly inflationary economy and the changes to the exchange rate system, by including the Complementary System for the Administration of Foreign Currencies (SICAD-as for its Spanish acronym). Many of these risks are beyond our 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 our 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 our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. These statements are not guarantees of future performance. They are subject to future events, risks and uncertainties as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. The material risks and uncertainties (in addition to those referred to above and elsewhere in this report) that could cause actual results to differ materially from our expectations and projections are described in "Item 1A - Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on February 28, 2013 and in other reports we file from time to time with the U.S. Securities and Exchange Commission ("SEC"). 27 -------------------------------------------------------------------------------- Table of Contents You should read that information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, our unaudited condensed consolidated financial statements and related notes in Item 1 of Part I of this report and our audited consolidated financial statements and related notes in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2012. We note such information for investors as permitted by the Private Securities Litigation Reform Act of 1995. There also may be other factors that we cannot anticipate or that are not described in this report, generally because they are unknown to us or we do not perceive them to be a material risk at this time that could cause results to differ materially from our expectations. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements except as may be required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC. The discussion and analysis of our financial condition and results of operations has been organized to present the following: • a brief overview of our company; • a discussion of our principal trends and results of operations for the three-month periods ended March 31, 2013 and 2012; • a review of our financial presentation and accounting policies, including our critical accounting policies; • a discussion of the principal factors that influence our results of operations, financial condition and liquidity; • a discussion of our liquidity and capital resources, a discussion of our capital expenditures and a description of our contractual obligations; and • a discussion of the market risks that we face. Business Overview MercadoLibre, Inc. (together with its subsidiaries "us", "we", "our" or the "company") hosts the largest online commerce platform in Latin America located at www.mercadolibre.com, which is focused on enabling e-commerce and its related services. Our services are designed to provide our users with mechanisms for buying, selling, paying, collecting, generating leads and comparing transactions via e-commerce in an effective and efficient manner. We are market leaders in e-commerce in each of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on unique visitors and page views. Additionally, we also operate online commerce platforms in the Dominican Republic, Panama and Portugal. Through our online commerce platform, we provide buyers and sellers with a robust online commerce environment that fosters the development of a large and growing e-commerce community in Latin America, a region with a population of over 584 million people and one of the fastest-growing Internet penetration rates in the world. We believe that we offer a technological and commercial solution that addresses the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America. We offer our users an eco-system of four related e-commerce services: the MercadoLibre Marketplace, the MercadoPago payments solution, the MercadoClics advertising program and the MercadoShops on-line stores solution. The MercadoLibre Marketplace, which we sometimes refer to as our marketplace, is a fully-automated, topically-arranged and user-friendly online commerce service. This service permits both businesses and individuals to list items and conduct their sales and purchases online in either a fixed-price or auction-based format. Additionally, through online classified listings, our registered users can list and purchase motor vehicles, vessels, aircraft, real estate and services. Any Internet user can browse through the various products and services that are listed on our web site and register with MercadoLibre to list, bid for and purchase items and services. To complement the MercadoLibre Marketplace, we developed MercadoPago, an integrated online payments solution. MercadoPago is designed to facilitate transactions both on and off the MercadoLibre Marketplace by providing a mechanism that allows our users to securely, easily and promptly send, receive and finance payments online. As a further enhancement to the MercadoLibre Marketplace, in 2009, we launched our MercadoClics program to enable businesses to promote their products and services on the Internet. Through MercadoClics (our advertising service) users and advertisers are able to place display and/or text advertisements on our web pages in order to promote their brands and offerings. MercadoClics offers advertisers a cost efficient and automated platform that enables advertisers to acquire traffic through advertisements placed on our platform. Advertisers purchase, on a cost per clicks basis, advertising space that appears around product search results for specific categories and other pages. These advertising placements are clearly differentiated from product search results and direct traffic both to and off our platform depending on the advertiser. 28 -------------------------------------------------------------------------------- Table of Contents To close out our suite of e-commerce services, during 2010 we launched the MercadoShops on-line stores solution. Through MercadoShops users can set-up, manage and promote their own on-line webstores. These webstores are hosted by MercadoLibre and offer integration with the other marketplace, payments and advertising services we offer. Users can choose from a basic, free webstore or pay monthly subscriptions for enhanced functionality and value added services on their stores. Reporting Segments and Geographic information Our segment reporting is based on geographic areas, which is the current criteria we are using to evaluate our segment performance. Our geography segments include Brazil, Argentina, Mexico, Venezuela and other countries (including Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay and United States of America (real estate classified in the State of Florida)). Recent developments Acquisition of a software development company On March 22, 2013, the Company completed, through its subsidiaries Meli Participaciones S.L. (ETVE) and MercadoLibre S.R.L. (MercadoLibre Argentina) (together referred to as the "Buyer"), the acquisition of the 100% of equity interest in a software development company located and organized under the laws of the Province of Cordoba, Argentina. The objective of the acquisition was to enhance the capabilities of the Company in terms of software development. The aggregate purchase price for the acquisition of the 100% of the acquired business was $ 3.5 million (settled in Argentine pesos 17.7 million). On such same date, the Buyer paid and agreed to paid the purchase price as follows: i) $ 2.2 million paid in cash; ii) set an escrow amounting to $ 0.5 million for a 24-months period, aiming to cover unexpected liabilities and working capital; iii) set an escrow amounting to $ 0.5 million for a 36-months period, aiming to continue the employment relationship of certain key employees; and iv) $ 0.2 million subject to the collection of certain credits held by the acquired company with certain customer. Acquisition of office building On April 2013, the Argentine subsidiary agreed to acquire three floors or 3,865 square meters in a new office building located in Buenos Aires for a total amount of $18.0 million plus VAT. The price will be paid in Argentine pesos. At the date of this report, the Company paid $0.4 million plus VAT in advance and will pay $3.2 million plus VAT at the date of the signing of the purchase agreement. The remaining $14.4 million plus VAT will be paid in seven monthly installments beginning in June 2013. Description of line items Net revenues We recognize revenues in each of our five reporting segments. Our reporting segments include our operations in Brazil, Argentina, Mexico, Venezuela and other countries (Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, Portugal, Uruguay and United States of America). We offer three types of up-front fees for three different combinations of placement and features. Up-front fees are charged at the time the listing is uploaded onto our platform and are not subject to successful sale of the items listed. Revenues from MercadoLibre Marketplace transactions are generated by: • up-front fees (including classifieds revenues); • final value fees; and • online advertising fees. Since the third quarter of 2010, we have offered payment processing through our MercadoPago solution at no added cost in Brazil and Argentina. On April 15, 2011 and November 10, 2011, we launched a new and improved version of our MercadoPago payments platform that may be used for all our marketplace transactions in Mexico and Venezuela, respectively. We also made offering MercadoPago mandatory in our Mexican, and more recently, in our Venezuelan, marketplace listings (with the exception of free listings). This change in pricing results, with respect to marketplace transactions, in our no longer charging our users in Mexico or Venezuela a specific fee for processing on-platform payments as we did in the past. When more than one service is included in one single arrangement with the customer, we recognize revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective selling prices. 29-------------------------------------------------------------------------------- Table of Contents We continue generating payment related revenues, reported within each of our reporting segments, attributable to: • commissions charged to sellers for the use of the MercadoPago on off-marketplace-platform transactions; and • revenues from financing that occurred when a buyer elects to pay in installments through our MercadoPago platform, fortransactions that occur either on or off our marketplace platform. The following table sets forth the percentage of consolidated net revenues by segment for the three-month periods ended March 31, 2013 and 2012: Three-Month Period Ended March 31, (% of total consolidated net revenues) 2013 2012 Brazil 46.5 % 50.4 % Argentina 24.9 21.6 Venezuela 14.7 13.4 Mexico 7.6 7.9 Other Countries 6.2 6.7 (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding. The following table summarizes the changes in net revenues for the three-month periods ended March 31, 2013 and 2012: Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Net Revenues: Brazil $ 47.8 $ 42.2 $ 5.6 13.3 % Argentina 25.6 18.1 7.5 41.4 Venezuela 15.1 11.2 3.9 34.6 Mexico 7.8 6.6 1.2 18.3 Other Countries 6.4 5.6 0.8 14.0 Total Net Revenues $ 102.7 $ 83.7 $ 19.0 22.7 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding. We have a highly fragmented customer revenue base given the large numbers of sellers and buyers who use our platforms. For the three-month periods ended March 31, 2013 and 2012, no single customer accounted for more than 5.0% of our net revenues. Our MercadoLibre Marketplace is available in thirteen countries (Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela), and MercadoPago is available in six countries (Argentina, Brazil, Chile, Colombia, Mexico and Venezuela). The functional currency for each country's operations is the country's local currency, except for Venezuela where the functional currency is the U.S. dollar due to Venezuela's status as a highly inflationary economy. See - "Critical accounting policies and estimates - Foreign Currency Translation" included below. Therefore, our net revenues are generated in multiple foreign currencies and then translated into U.S. dollars at the average monthly exchange rate. Our subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as a cost of net revenues. These taxes represented 6.2% and 6.5% of net revenues for the three-month periods ended March 31, 2013 and 2012. Cost of net revenues Cost of net revenues primarily represents bank and credit card processing charges for transactions and fees paid with credit cards and other payment methods, fraud prevention fees, certain taxes on revenues, compensation for customer support personnel, ISP connectivity charges, depreciation and amortization and hosting and site operation fees. 30-------------------------------------------------------------------------------- Table of Contents Product and technology development expenses Our product and technology development related expenses consist primarily of compensation for our engineering and web-development staff, depreciation and amortization costs related to product and technology development, telecommunications costs and payments to third-party suppliers who provide technology maintenance services to us. Sales and marketing expenses Our sales and marketing expenses consist primarily of marketing costs for our platforms through online and offline advertising, bad debt charges, chargebacks related to MercadoPago operation, the salaries of employees involved in these activities, public relations costs, marketing activities for our users and depreciation and amortization costs. We carry out the vast majority of our marketing efforts on the Internet. In that context, we enter into agreements with portals, search engines, social networks, ad networks and other sites in order to attract Internet users to the MercadoLibre Marketplace and convert them into confirmed registered users and