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Why Lincoln Electric Deconsolidated Its Venezuela Subsidiary

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What does deconsolidation of a subsidiary mean?

An unconsolidated subsidiary is a company that’s owned by a parent company. But the unconsolidated subsidiary’s financial statement isn’t included in the consolidated financial statements of the parent company. This type of subsidiary or company appears in the combined financial statement as an investment, unless it’s written off.

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Why was LECO’s Venezuela subsidiary deconsolidated?

According to Lincoln Electric (LECO) management, the conditions in Venezuela prompted the deconsolidation of its Venezuela subsidiary from the financial statements as of June 30, 2016. The subsidiary’s contribution to overall revenues was minimal. In the first half of 2016, Venezuela sales were approximately $11 million, and EBIT (earnings before interest and tax) was minimal.

How much did Lincoln Electric write off for its investment in Venezuela?

Below are some of Lincoln Electric’s key facts about the Venezuela subsidiary write-off:

  • wrote off $34.3 million in pretax charge ($34.1 million in non-cash charge), reported under operating expenses
  • will continue operating its facilities in Venezuela
  • will use the cost method of accounting for Venezuela, which will only recognize income in future periods once cash is received

Growth forecast for Lincoln and its peers for fiscal 2016

According to analyst estimates, LECO expects 2016 revenues of $230.0 billion, which is ~8.0% below 2015 revenue of $2.5 billion.

For fiscal 2016, analysts estimate General Electric’s (GE) revenues at $124.9 billion, which is ~8.5% higher than 2015 revenue of $115.1 billion.

For Honeywell International (HON), analysts expect its revenues to increase 5.1% to $40.5 billion compared to $38.5 billion in 2015. In fiscal 2016, analysts expect 3M’s (MMM) revenues to increase marginally by 0.3% to $30.3 billion over $30.2 billion in fiscal 2015.

On a year-over-year basis from July 26, 2015, to July 26, 2016, LECO rose 10.6%. The broad-based S&P 500 Index (SPY) rose 4.4%. On a year-to-date basis, LECO has risen 23.2%.

Next, let’s look at LECO’s cash flows from operations, which surged in 2Q16.

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