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Note 16 - Guarantor Subsidiaries

12 Months Ended

Dec. 31, 2019

Note 16: Guarantor Subsidiaries

Presented below are Hecla’s 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 (see Note 6 for more information). 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.; Klondex Hollister Mine Inc.; and Hecla Quebec, Inc. 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.

The condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the 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 for two consolidated tax groups of subsidiaries within the United States: the Nevada U.S. Group and Hecla U.S. group. Within each tax group, all subsidiaries' estimated future taxable income contributes to the ability of their tax group 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 income 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.

Condensed Consolidating Balance Sheets

	As of December 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Assets
Cash and cash equivalents	$	33,750		$	15,357		$	13,345		$	—		$	62,452
Other current assets		9,725			89,722			17,299			(74	)		116,672
Properties, plants, and equipment - net		1,913			2,410,458			11,327			—			2,423,698
Intercompany receivable (payable)		(28,381	)		(579,830	)		216,632			391,579			—
Investments in subsidiaries		1,636,802			—			—			(1,636,802	)		—
Other non-current assets		289,422			24,325			(121,981	)		(157,280	)		34,486
Total assets	$	1,943,231		$	1,960,032		$	136,622		$	(1,402,577	)	$	2,637,308
Liabilities and Stockholders' Equity
Current liabilities	$	(309,293	)	$	155,441		$	8,334		$	262,492		$	116,974
Long-term debt		504,729			17,271			761			—			522,761
Non-current portion of accrued reclamation		—			96,389			7,404			—			103,793
Non-current deferred tax liability		—			166,549			—			(28,267	)		138,282
Other non-current liabilities		55,372			6,577			1,126			—			63,075
Stockholders' equity		1,692,423			1,517,805			118,997			(1,636,802	)		1,692,423
Total liabilities and stockholders' equity	$	1,943,231		$	1,960,032		$	136,622		$	(1,402,577	)	$	2,637,308

As of December 31, 2018

Parent

Guarantors

Non-

Guarantors

Eliminations

Consolidated

Revised

Revised

(in thousands)

Assets

Cash and cash equivalents
$ 6,266 $ 17,233 $ 3,890 $ — $ 27,389

Other current assets
6,388 105,900 24,542 (69
)
136,761

Properties, plants, and equipment - net
1,913 2,503,467 14,624 — 2,520,004

Intercompany receivable (payable)
171,908 (546,374
)
152,031 222,435 —

Investments in subsidiaries
1,577,869 — — (1,577,869
)
—

Other non-current assets
276,641 10,906 (124,845
)
(142,912
)
19,790

Total assets
$ 2,040,985 $ 2,091,132 $ 70,242 $ (1,498,415
)
$ 2,703,944

Liabilities and Stockholders' Equity

Current liabilities
$ (233,824
)
$ 157,640 $ 7,145 $ 205,233 $ 136,194

Long-term debt
532,799 143,858 1 (135,988
)
540,670

Non-current portion of accrued reclamation
— 100,445 4,534 — 104,979

Non-current deferred tax liability
— 163,328 — 10,209 173,537

Other non-current liabilities
51,047 5,641 913 — 57,601

Stockholders' equity
1,690,963 1,520,220 57,649 (1,577,869
)
1,690,963

Total liabilities and stockholders' equity
$ 2,040,985 $ 2,091,132 $ 70,242 $ (1,498,415
)
$ 2,703,944