active traders on our platform. Additionally, we occasionally allocate a portion of our marketing budget to cable television advertising in order to improve our brand awareness and to complement our online efforts. We also work intensively on attracting, developing and growing our seller community through our supply efforts. We have dedicated professionals in most of our operations that work with sellers, through trade show participation, seminars and meetings to provide them with important tools and skills to become effective sellers on our platform. General and administrative expenses Our general and administrative expenses consist primarily of salaries for management and administrative staff, compensation for outside directors, long term retention plan compensation, expenses for legal, accounting and other professional services, insurance expenses, office space rental expenses, travel and business expenses, as well as depreciation and amortization costs. General and administrative expenses include the costs of the following areas of our company: general management, finance, administration, accounting, legal and human resources. Other (expenses) income, net Other income (expenses) consists primarily of interest income derived from our investments and cash equivalents, foreign currency gains or losses, and other non-operating results. Income and asset tax We are subject to federal and state taxes in the United States, as well as foreign taxes in the multiple jurisdictions where we operate. Our tax obligations consist of current and deferred income taxes and asset taxes incurred in these jurisdictions. We account for income taxes following the liability method of accounting. Therefore, our income tax expense consists of taxes currently payable, if any (given that in certain jurisdictions we still have net operating loss carry-forwards), plus the change during the period in our deferred tax assets and liabilities. Critical accounting policies and estimates The preparation of our unaudited condensed consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our audit committee and board of directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our condensed consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our unaudited condensed consolidated financial statements, the notes thereto and other disclosures included in this report. There have been no significant changes in critical accounting policies, management estimates or accounting policies followed since the year ended December 31, 2012. 31 -------------------------------------------------------------------------------- Table of Contents Foreign Currency Translation Historically, all of our foreign operations have used the local currency as their functional currency. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using period/year-end exchange rates while income and expense accounts are translated at the average rates in effect during the period/year. The resulting translation adjustment is recorded as part of other comprehensive income (loss), a component of equity. Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency exchange losses or gains are included in the consolidated statements of income under the caption "Foreign currency loss". Venezuelan currency status In accordance with U.S. GAAP, we have classified our Venezuelan operations as highly inflationary as from January 1, 2010, using the U.S. dollar as the functional currency for purposes of reporting our financial statements. Therefore, no translation effect has been accounted for in other comprehensive income related to our Venezuelan operations. On May 14, 2010, the Venezuelan government enacted reforms to its exchange regulations making the Venezuelan Central Bank (BCV) the only institution that could legally authorize the purchase or sale of foreign currency bonds, thereby excluding non-authorized brokers from the foreign exchange market. Under this system, known as the SITME, entities domiciled in Venezuela could purchase U.S. dollar-denominated securities only through banks authorized by the BCV to import goods, services or capital goods. We began to use the SITME rate and started re-measuring foreign currency transactions using the SITME rate published by BCV, which has been settled at Bolivares Fuertes 5.3. On February 8, 2013, the Government of Venezuela, through the Foreign Exchange Agreement No. 14, has devalued as from February 9, 2013, the official exchange rate from 4.3 to 6.3 Bolivares Fuertes per U.S. dollars. The devaluation required re-measurement of the Company's Venezuelan subsidiaries' non-U.S. dollar denominated monetary assets and liabilities as from February 9, 2013. This devaluation has generated a foreign currency loss of approximately $6.4 million. In addition, on February 8, 2013, the Government of Venezuela, through Decree No. 9381 (the "Decree") has created the Organo Superior para la Optimización del Sistema Cambiario (or the "Committee"), a committee that will have the authority to design, plan and execute foreign exchange policies. Finally, on February 9, 2013, the BCV has eliminated the SITME. On March 19, 2013, the BCV announced the creation of the Sistema Complementario de Administración de Divisas (Complementary System for the Administration of Foreign Currencies - or SICAD) and it will act jointly with CADIVI. In order to operate with this new system, the companies should be registered at the Registro Automatizado (Automatized Register - or RUSAD). The acquisition of foreign currencies under this new system will be organized under an auction process where the minimum exchange rate to be offered would be 6.30 Bolivares Fuertes. At the date of this report, we were unable to access to the auction process and there is no information available on the details or planned frequency of the SICAD mechanism. There can be no assurance that the SICAD market will provide a currency exchange in a manner widely available to the extent that our Venezuelan operations will be able to obtain U.S. dollars for dividends remittances. Accordingly, as of March 31, 2013, the exchange rate used to re-measure our net monetary assets of our Venezuelan operations was 6.30 Bolivares Fuertes per U.S. dollar. Until 2010 we were able to obtain U.S. dollars using alternative mechanisms other than through the Commission for the Administration of Foreign Exchange (CADIVI). These U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. No dividends were distributed since 2011 from our Venezuelan subsidiaries. The following table sets forth the assets, liabilities and net assets of our Venezuelan subsidiaries, before intercompany eliminations, as of March 31, 2013 and December 31, 2012 and net revenues for the three-month periods ended March 31, 2013 and 2012. For the three months ended March 31, 2013 2012 Venezuelan operations Net Revenues $ 15,130,551 $ 11,241,572 As of March 31, As of December 31, 2013 2012 Assets 60,364,056 62,938,728 Liabilities (20,966,195 ) (22,652,965 ) Net Assets $ 39,397,861 $ 40,285,763 32 -------------------------------------------------------------------------------- Table of Contents As of March 31, 2013, net assets of our Venezuelan subsidiaries amount to approximately 13.1% of our consolidated net assets, and cash and investments of our Venezuelan subsidiaries held in local currency in Venezuela amount to approximately 14.6% of our consolidated cash and investments. Our business and ability to obtain U.S. dollars in Venezuela are negatively affected by the abovementioned devaluation and exchange regulations in Venezuela. In addition, our business and ability to obtain U.S. dollars in Venezuela would be further negatively affected by additional devaluations or the imposition of additional or more stringent controls on foreign currency exchange that the government of Venezuela may decide in the future. Despite the current difficult macroeconomic environment in Venezuela, we continue to actively manage, through our Venezuelan subsidiaries, our investment in and exposure to Venezuela. Based on current operating, political and economic conditions and certain other factors in Venezuela, we continue to believe that our business plans and operating strategy in Venezuela will not be materially adversely impacted in the long run. Argentine currency status The Argentine government has implemented certain measures that control and restrict the ability of companies and individuals to exchange Argentine Pesos for foreign currencies. Those measures include, among other things, the requirement to obtain the prior approval from the Argentine Tax Authority of the foreign currency transaction (for example and without limitation, for the payment of non-Argentine goods and services, payment of principal and interest on non-Argentine debt and also payment of dividends to parties outside of the country), which approval process could delay, and eventually restrict, the ability to exchange Argentine pesos for other currencies, such as U.S. dollars. Those approvals are administered by the Argentine Central Bank through the Local Exchange Market ("Mercado Unico Libre de Cambios" or "MULC"), which is the only market where exchange transactions may be lawfully made. Further, restrictions also currently apply to the acquisition of any foreign currency for holding as cash within Argentina. Although the controls and restrictions on the acquisition of foreign currencies in Argentina do place certain limitations on our current ability to convert cash generated by our Argentine subsidiaries to currencies different from the Argentine peso, based on the current state of Argentine currency rules and regulations, we do not expect that the current controls and restrictions, will have a material adverse effect on our business plans in Argentina nor on our overall business, financial condition and results of operations. Allowances for doubtful accounts and for chargebacks We are exposed to losses due to uncollectible accounts and credits to sellers. Allowances for these items represent our estimate of future losses based on our historical experience. The allowances for doubtful accounts and for chargebacks are recorded as charges to sales and marketing expenses. Historically, our actual losses have been consistent with our charges. However, future adverse changes to our historical experience for doubtful accounts and chargebacks could have a material impact on our future consolidated statements of income and cash flows. We believe that the accounting estimate related to allowances for doubtful accounts and for chargebacks is a critical accounting estimate because it requires management to make assumptions about future collections and credit analysis. Our management's assumptions about future collections require significant judgment. Legal contingencies In connection with certain pending litigation and other claims, we have estimated the range of probable loss and provided for such losses through charges to our condensed consolidated statement of income. These estimates are based on our assessment of the facts and circumstances and historical information related to actions filed against the Company at each balance sheet date and are subject to change based upon new information and future events. From time to time, we are involved in disputes that arise in the ordinary course of business. We are currently involved in certain legal proceedings as described in "Legal Proceedings" in Item 1 of Part II of this report, Item 3 of Part I of our annual report on Form 10-K for our fiscal year ended December 31, 2012 and in Note 7 to our unaudited interim condensed consolidated financial statements, included in this report. We believe that we have meritorious defenses to the claims against us, and we will defend ourselves accordingly. However, even if successful, our defense could be costly and could divert management's time. If the plaintiffs were to prevail on certain claims, we might be forced to pay damages or modify our business practices. Any of these consequences could materially harm our business and could have a material adverse impact on our financial position, results of operations or cash flows. Results of operations for the three-month period ended March 31, 2013 compared to three-month period ended March 31, 2012 The selected financial data for the three-month periods ended March 31, 2013 and 2012 have been derived from our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. These statements include all normal recurring adjustments that management believes are necessary to fairly state our financial position, results of operations and cash flows. Results of operations for the three-month periods ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013 or for any other period. 33-------------------------------------------------------------------------------- Table of Contents Statement of income data Three Months Ended March 31, (In millions) 2013 (*) 2012 (*) (Unaudited) Net revenues $ 102.7 $ 83.7 Cost of net revenues (28.6 ) (21.1 ) Gross profit 74.1 62.6 Operating expenses: Product and technology development (9.4 ) (7.6 ) Sales and marketing (22.3 ) (17.4 ) General and administrative (13.8 ) (12.7 ) Total operating expenses (45.5 ) (37.7 ) Income from operations 28.6 24.9 Other income (expenses): Interest income and other financial gains 3.4 3.1 Interest expense and other financial charges (0.4 ) (0.1 ) Foreign currency losses (6.2 ) (1.0 ) Other losses, net (0.0 ) (.0 ) Net income before income / asset tax expense 25.4 26.9 Income / asset tax expense (7.8 ) (7.3 ) Net income $ 17.5 $ 19.6 Less: Net Income attributable to Noncontrolling .0 .0 Net income available to common shareholders $ 17.5 $ 19.6 (*) The table above may not add due to rounding. Other Data Three Months Ended March 31, (In millions) 2013 2012Number of confirmed registered users at end of the period 1 85.7 69.5 Number of confirmed new registered users during the period 2 4.2 3.6 Gross merchandise volume 3 1,563.3 1,321.7 Number of items sold 4 18.1 15.0 Total payment volume 5 532.1 370.1 Total payment transactions 6 6.7 4.9 Capital expenditures 6.7 3.0 Depreciation and amortization 2.6 2.0 1- Measure of the cumulative number of users who have registered on the MercadoLibre Marketplace and confirmed their registration. 