Note 5 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 5: Income Taxes

Major components of our income tax benefit (provision) for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):

	2019			2018			2017
Current:
Domestic	$	(701	)	$	(454	)	$	22,171
Foreign		(7,289	)		(4,382	)		(22,526	)
Total current income tax benefit (provision)		(7,990	)		(4,836	)		(355	)
Deferred:
Domestic		15,243			7,147			(30,766	)
Foreign		16,848			4,390			10,158
Total deferred income tax benefit (provision)		32,091			11,537			(20,608	)
Total income tax benefit (provision)	$	24,101		$	6,701		$	(20,963	)

Domestic and foreign components of (loss) income before income taxes for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):

	2019			2018			2017
Domestic	$	(49,874	)	$	(44,513	)	$	(7,920	)
Foreign		(73,784	)		11,249			363
Total	$	(123,658	)	$	(33,264	)	$	(7,557	)

The annual tax benefit (provision) is different from the amount that would be provided by applying the statutory federal income tax rate to our pretax (loss) income. The reasons for the difference are (in thousands):

	2019					2018					2017
Computed “statutory” benefit (provision)	$	25,968		21	%	$	6,986		21	%	$	2,645		35	%
Percentage depletion		3,030		2			3,158		10			5,174		68
Change in valuation allowance		686		1			(2,304	)	(7	)		24,464		324
Federal rate change		—		—			—		—			(37,546	)	(497	)
State taxes, net of federal taxes		2,648		2			(849	)	(3	)		1,112		15
Foreign currency remeasurement of monetary assets and liabilities		(8,629	)	(7	)		6,747		20			(12,812	)	(169	)
Rate differential on foreign earnings		2,705		2			(3,970	)	(12	)		(1,438	)	(19	)
Compensation		(1,056	)	(1	)		(970	)	(3	)		(661	)	(9	)
Foreign withholding taxes		—		—			278		1			(278	)	(4	)
Expiration of U.S. foreign tax credits		—		—			—		—			(2,300	)	(30	)
Other		(1,251	)	(1	)		(2,375	)	(7	)		677		9
Total benefit (provision)	$	24,101		19	%	$	6,701		20	%	$	(20,963	)	(277	)%

At December 31, 2019 and 2018, the net deferred tax liability was approximately $135 million and $172 million, respectively. The individual components of our net deferred tax assets and liabilities are reflected in the table below (in thousands).

	December 31,
	2019			2018
Deferred tax assets:
Accrued reclamation costs	$	28,306		$	29,064
Deferred exploration		13,762			16,500
Foreign net operating losses		12,013			13,231
Domestic net operating losses		175,024			152,320
Pension and benefit obligation		13,866			12,345
Foreign exchange loss		21,719			24,849
Foreign tax credit carryforward		4,149			4,149
Miscellaneous		32,926			26,290
Total deferred tax assets		301,765			278,748
Valuation allowance		(86,634	)		(94,981	)
Total deferred tax assets		215,131			183,767
Deferred tax liabilities:
Miscellaneous		(904	)		(5,234	)
Properties, plants and equipment		(348,972	)		(350,083	)
Total deferred tax liabilities		(349,876	)		(355,317	)
Net deferred tax liability	$	(134,745	)	$	(171,550	)

As discussed in Note 15, we acquired Klondex Mines Ltd. ("Klondex") in July 2018. With the acquisition of Klondex, we acquired a U.S. consolidated tax group (the "Nevada U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Hecla U.S.”). Under acquisition accounting, we recorded a net deferred tax liability of $59.5 million. In 2019 and 2018, we recorded a deferred tax benefit of $15.1 million and $6.3 million, respectively, in the Nevada U.S. Group. Net operating losses acquired as of the acquisition date are subject to limitation under Internal Revenue Code Section 382. However, the annual limitation is not expected to have a material impact on our ability to utilize the losses.

