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Note 14 - Guarantor Subsidiaries
 6 Months Ended
Jun. 30, 2019
Notes to Financial Statements  
Guarantor Subsidiaries [Text Block]

Note 14.    Guarantor Subsidiaries

 

Presented below are Hecla’s unaudited interim condensed consolidating financial statements as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended, resulting from the guarantees by certain of Hecla's subsidiaries of the Senior Notes and RQ Notes (see Note 9 for more information). As of June 30, 2019, the Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi, Inc.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; Hecla Juneau Mining Company; Klondex Holdings Inc.; Klondex Gold & Silver Mining Co.; Klondex Midas Holdings Limited; Klondex Aurora Mine Inc.; and Klondex Hollister Mine Inc. It is expected that in the third quarter of 2019 Hecla Quebec Inc. will be added as a Guarantor of the Senior Notes and RQ Notes. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014. We issued the RQ Notes on March 5, 2018.

 

The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim consolidated financial statements set forth elsewhere in this report. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and our non-guarantor subsidiaries are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla and its subsidiaries and among the subsidiaries. While valid at an individual subsidiary level, such activities are eliminated in consolidation because, when taken as a whole, they do not represent business activity with third-party customers, vendors, and other parties. Examples of such eliminations include the following:

 

 

•

Investments in subsidiaries. The acquisition of a company results in an investment in debt or equity capital on the records of the parent company and a contribution to debt or equity capital on the records of the subsidiary. Such investments and capital contributions are eliminated in consolidation.

 

 

•

Capital contributions. Certain of Hecla's subsidiaries do not generate cash flow, either at all or that is sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. Generally on an annual basis, when not otherwise intended as debt, the boards of directors of such parent companies declare contributions of capital to their subsidiary companies, which increase the parents' investment and the subsidiaries' additional paid-in capital. In consolidation, investments in subsidiaries and related additional paid-in capital are eliminated.

 

 

•

Debt. At times, inter-company debt agreements have been established between certain of Hecla's subsidiaries and their parents. The related debt liability and receivable balances, accrued interest expense (if any) and income activity (if any), and payments of principal and accrued interest amounts (if any) by the subsidiary companies to their parents are eliminated in consolidation.

 

 

•

Dividends. Certain of Hecla's subsidiaries which generate cash flow routinely provide cash to their parent companies through inter-company transfers. On at least an annual basis, the boards of directors of such subsidiary companies declare dividends to their parent companies, which reduces the subsidiaries' retained earnings and increases the parents' dividend income. In consolidation, such activity is eliminated.

 

 

•

Deferred taxes. Our ability to realize deferred tax assets and liabilities is considered on a consolidated basis for subsidiaries within the United States, with all subsidiaries' estimated future taxable income contributing to the ability to realize all such assets and liabilities. However, when Hecla's subsidiaries are viewed independently, we use the separate return method to assess the realizability of each subsidiary's deferred tax assets and whether a valuation allowance is required against such deferred tax assets. In some instances, a parent company or subsidiary may possess deferred tax assets whose realization depends on the future taxable incomes of other subsidiaries on a consolidated-return basis, but would not be considered realizable if such parent or subsidiary filed on a separate stand-alone basis. In such a situation, a valuation allowance is assessed on that subsidiary's deferred tax assets, with the resulting adjustment reported in the eliminations column of the guarantor and parent's financial statements, as is the case in the financial statements set forth below. The separate return method can result in significant eliminations of deferred tax assets and liabilities and related income tax provisions and benefits. Non-current deferred tax asset balances are included in other non-current assets on the consolidating balance sheets and make up a large portion of that item, particularly for the guarantor balances.

 

Separate financial statements of the Guarantors are not presented because the guarantees by the Guarantors are joint and several and full and unconditional, except for certain customary release provisions, including: (1) the sale or disposal of all or substantially all of the assets of the Guarantor; (2) the sale or other disposition of the capital stock of the Guarantor; (3) the Guarantor is designated as an unrestricted entity in accordance with the applicable provisions of the indenture; (4) Hecla ceases to be a borrower as defined in the indenture; and (5) upon legal or covenant defeasance or satisfaction and discharge of the indenture.