2- Measure of the number of new users who have registered on the MercadoLibre Marketplace and confirmed their registration. 3- Measure of the total U.S. dollar sum of all transactions completed through the MercadoLibre Marketplace, excluding motor vehicles, vessels, aircraft and real estate. 4- Measure of the number of items that were sold/purchased through the MercadoLibre Marketplace. 5- Measure of the total U.S. dollar sum of all transactions paid for using MercadoPago. 6- Measure of the number of all transactions paid for using MercadoPago. 34 -------------------------------------------------------------------------------- Table of Contents Net revenues Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Total Net Revenues $ 102.7 $ 83.7 $ 19.0 22.7 % As a percentage of net revenues (*) 100.0 % 100.0 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding. The 22.7% growth in net revenues in the first quarter of 2013 as compared to the same period of 2012 resulted mainly from a 18.3% increase in the gross merchandise volume ("GMV") transacted through our platform during the first quarter of 2013 as compared to the same period of 2012. This GMV growth resulted from a 20.5% increase in items sold when comparing those periods. Non-marketplace revenues from financing and off-platform payments grew 44.9% in the first quarter of 2013 as compared to the same period in 2012, mainly as a consequence of a 43.8% increase in the total payments volume ("TPV") paid using MercadoPago. Finally, classified and ad sales revenues for the first quarter of 2013 grew 20.7% as compared to the same period of 2012. Measured in local currencies, net revenues grew 36.3% during the three-month period ended March 31, 2013 as compared to the same period in 2012. The local currency revenue growth was calculated by using the average monthly exchange rates for each month during 2012 and applying them to the corresponding months in 2013, so as to calculate what our financial results would have been had exchange rates remained stable from one year to the next. The following table summarizes the changes in net revenues by each reporting segment for the three-month periods ended March 31, 2013 and 2012: Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Net Revenues: Brazil $ 47.8 $ 42.2 $ 5.6 13.3 % Argentina 25.6 18.1 7.5 41.4 Venezuela 15.1 11.2 3.9 34.6 Mexico 7.8 6.6 1.2 18.3 Other Countries 6.4 5.6 0.8 14.0 Total Net Revenues $ 102.7 $ 83.7 $ 19.0 22.7 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The table above may not total due to rounding. On a segment basis, our net revenues for the three-month periods ended March 31, 2013 and 2012, increased across all segments. 35-------------------------------------------------------------------------------- Table of Contents The following table sets forth our total net revenues and the sequential quarterly growth of these net revenues for the periods described below: Quarter Ended March 31, June 30, September 30, December 31, (in millions, except percentages) (*) 2013 Net Revenues $ 102.7 n/a n/a n/a Percent change from prior quarter -1 % 2012 Net Revenues $ 83.7 $ 88.8 $ 97.3 $ 103.8 Percent change from prior quarter -3 % 6 % 9 % 7 % 2011 Net Revenues $ 61.5 $ 69.4 $ 81.6 $ 86.5 Percent change from prior quarter -1 % 13 % 18 % 6 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. Cost of net revenues Three-Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Total cost of net revenues $ 28.6 $ 21.1 $ 7.5 35.7 % As a percentage of net revenues (*) 27.9 % 25.2 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013, the increase in cost of net revenues as compared to the same period of 2012 was primarily attributable to an increase of collection fees by $3.1 million. The increase in collection fees, which occurred primarily in Brazil and Argentina, was a result of the higher penetration of our payment solution into our marketplace, which derived in higher collection fee cost and additional collections related services contracted. For the three months ended March 31, 2013, total TPV represents 34.0% of our total GMV (excluding motor vehicles, vessels, aircraft and real estate) as compared to 28.0% for the three months ended 2012. Moreover, during the three months ended March 31, 2013 as compared to the same period in 2012, expenditures related to our in-house customer support operations increased by $1.8 million, or 35.6%, primarily driven by an increase in compensation and recruitment costs, and increased investments in customer service operations to improve our users' experience. The increased compensation costs and recruitment operational are incurred in order to improve our service and our initiatives to combat fraud, illegal items and fee evasion. In addition, sales taxes and other operational taxes increased by $0.9 million, or 16.2%, as compared to the same period in 2012, mainly as a consequence of increases in net revenues. For the three-month period ended March 31, 2013, our hosting cost increased by $0.6 million as compared to the same period in 2012. Finally, our fraud prevention cost increased by $0.7 million as compared to the same period in 2012. Product and technology development Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Product and technology development $ 9.4 $ 7.6 $ 1.8 23.7 % As a percentage of net revenues (*) 9.1 % 9.1 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013, the growth in product and technology development expenses as compared to the same period in 2012, was primarily attributable to an increase of $1.0 million, or 24.9%, in compensation costs. This increase in compensation expenses were primarily related to increases in compensation costs and to the addition of engineers, as we continue to invest in top quality talent to develop enhancements and new features across our platforms. We believe product development is one of our key competitive advantages and intend to continue to invest in adding engineers to meet the increasingly sophisticated product expectations of our customer base. 36-------------------------------------------------------------------------------- Table of Contents Product and technology development expenses also grew during the three-month period ended March 31, 2013 as compared to the same period in 2012 as a consequence of an increase of $0.5 million, or 41.0%, in depreciation and amortization expenses and an increase of $ 0.2 million, or 19.6%, in other product development expenses. Sales and marketing Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Sales and marketing $ 22.3 $ 17.4 $ 4.9 28.2 % As a percentage of net revenues (*) 21.7 % 20.8 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013, the $4.9 million increase in sales and marketing expenses as compared to the same period in 2012 was primarily attributable to: i) an increase of $1.8 million in total chargebacks