Condensed Consolidating Statements of Operations

	Year Ended December 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	(1,282	)	$	618,241		$	56,307		$	—		$	673,266
Cost of sales		(1,948	)		(407,353	)		(41,048	)		—			(450,349	)
Depreciation, depletion, and amortization		—			(189,746	)		(9,772	)		—			(199,518	)
General and administrative		(16,830	)		(17,350	)		(1,652	)		—			(35,832	)
Exploration and pre-development		(22	)		(13,191	)		(5,856	)		—			(19,069	)
Research and development		—			(533	)		(2	)		—			(535	)
Loss on derivative contracts		(3,971	)		—			—			—			(3,971	)
Acquisition costs		(271	)		(221	)		(153	)		—			(645	)
Equity in earnings of subsidiaries		(76,385	)		—			—			76,385			—
Other (expense) income		1,186			(73,750	)		2,161			(16,602	)		(87,005	)
(Loss) income before income taxes		(99,523	)		(83,903	)		(15	)		59,783			(123,658	)
(Provision) benefit from income taxes		(34	)		7,941			(408	)		16,602			24,101
Net (loss) income		(99,557	)		(75,962	)		(423	)		76,385			(99,557	)
Preferred stock dividends		(552	)		—			—			—			(552	)
(Loss) income applicable to common stockholders		(100,109	)		(75,962	)		(423	)		76,385			(100,109	)
Net (loss) income		(99,557	)		(75,962	)		(423	)		76,385			(99,557	)
Changes in comprehensive (loss) income		5,159			—			—			—			5,159
Comprehensive (loss) income	$	(94,398	)	$	(75,962	)	$	(423	)	$	76,385		$	(94,398	)

F- 49

Table of Contents

	Year Ended December 31, 2018
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
				Revised			Revised
	(in thousands)
Revenues	$	8,084		$	508,830		$	50,223		$	—		$	567,137
Cost of sales		(446	)		(316,132	)		(37,416	)		—			(353,994	)
Depreciation, depletion, and amortization		—			(129,442	)		(4,602	)		—			(134,044	)
General and administrative		(18,760	)		(15,963	)		(1,819	)		—			(36,542	)
Exploration and pre-development		(130	)		(30,332	)		(10,120	)		—			(40,582	)
Research and development		—			(4,094	)		(1,347	)		—			(5,441	)
Gain on derivative contracts		40,253			—			—			—			40,253
Acquisition costs		(9,445	)		(344	)		(256	)		—			(10,045	)
Equity in earnings of subsidiaries		(47,226	)		—			—			47,226			—
Other (expense) income		513			(16,347	)		3,258			(47,430	)		(60,006	)
(Loss) income before income taxes		(27,157	)		(3,824	)		(2,079	)		(204	)		(33,264	)
(Provision) benefit from income taxes		595			(37,999	)		(3,325	)		47,430			6,701
Net (loss) income		(26,562	)		(41,823	)		(5,404	)		47,226			(26,563	)
Preferred stock dividends		(552	)		—			—			—			(552	)
(Loss) income applicable to common stockholders		(27,114	)		(41,823	)		(5,404	)		47,226			(27,115	)
Net (loss) income		(26,562	)		(41,823	)		(5,404	)		47,226			(26,563	)
Changes in comprehensive (loss) income		(17,807	)		38			—			(38	)		(17,807	)
Comprehensive (loss) income	$	(44,369	)	$	(41,785	)	$	(5,404	)	$	47,188		$	(44,370	)

	Year Ended December 31, 2017
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
				Revised			Revised
	(in thousands)
Revenues	$	(5,983	)	$	498,000		$	85,758		$	—		$	577,775
Cost of sales		1,098			(284,344	)		(21,481	)		—			(304,727	)
Depreciation, depletion, and amortization		—			(117,906	)		(2,693	)		—			(120,599	)
General and administrative		(17,693	)		(15,889	)		(2,029	)		—			(35,611	)
Exploration and pre-development		(459	)		(19,892	)		(8,607	)		—			(28,958	)
Research and development		—			(3,276	)		—			—			(3,276	)
Loss on derivative contracts		(21,250	)		—			—			—			(21,250	)
Acquisition costs		(24	)		—			(1	)		—			(25	)
Equity in earnings of subsidiaries		(187,574	)		—			—			187,574			—
Other (expense) income		203,365			(80,035	)		8,298			(202,514	)		(70,886	)
(Loss) income before income taxes		(28,520	)		(23,342	)		59,245			(14,940	)		(7,557	)
(Provision) benefit from income taxes		—			(205,569	)		(17,908	)		202,514			(20,963	)
Net (loss) income		(28,520	)		(228,911	)		41,337			187,574			(28,520	)
Preferred stock dividends		(552	)		—			—			—			(552	)
(Loss) income applicable to common stockholders		(29,072	)		(228,911	)		41,337			187,574			(29,072	)
Net (loss) income		(28,520	)		(228,911	)		41,337			187,574			(28,520	)
Changes in comprehensive (loss) income		11,229			252			1,303			(1,555	)		11,229
Comprehensive (loss) income	$	(17,291	)	$	(228,659	)	$	42,640		$	186,019		$	(17,291	)