 

Unaudited Interim Condensed Consolidating Balance Sheets

 

   

As of June 30, 2019

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Assets

                                        

Cash and cash equivalents

   $ 14     $ 2,107     $ 7,313     $ —     $ 9,434  

Other current assets

     12,108       62,222       61,728       (74

)

     135,984  

Properties, plants, equipment and mineral interests, net

     1,913       1,785,072       698,884       —       2,485,869  

Intercompany receivable (payable)

     152,061       (364,163

)

     (199,609

)

     411,711       —  

Investments in subsidiaries

     1,506,079       —       —       (1,506,079

)

     —  

Other non-current assets

     286,460       22,798       (117,873

)

     (151,959

)

     39,426  

Total assets

   $ 1,958,635     $ 1,508,036     $ 450,443     $ (1,246,401

)

   $ 2,670,713  

Liabilities and Stockholders' Equity

                                        

Current liabilities

   $ (314,607

)

   $ 122,102     $ 44,741     $ 265,617     $ 117,853  

Long-term debt

     586,667       18,226       2,197       —       607,090  

Non-current portion of accrued reclamation

     —       89,209       14,573       —       103,782  

Non-current deferred tax liability

     —       66,781       87,496       (5,939

)

     148,338  

Other non-current liabilities

     47,347       6,116       959       —       54,422  

Stockholders' equity

     1,639,228       1,205,602       300,477       (1,506,079

)

     1,639,228  

Total liabilities and stockholders' equity

   $ 1,958,635     $ 1,508,036     $ 450,443     $ (1,246,401

)

   $ 2,670,713  

 

   

As of December 31, 2018

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Assets

                                        

Cash and cash equivalents

   $ 6,265     $ 8,661     $ 12,463     $ —     $ 27,389  

Other current assets

     6,388       69,574       60,868       (69

)

     136,761  

Properties, plants, equipment and mineral interests, net

     1,913       1,795,994       722,097       —       2,520,004  

Intercompany receivable (payable)

     171,905       (222,815

)

     (171,834

)

     222,744       —  

Investments in subsidiaries

     1,577,564       —       —       (1,577,564

)

     —  

Other non-current assets

     276,641       9,030       (122,969

)

     (142,912

)

     19,790  

Total assets

   $ 2,040,676     $ 1,660,444     $ 500,625     $ (1,497,801

)

   $ 2,703,944  

Liabilities and Stockholders' Equity

                                        

Current liabilities

   $ (234,133

)

   $ 118,863     $ 45,922     $ 205,542     $ 136,194  

Long-term debt

     532,799       141,870       1,989       (135,988

)

     540,670  

Non-current portion of accrued reclamation

     —       94,602       10,377       —       104,979  

Non-current deferred tax liability

     —       64,639       98,689       10,209       173,537  

Other non-current liabilities

     51,047       5,659       895       —       57,601  

Stockholders' equity

     1,690,963       1,234,811       342,753       (1,577,564

)

     1,690,963  

Total liabilities and stockholders' equity

   $ 2,040,676     $ 1,660,444     $ 500,625     $ (1,497,801

)

   $ 2,703,944  

 

Unaudited Interim Condensed Consolidating Statements of Operations

 

   

Three Months Ended June 30, 2019

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Revenues

   $ 1,292     $ 76,213     $ 56,667     $ —     $ 134,172  

Cost of sales

     (257

)

     (58,994

)

     (45,687

)

     —       (104,938

)

Depreciation, depletion, amortization

     —       (29,068

)

     (20,409

)

     —       (49,477

)

General and administrative

     (4,766

)

     (3,738

)

     (414

)

     —       (8,918

)

Exploration and pre-development

     (3

)

     (2,097

)

     (3,044

)

     —       (5,144

)

Research and development

     —       (153

)

     (5

)

     —       (158

)

Gain on derivative contracts

     3,798       —       —       —       3,798  

Acquisition costs

     (163

)

     (81

)

     (153

)

     —       (397

)

Equity in earnings of subsidiaries

     (48,370

)

     —       —       48,370       —  

Other expense

     1,939       (6,091

)

     (20,058

)

     (2,439

)

     (26,649

)

Income (loss) before income taxes

     (46,530

)

     (24,009

)

     (33,103

)

     45,931       (57,711

)

(Provision) benefit from income taxes

     (2

)

     (2,859

)

     11,601       2,439       11,179  

Net income (loss)

     (46,532

)

     (26,868

)

     (21,502

)

     48,370       (46,532

)

Preferred stock dividends

     (138

)

     —       —       —       (138

)

Income (loss) applicable to common stockholders

     (46,670

)

     (26,868

)

     (21,502

)