expenses mainly attributable to our Brazilian operation; ii) an increase of $1.5 million in salaries as compared to the same period in 2012, driven by higher salaries to retain talent; iii) on-line marketing increased by $1.0 million, or 25.5%, as compared to the same period of 2012. In addition, off-line marketing also increased by $1.0 million, from $0.1 million during the three months ended March 31, 2012 to $1.1 million in the same period of 2013 mainly as a consequence of the production of new campaigns in Latin American television; iv) the increase in sales and marketing expenses was partially offset by a decrease of $0.9 million in bad debt. Bad debt represented 4.0% and 6.0% of net revenues for the three months ended March 31, 2013 and 2012, respectively. General and administrative Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) General and administrative $ 13.8 $ 12.7 $ 1.1 8.6 % As a percentage of net revenues (*) 13.4 % 15.2 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013, general and administrative expenses increased by $1.1 million as compared to the same period of 2012, primarily attributable to a $1.4 million increase in salaries, which includes compensation costs related to our LTRP, and an increase of $0.7 million in legal expenses. These increases were partially offset by a decrease in other general and administrative expenses of $0.6 million and by a decrease of $0.3 million in office expenses. Other (expenses) income, net Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Other (expenses) income, net $ (3.2 ) $ 2.0 $ (5.2 ) -263.1 % As a percentage of net revenues 3.1 % 2.4 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013 as compared to the same period in 2012, the $5.2 million decrease in other (expense) income, net was primarily attributable to a consolidated loss in foreign exchange of $6.2 million as compared to a $1.0 million loss in the same period in 2012. This increase in foreign exchange loss was mainly attributable to the $6.4 million foreign exchange loss relating to the devaluation in Venezuela, which occurred on February 8, 2013, which devalued the exchange rate from 5.3 Bolivares Fuertes per U.S. dollar to 6.3 Bolivares Fuertes per U.S. dollar. Particularly, this loss relates to the monetary assets and liabilities held by our Venezuela subsidiaries in Bolivares Fuertes. 37-------------------------------------------------------------------------------- Table of Contents Income and asset tax Three-Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Income and asset tax $ 7.8 $ 7.3 $ 0.5 7.7 % As a percentage of net revenues (*) 7.6 % 8.7 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. During the three-month period ended March 31, 2013 as compared to the same period in 2012, income and asset tax increased by $0.5 million, mainly as a consequence of an increase in permanent differences period over period. For the three-month period ended March 31, 2013, our income and asset tax expense margin was lower as compared to the same period in the previous year from 8.7% to 7.6%, because our income and asset tax expense margin was positively impacted by a decrease in income tax charge in Brazil as a consequence of permanent tax differences period over period. Our income and asset tax expense margin was also positively impacted by the effect of a higher pre-tax income in our Argentine subsidiary, which has a lower effective tax rate as a consequence of the software development law. Our blended tax rate is defined as income and asset tax expense as a percentage of income before income and asset tax. Our effective income tax rate is defined as the provision for income taxes (net of charges related to dividend distribution from foreign subsidiaries which are offset with domestic foreign tax credits) as a percentage of income before income and asset tax. The effective income tax rate excludes the effects of the deferred income tax, and the assets and complementary income tax. The following table summarizes the changes in our blended and effective tax rate for the three-month periods ended March 31, 2013 and 2012: Three-Month Period Ended March 31, 2013 2012 Blended tax rate 30.9 % 27.0 % Effective tax rate 29.6 % 29.6 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. Our blended tax rate increased 3.9% from the three-month period ended March 31, 2013 to the same period in 2012 mainly as a result of the foreign exchange loss of $6.4 million related to the devaluation of the Bolivares Fuertes against the U.S. dollar in Venezuela in February 2013, which was considered as non-deductible for tax purposes. Our effective tax rate has not changed during the three-month period ended March 31, 2013 as compared to the same period in 2012. 38-------------------------------------------------------------------------------- Table of Contents The following table sets forth our effective income tax rate related to our main locations for the three-month periods ended March 31, 2013 and 2012: Three-Month Period Ended March 31, 2013 2012 Effective tax rate by country Argentina 17.6 % 15.8 % Brazil 34.7 % 37.7 % Mexico 31.6 % 39.3 % Venezuela 143.7 % 33.5 % The Company's Argentine subsidiary is a beneficiary of a software development law granting it a relief of 60% of total income tax determined in each year. Mainly for that reason, our Argentine operation's effective income tax rate for the three-month periods ended March 31, 2013 and 2012 are currently lower than the local statutory rate of 35%. If we had not been granted the Argentine tax holiday, our Argentine effective income tax rate would have been higher but, in that case, we would have pursued an alternative tax planning strategy. In addition, the Argentine government issued a new software development law which is still waiting for the regulatory decree. If the Argentine subsidiary qualifies under the new software development law, it is possible that the current Argentine income tax relief we benefit from could be reduced slightly. However, under the new law, it is also possible that the tax holiday would be extended for an additional five years, while also providing us with certain other fiscal benefits. The increase in our Argentine operation's effective income tax rate for the three-month period ended March 31, 2013 as compared to the same period in 2012 as a consequence of changes in both temporary and permanent tax differences including the relief in the income tax expense derived from the application of the software development law. For the three-month period ended March 31, 2013, our Brazilian effective income tax rate was slightly higher than the local statutory rate of 34% mainly as a consequence of changes in temporary tax differences. For the three-month period ended March 31, 2013, our Mexican effective income tax rate was higher than the local statutory rate of 30% mainly as a result of changes in temporary tax differences. For the three-month period ended March 31, 2012, our Mexican effective income tax rate was higher than the local statutory rate of 30% mainly