Condensed Consolidating Statements of Cash Flows

	Year Ended December 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities	$	(162,380	)	$	158,854		$	17,183		$	107,209		$	120,866
Cash flows from investing activities:
Additions to properties, plants, and equipment		—			(116,386	)		(5,035	)		—			(121,421	)
Other investing activities, net		(58,933	)		139			1,415			58,933			1,554
Cash flows from financing activities:
Dividends paid to stockholders		(5,466	)		—			—			—			(5,466	)
Borrowings under debt arrangements		279,500			—			—			—			279,500
Repayments of debt		(279,500	)		(7,157	)								(286,657	)
Other financing activity		254,263			(38,201	)		(4,108	)		(166,142	)		45,812
Effect of exchange rate changes on cash		—			875			—			—			875
Changes in cash, cash equivalents and restricted cash and cash equivalents		27,484			(1,876	)		9,455			—			35,063
Beginning cash, cash equivalents and restricted cash and cash equivalents		6,266			18,258			3,890			—			28,414
Ending cash, cash equivalents and restricted cash and cash equivalents	$	33,750		$	16,382		$	13,345		$	—		$	63,477

	Year Ended December 31, 2018
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
				Revised			Revised
	(in thousands)
Cash flows from operating activities	$	(222	)	$	91,999		$	296,081		$	(293,637	)	$	94,221
Cash flows from investing activities:														—
Additions to properties, plants, and equipment		—			(130,110	)		(6,823	)		—			(136,933	)
Purchase of other companies, net of cash acquired		(139,326	)					—			—			(139,326	)
Other investing activities, net		(209,525	)		6,789			—			242,448			39,712
Cash flows from financing activities:
Dividends paid to stockholders		(4,945	)		—			—			—			(4,945	)
Borrowings under debt arrangements		102,024			—			—			—			102,024
Repayments of debt		(106,036	)		(7,339	)		—			—			(113,375	)
Other financing activity		260,418			11,816			(322,011	)		51,189			1,412
Effect of exchange rate changes on cash		—			(1,515	)		—			—			(1,515	)
Changes in cash, cash equivalents and restricted cash and cash equivalents		(97,612	)		(28,360	)		(32,753	)		—			(158,725	)
Beginning cash, cash equivalents and restricted cash and cash equivalents		103,878			46,618			36,643			—			187,139
Ending cash, cash equivalents and restricted cash and cash equivalents	$	6,266		$	18,258		$	3,890		$	—		$	28,414

Year Ended December 31, 2017

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

Revised

Revised

(in thousands)

Cash flows from operating activities
$ (139,900
)
$ (43,279
)
$ 65,260 $ 233,797 $ 115,878

Cash flows from investing activities:
—

Additions to properties, plants, and equipment
— (85,534
)
(12,504
)
(98,038
)

Other investing activities
154,723 7,901 218 (161,367
)
1,475

Cash flows from financing activities:
— — —

Dividends paid to stockholders
(4,528
)
— — (4,528
)

Repayments of debt
— (6,986
)
— (6,986
)

Other financing activity
(19,692
)
134,178 (35,790
)
(72,430
)
6,266

Effect of exchange rates on cash
— 1,095 — — 1,095

Changes in cash, cash equivalents and restricted cash and cash equivalents
(9,397
)
7,375 17,184 — 15,162

Beginning cash, cash equivalents and restricted cash and cash equivalents
113,275 39,243 19,459 — 171,977

Ending cash, cash equivalents and restricted cash and cash equivalents
$ 103,878 $ 46,618 $ 36,643 $ — $ 187,139