     48,370       (46,670

)

Net income (loss)

     (46,532

)

     (26,868

)

     (21,502

)

     48,370       (46,532

)

Changes in comprehensive income (loss)

     3,540       —       —       —       3,540  

Comprehensive income (loss)

   $ (42,992

)

   $ (26,868

)

   $ (21,502

)

   $ 48,370     $ (42,992

)

 

   

Six Months Ended June 30, 2019

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Revenues

   $ (1,185

)

   $ 178,645     $ 109,329     $ —     $ 286,789  

Cost of sales

     (718

)

     (125,863

)

     (88,743

)

     —       (215,324

)

Depreciation, depletion, amortization

     —       (49,940

)

     (38,324

)

     —       (88,264

)

General and administrative

     (9,159

)

     (8,849

)

     (869

)

     —       (18,877

)

Exploration and pre-development

     (19

)

     (3,641

)

     (6,742

)

     —       (10,402

)

Research and development

     —       (506

)

     (55

)

     —       (561

)

Loss on derivative contracts

     1,999       —       —       —       1,999  

Acquisition costs

     (121

)

     (136

)

     (153

)

     —       (410

)

Equity in earnings of subsidiaries

     (70,803

)

     —       —       70,803       —  

Other expense

     7,943       (11,821

)

     (32,700

)

     (8,832

)

     (45,410

)

Income (loss) before income taxes

     (72,063

)

     (22,111

)

     (58,257

)

     61,971       (90,460

)

(Provision) benefit from income taxes

     (2

)

     (6,775

)

     16,340       8,832       18,395  

Net income (loss)

     (72,065

)

     (28,886

)

     (41,917

)

     70,803       (72,065

)

Preferred stock dividends

     (276

)

     —       —       —       (276

)

Income (loss) applicable to common stockholders

     (72,341

)

     (28,886

)

     (41,917

)

     70,803       (72,341

)

Net income (loss)

     (72,065

)

     (28,886

)

     (41,917

)

     70,803       (72,065

)

Changes in comprehensive income (loss)

     7,799       —       —       —       7,799  

Comprehensive income (loss)

   $ (64,266

)

   $ (28,886

)

   $ (41,917

)

   $ 70,803     $ (64,266

)

 

   

Three Months Ended June 30, 2018

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Revenues

   $ 2,697     $ 75,197     $ 69,365     $ —     $ 147,259  

Cost of sales

     (73

)

     (37,489

)

     (42,878

)

     —       (80,440

)

Depreciation, depletion, amortization

     —       (11,996

)

     (19,821

)

     —       (31,817

)

General and administrative

     (4,615

)

     (4,602

)

     (570

)

     —       (9,787

)

Exploration and pre-development

     (72

)

     (3,064

)

     (6,117

)

     —       (9,253

)

Research and development

     —       (1,579

)

     (758

)

     —       (2,337

)

Gain on derivative contracts

     16,804       —       —       —       16,804  

Acquisition costs

     (940

)

     (68

)

     (2

)

     —       (1,010

)

Foreign exchange gain (loss)

     (5,731

)

     (74

)

     8,281       —       2,476  

Suspension costs

     —       (6,801

)

     —       —       (6,801

)

Equity in earnings of subsidiaries

     5,745       —       —       (5,745

)

     —  

Other (expense) income

     (1,741

)

     (1,616

)

     (5,522

)

     (3,714

)

     (12,593

)

Income (loss) before income taxes

     12,074       7,908       1,978       (9,459

)

     12,501  

(Provision) benefit from income taxes

     —       (3,715

)

     (426

)

     3,714       (427

)

Net income (loss)

     12,074       4,193       1,552       (5,745

)

     12,074  

Preferred stock dividends

     (138

)

     —       —       —       (138

)

Income (loss) applicable to common stockholders

     11,936       4,193       1,552       (5,745

)

     11,936  

Net income (loss)

     12,074       4,193       1,552       (5,745

)

     12,074  

Changes in comprehensive income (loss)

     (5,162

)

     —       —       —       (5,162

)

Comprehensive income (loss)

   $ 6,912     $ 4,193     $ 1,552     $ (5,745

)

   $ 6,912  

 

   

Six Months Ended June 30, 2018

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Revenues

   $ 3,312     $ 145,408     $ 138,248     $ —     $ 286,968  

Cost of sales

     402       (72,190

)

     (81,521

)

     —       (153,309

)