as a result of changes in temporary and permanent tax differences. For the three-month period ended March 31, 2013, our Venezuelan effective income tax rate was significantly higher than the local statutory rate of 34%, mainly due to the impact of the devaluation of the Bolivares Fuertes in February 2013, which is considered as a permanent difference for U.S. GAAP reporting purposes and net of other temporary differences. Our effective tax rate reflects the tax effect of significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35%, especially in the case of Argentina, where we have significant operations with a low effective tax rate as a consequence of an Argentine tax holiday from which we benefit. A future change in the mix of pretax income from these various tax jurisdictions would impact the Company's periodic effective tax rate. We do not expect to have a significant impact in the domestic effective income tax rate related to dividend distributions from foreign subsidiaries since our strategy is to reinvest our cash surplus in our international operations, and to distribute dividends when they can be offset with available tax credits. Liquidity and Capital Resources Our main cash requirement historically has been working capital to fund MercadoPago financing operations in Brazil. We also require cash for capital expenditures relating to technology infrastructure, software applications, office space, business acquisitions and to fund the payment of quarterly cash dividends on shares of our common stock. Since our inception, we have funded our operations primarily through contributions received from our stockholders during the first two years of operations, from funds raised during our initial public offering, and from cash generated from our operations. We have funded MercadoPago by discounting credit card receivables, with loans backed with credit card receivables and through cash advances derived from our business. At March 31, 2013, our main source of liquidity, amounting to $197.7 million of cash and cash equivalents and short-term investments and $95.0 million of long-term investments has been provided by cash generated from operations. We consider our long-term investments as part of our liquidity because long-term investments are comprised by available-for-sale securities classified as long-term as a consequence of their contractual maturities. 39-------------------------------------------------------------------------------- Table of Contents The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, funds receivable from and payable to MercadoPago users, and short-term debt. As long as we continue transferring credit card receivables to financial institutions in return for cash, we will continue generating cash. As of March 31, 2013, cash and investments of foreign subsidiaries amounted to $242.1 million or 82.7% of our consolidated cash and investments and approximately 60.2% of consolidated cash and investments are held outside the U.S., mostly in Brazil, Argentina and Venezuela. Our strategy is to reinvest our undistributed earnings of our foreign operations in those operations and to distribute dividends when they can be offset with available tax credits. We do not expect a material impact in any repatriation of undistributed earnings of foreign subsidiaries on our operations since the taxable domestic gains generated by any dividend distributions will be mostly offset with foreign tax credits that arise from income tax paid in our foreign operations, which we are allowed to compute for domestic income tax purposes. In the event we change the way we manage our business, the working capital needs could be funded, as we did in the past, through a combination of the sale of credit card coupons to financial institutions, loans backed by credit card receivables and cash advances from our business. The following table presents our cash flows from operating activities, investing activities and financing activities for the three-month periods ended March 31, 2013 and 2012: Three-Month Period Ended March 31, (In millions) 2013 2012 Net cash provided by (used in): Operating activities $ 30.1 $ 19.0 Investing activities 3.8 (6.8 ) Financing activities (4.8 ) (3.5 ) Effect of exchange rates on cash and cash equivalents (8.4 ) (0.2 ) Net increase in cash and cash equivalents $ 20.7 $ 8.5 Net cash provided by operating activities Cash provided by operating activities consists of net income adjusted for certain non-cash items, and the effect of changes in working capital and other activities. Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Net Cash provided by: Operating activities $ 30.1 $ 19.0 $ 11.1 58.5 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. The $11.1 million increase in net cash provided by operating activities during the three-month period ended March 31, 2013 as compared to the same period in 2012 was mainly attributable to a $6.4 million non-cash foreign exchange loss relating to the devaluation in Venezuela. Additionally, accrued interest increased by $1.8 million and depreciation and amortization increased by $0.7 million, in that same period. These non-cash effects were partially offset by a $2.2 million decrease in net income. Finally, the increase in net cash provided by operating activities was attributable to an increase in MercadoPago working capital by $3.4 million and other changes in working capital amounting to $1.1 million. 40 -------------------------------------------------------------------------------- Table of Contents Net cash provided by (used in) investing activities Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Net Cash provided by (used in): Investing activities $ 3.8 $ (6.8 ) $ 10.6 156.0 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. Net cash provided by investing activities in the three-month period ended March 31, 2013 resulted mainly from proceeds from the sale and maturity of investments of $146.4 million partially offset by purchases of investments for $136.5 million, as part of our financial strategy. Additionally, we used $2.9 million of cash during the three-month period ended March 31, 2013 to make capital expenditures mainly related to technological equipment and software licenses and $3.2 million to fund the acquisition of a software development company located in the Province of Cordoba, Argentina. Net cash used in financing activities Three Month Period Ended Change from 2012 March 31, to 2013 (*) 2013 2012 in Dollars in % (in millions, except percentages) Net Cash used in: Financing activities $ (4.8 ) $ (3.5 ) $ (1.3 ) 36.2 % (*) Percentages have been calculated using whole-dollar amounts rather than rounded amounts that appear in the table. For the three-month period ended March 31, 2013, our primary use of cash was to fund the $4.8 million quarterly cash dividends paid on January 15, 2013. For the three-month period ended March 31, 2012, our primary use of cash was to fund the $3.5 million quarterly cash dividends paid on January 17, 2012. In the event that we decide to pursue