We evaluated the positive and negative evidence available to determine the amount of valuation allowance required on our deferred tax assets.  At December 31, 2019 and 2018, the balances of our valuation allowances were approximately $87 million and $95 million, respectively, primarily related to net operating losses. Due to the changes to tax laws under the Tax Cuts and Jobs Act enacted in December 2017 ("TCJ Act"), at December 31, 2017 we determined it is more likely than not that we will not realize our net deferred tax assets in our Hecla U.S. consolidated group. Accordingly, we applied a valuation allowance which remains in place on those net deferred tax assets at December 31, 2019. A portion of the valuation allowance relating to exploration and other deferred tax assets in Mexico was released in 2017, as we determined that it was more likely than not that the benefit would be realized as a result of operating activities at San Sebastian. As of December 31, 2019, a $81.6 million valuation allowance remains in U.S. jurisdictions, $2.9 million in Canadian jurisdictions and $2.1 million in Mexican jurisdictions. The changes in the valuation allowance for the years ended December 31, 2019, 2018 and 2017, are as follows (in thousands):

	2019			2018			2017
Balance at beginning of year	$	(94,981	)	$	(78,684	)	$	(99,602	)
Valuation allowance on deferred tax assets acquired with the Klondex acquisition		5,905			(11,470	)		—
Increase related to non-utilization of net operating loss carryforwards and non-recognition of deferred tax assets due to uncertainty of recovery		2,442			(5,700	)		(14,964	)
Decrease related to utilization and expiration of deferred tax assets, other		—			873			35,882
Balance at end of year	$	(86,634	)	$	(94,981	)	$	(78,684	)

As of December 31, 2019, for U.S. income tax purposes, we have federal and state net operating loss carryforwards of $704.5 million and $412.2 million, respectively.  U.S. net operating loss carryforwards for periods arising before December 31, 2017 have a 20-year expiration period, the earliest of which could expire in 2020. U.S. net operating loss carryforwards arising in 2018 and future periods have an indefinite carryforward period. We have foreign and provincial net operating loss carryforwards of approximately $49.8 million each, which expire between 2032 and 2039. Our utilization of U.S. net operating loss carryforwards may be subject to annual limitations if there is a change in control as defined under Internal Revenue Code Section 382. As of December 31, 2019, no change in control has occurred in the Hecla U.S. group. Net operating losses acquired with the Nevada U.S. Group are subject to limitation under Internal Revenue Section 382. However, the annual limitation is not expected to have a material impact on our ability to utilize the losses.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions.  We are no longer subject to income tax examinations by U.S. federal and state tax authorities for years prior to 2000, or examinations by foreign tax authorities for years prior to 2013.  We are currently under examination in certain local tax jurisdictions. However, we do not anticipate any material adjustments.

We had nounrecognized tax benefits as of December 31, 2019 or 2018.  Due to the net operating loss carryover provision, coupled with the lack of any unrecognized tax benefits, we have not provided for any interest or penalties associated with any unrecognized tax benefits.  If interest and penalties were to be assessed, our policy is to charge interest to interest expense, and penalties to other operating expense.  It is not anticipated that there will be any significant changes to unrecognized tax benefits within the next 12 months.

On December 22, 2017, the United States enacted the TCJ Act resulting in significant modifications to existing law. We completed the accounting for the effects of the Act during the quarter ended December 31, 2017. Our financial statements for the year ended December 31, 2017 reflect certain effects of the TCJ Act which include a reduction in the corporate tax rate from 35% to 21% as well as other changes. As a result of the changes to tax laws and tax rates under the TCJ Act, we incurred incremental income tax expense of $30 million during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from 35% to 21% and application of a full valuation allowance. We have not accrued a one-time transition tax on unrepatriated foreign earnings due to an estimated net deficit in foreign earnings from all foreign jurisdictions. The other relevant provisions of the TCJ Act that became effective in 2018 consist of global intangible low-taxed income (GILTI) tax and base erosion and anti-abuse tax (BEAT); however, these provisions have not materially impacted us.