Depreciation, depletion, amortization

     —       (23,256

)

     (36,615

)

     —       (59,871

)

General and administrative

     (8,448

)

     (8,050

)

     (1,024

)

     —       (17,522

)

Exploration and pre-development

     (127

)

     (5,003

)

     (12,488

)

     —       (17,618

)

Research and development

     —       (2,061

)

     (1,712

)

     —       (3,773

)

Loss on derivative contracts

     20,811       —       —       —       20,811  

Acquisition costs

     (3,300

)

     (68

)

     (149

)

     —       (3,517

)

Foreign exchange gain (loss)

     (14,435

)

     (74

)

     19,577       —       5,068  

Suspension costs

     —       (11,818

)

     —       —       (11,818

)

Equity in earnings of subsidiaries

     23,513       —       —       (23,513

)

     —  

Other (expense) income

     (1,414

)

     (3,393

)

     (9,901

)

     (9,202

)

     (23,910

)

Income (loss) before income taxes

     20,314       19,495       14,415       (32,715

)

     21,509  

(Provision) benefit from income taxes

     —       (9,203

)

     (1,194

)

     9,202       (1,195

)

Net income (loss)

     20,314       10,292       13,221       (23,513

)

     20,314  

Preferred stock dividends

     (276

)

     —       —       —       (276

)

Income (loss) applicable to common stockholders

     20,038       10,292       13,221       (23,513

)

     20,038  

Net income (loss)

     20,314       10,292       13,221       (23,513

)

     20,314  

Changes in comprehensive income (loss)

     (7,267

)

     —       38       (38

)

     (7,267

)

Comprehensive income (loss)

   $ 13,048     $ 10,292     $ 13,259     $ (23,551

)

   $ 13,048  

 

Unaudited Interim Condensed Consolidating Statements of Cash Flows

 

   

Six Months Ended June 30, 2019

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Cash flows from operating activities

   $ (168,393

)

   $ 2,714     $ 12,414     $ 137,550     $ 8,713  

Cash flows from investing activities:

                                        

Additions to properties, plants, and equipment

     —       (52,144

)

     (19,101

)

           (71,245

)

Other investing activities, net

     71,485       17       (99

)

     (71,485

)

     (82

)

Cash flows from financing activities:

                                        

Dividends paid to stockholders

     (2,706

)

     —       —             (2,706

)

Issuance of debt

     170,000       —       —             170,000  

Payments on debt

     (118,000

)

     (2,475

)

     (902

)

           (121,377

)

Other financing activity

     41,363       20,906       2,106       (66,065

)

     (1,690

)

Effect of exchange rate changes on cash

     —       —       432             432  

Changes in cash, cash equivalents and restricted cash and cash equivalents

     (6,251

)

     (6,554

)

     (5,150

)

     —       (17,955

)

Beginning cash, cash equivalents and restricted cash and cash equivalents

     6,265       9,686       12,463             28,414  

Ending cash, cash equivalents and restricted cash and cash equivalents

   $ 14     $ 3,132     $ 7,313     $ —     $ 10,459  

 

 

   

Six Months Ended June 30, 2018

  
   

Parent

    

Guarantors

    

Non-Guarantors

    

Eliminations

    

Consolidated

  
   

(in thousands)

  

Cash flows from operating activities

   $ 27,981     $ 60,805     $ 2,166     $ (43,934

)

   $ 47,018  

Cash flows from investing activities:

                                        

Additions to properties, plants, and equipment

     —       (25,454

)

     (17,850

)

     —       (43,304

)

Other investing activities, net

     6,294       44       420       21,359       28,117  

Cash flows from financing activities:

                                        

Dividends paid to stockholders

     (2,276

)

     —       —       —       (2,276

)

Borrowings on debt

     31,024       —       —       —       31,024  

Payments on debt

     —       (1,393

)

     (2,369

)

     —       (3,762

)

Other financing activity

     (3,544

)

     (40,658

)

     18,930       22,575       (2,697

)

Effect of exchange rate changes on cash

     —       —       (532

)

     —       (532

)

Changes in cash, cash equivalents and restricted cash and cash equivalents

     59,479       (6,656

)

     765       —       53,588  

Beginning cash, cash equivalents and restricted cash and cash equivalents

     103,878       32,048       51,213       —       187,139  

Ending cash, cash equivalents and restricted cash and cash equivalents

   $ 163,357     $ 25,392     $ 51,978     $ —     $ 240,727