strategic acquisitions in the future, we may fund them with available cash, third party debt financing, or by raising equity capital, as market conditions allow. Debt As of March 31, 2013, we recorded $6.3 million of dividends payable to our stockholders. In addition, as of March 31, 2013, our outstanding debt of $0.2 million is related to Argentine car lease contracts. Cash Dividends On January 15, 2013, we paid the fourth quarterly cash dividend for $4.8 million (or $0.109 per share) on our outstanding shares of common stock held of record as of the close of business on December 31, 2012. On February 22, 2013, our board of directors approved a quarterly cash dividend of $6.3 million (or $0.143 per share) on our outstanding shares of common stock. The dividend was paid on April 15, 2013 to stockholders of record as of the close of business on March 29, 2013. On April 30, 2013, the board of directors declared a quarterly cash dividend of $6.3 million (or $0.143 per share) on our outstanding shares of common stock. The dividend will be paid on July 15, 2013 to stockholders of record as of the close of business on June 28, 2013. We currently expect to continue paying comparable cash dividends on a quarterly basis. However, any future determination as to the declaration of dividends on our common stock will be made at the discretion of our board of directors. 41-------------------------------------------------------------------------------- Table of Contents Capital expenditures Our capital expenditures for the three-month period ended March 31, 2013 and 2012 amounted to $6.7 million and $3.7 million, respectively. During the three months ended March 31, 2013 we acquired the 100% ownership interest in a software development company located in the Province of Cordoba, Argentina at an aggregate purchase price of $3.4 million. On April 2013, the Company agreed to acquire three floors or 3,865 square meters in a new office building located in Buenos Aires for a total amount of $18.0 million plus VAT. The price will be paid in Argentine pesos. The Company paid $0.4 million plus VAT in advance and will pay $3.2 million plus VAT at the date of signing of the purchase agreement. The remaining $14.4 million plus VAT will be paid in seven monthly installments beginning in June 2013. The Company is permanently increasing the level of investment on hardware and software licenses necessary to improve and update the technology of our platform and cost of computer software developed internally. We anticipate continued investments in capital expenditures related to information technology in the future as we strive to maintain our position in the Latin American e-commerce market. We believe that our existing cash and cash equivalents, including the sale of credit card receivables and cash generated from operations will be sufficient to fund our operating activities, property and equipment expenditures and to pay or repay obligations going forward. Off-balance sheet arrangements At March 31, 2013, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. Recent accounting pronouncements In March 2013, the Financial Accounting Standards Board ("FASB") issued "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity a consensus of the FASB Emerging Issues Task Force" clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations or cash flows. Non-GAAP Financial Measures To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we use free cash flows, adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share as non-GAAP measures. These non-GAAP measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. These non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the most comparable GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can be found in the tables included in this quarterly report. Non-GAAP financial measures are provided to enhance investors' overall understanding of our current financial performance. Specifically, we believe that free cash flow provides useful information to both management and investors by excluding payments for the acquisition of property, equipment, of intangible assets and of businesses net of cash acquired, that may not be indicative of our core operating results. In addition, we report free cash flows to investors because we believe that the inclusion of this measure provides consistency in our financial reporting. Free cash flow represents cash from operating activities less payment for the acquisition of property, equipment and intangible assets and acquired businesses net of cash acquired. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our operations after the purchases of property, and equipment, of intangible assets and of acquired businesses net of cash acquired. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for the period. Reconciliation of Operating Cash Flows to Free Cash Flows Three Months Ended March 31, 2013 2012 Net Cash provided by Operating Activities $ 30.1 $ 19.0 Payment for acquired businesses, net of cash acquired (3.2 ) - Purchase of intangible assets - (0.0 ) Purchases of property and equipment (2.9 ) (3.7 ) Free cash flows $ 24.0 $ 15.3 The table above may not total due to rounding. Moreover, we believe that adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share provide useful information to both management and investors by excluding the foreign exchange loss attributable to the devaluation in Venezuela, because it may not be indicative of our results of operations. In addition, we report adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share to investors because we believe that the inclusion of these measures provides consistency in the Company's financial reporting and because these financial measures provide useful information to management and investors about what our adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share, would have been, had the foreign exchange loss in Venezuela not occurred. A limitation of the utility of adjusted net income before income / asset tax, adjusted income / asset tax, adjusted net income, adjusted blended tax rate and adjusted earnings per share, as measures of financial performance, is that these measures do not represent the total foreign exchange effect in our Income Statement for the period. 42-------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013(**) Net income before income / asset tax expense $ 25.4 Devaluation loss in Venezuela 6,4 Adjusted Net income before income / asset tax expense $ 31.7 Income and asset tax (7.8 ) Income tax effect on devaluation loss in Venezuela (0.5 )(1) Adjusted Income and asset tax $ (8.4 ) Net Income $ 17.5 Devaluation loss in Venezuela 6.4 Income tax effect on devaluation loss in Venezuela (0.5 ) (1) Adjusted Net Income $ 23.4 Adjusted Blended Tax Rate 26.4 % Weighted average of outstanding common shares 44,151,323 Adjusted Earnings per share $ 0.53 (**) Stated in millions of U.S. dollars. (1) Income tax charge related to the Venezuela devaluation under local tax norms. The table above may not total due to rounding. |