Note 13 - Guarantor Subsidiaries

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Guarantor Subsidiaries [Text Block]

Note 13.   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 (see Note 9 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 offering of the Senior Notes on February 19, 2020 under our shelf registration statement previously filed with the SEC.

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 condensed 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 the 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 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 unaudited interim 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 March 31, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Assets
Cash and cash equivalents	$	190,274		$	16,984		$	8,457		$	—		$	215,715
Other current assets		19,131			95,981			11,788			(73	)		126,827
Properties, plants, equipment and mineral interests - net		1,913			2,380,598			10,676			—			2,393,187
Intercompany receivable (payable)		(15,844	)		(565,090	)		224,183			356,751			—
Investments in subsidiaries		1,648,133			—			—			(1,648,133	)		—
Other non-current assets		263,344			24,970			(124,320	)		(135,599	)		28,395
Total assets	$	2,106,951		$	1,953,443		$	130,784		$	(1,427,054	)	$	2,764,124
Liabilities and Stockholders' Equity
Current liabilities	$	(292,781	)	$	154,776		$	5,682		$	249,506		$	117,183
Long-term debt		679,021			15,406			543			—			694,970
Non-current portion of accrued reclamation		—			91,478			6,031			—			97,509
Non-current deferred tax liability		—			154,664			—			(28,427	)		126,237
Other non-current liabilities		63,828			6,575			939			—			71,342
Stockholders' equity		1,656,883			1,530,544			117,589			(1,648,133	)		1,656,883
Total liabilities and stockholders' equity	$	2,106,951		$	1,953,443		$	130,784		$	(1,427,054	)	$	2,764,124

	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, equipment and mineral interests - 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

Unaudited Interim Condensed Consolidating Statements of Operations

	Three Months Ended March 31, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	1,679		$	125,316		$	9,930		$	—		$	136,925
Cost of sales		(284	)		(78,751	)		(6,852	)		—			(85,887	)
Depreciation, depletion, amortization		—			(38,193	)		(1,473	)		—			(39,666	)
General and administrative		(3,163	)		(5,339	)		(437	)		—			(8,939	)
Exploration and pre-development		(12	)		(2,055	)		(998	)		—			(3,065	)
Gain on derivative contracts		7,893			—			—			—			7,893
Acquisition costs		(5	)		—			—			—			(5	)
Equity in earnings of subsidiaries		11,330			—			—			(11,330	)		—
Other (expense) income		(34,623	)		10,704			(741	)		(843	)		(25,503	)
(Loss) income before income taxes		(17,185	)		11,682			(571	)		(12,173	)		(18,247	)
Benefit (provision) from income taxes		—			1,056			(837	)		843			1,062
Net (loss) income		(17,185	)		12,738			(1,408	)		(11,330	)		(17,185	)
Preferred stock dividends		(138	)		—			—			—			(138	)
(Loss) income applicable to common stockholders		(17,323	)		12,738			(1,408	)		(11,330	)		(17,323	)
Net (loss) income		(17,185	)		12,738			(1,408	)		(11,330	)		(17,185	)
Changes in comprehensive (loss) income		(19,335	)		—			—			—			(19,335	)
Comprehensive (loss) income	$	(36,520	)	$	12,738		$	(1,408	)	$	(11,330	)	$	(36,520	)

	Three Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	(2,477	)	$	142,494		$	12,600		$	—		$	152,617
Cost of sales		(461	)		(99,333	)		(10,592	)		—			(110,386	)
Depreciation, depletion, amortization		—			(37,027	)		(1,760	)		—			(38,787	)
General and administrative		(4,393	)		(5,111	)		(455	)		—			(9,959	)
Exploration and pre-development		(16	)		(3,062	)		(2,180	)		—			(5,258	)
Research and development		—			(403	)		—			—			(403	)
Gain on derivative contracts		(1,799	)		—			—			—			(1,799	)
Acquisition costs		42			(55	)		—			—			(13	)
Equity in earnings of subsidiaries		(22,432	)		—			—			22,432			—
Other (expense) income		6,003			(19,778	)		1,407			(6,393	)		(18,761	)
Income (loss) before income taxes		(25,533	)		(22,275	)		(980	)		16,039			(32,749	)
(Provision) benefit from income taxes		—			(62	)		885			6,393			7,216
Net income (loss)		(25,533	)		(22,337	)		(95	)		22,432			(25,533	)
Preferred stock dividends		(138	)		—			—			—			(138	)
Income (loss) applicable to common stockholders		(25,671	)		(22,337	)		(95	)		22,432			(25,671	)
Net income (loss)		(25,533	)		(22,337	)		(95	)		22,432			(25,533	)
Changes in comprehensive income (loss)		4,259			—			—			—			4,259
Comprehensive income (loss)	$	(21,274	)	$	(22,337	)	$	(95	)	$	22,432		$	(21,274	)

Unaudited Interim Condensed Consolidating Statements of Cash Flows

	Three Months Ended March 31, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities	$	(13,285	)	$	33,035		$	19,830		$	(34,653	)	$	4,927
Cash flows from investing activities:
Additions to properties, plants, equipment and mineral interests		—			(19,068	)		(802	)		—			(19,870	)
Other investing activities, net		(11,331	)		154			—			11,331			154
Cash flows from financing activities:
Dividends paid to stockholders		(1,442	)		—			—			—			(1,442	)
Borrowings on debt		679,500			—			—			—			679,500
Payments on debt		(506,500	)		(1,284	)		—			—			(507,784	)
Other financing activity		9,582			(10,233	)		(23,129	)		23,322			(458	)
Effect of exchange rate changes on cash		—			(949	)		(787	)		—			(1,736	)
Changes in cash, cash equivalents and restricted cash and cash equivalents		156,524			1,655			(4,888	)		—			153,291
Beginning cash, cash equivalents and restricted cash and cash equivalents		33,750			16,382			13,345			—			63,477
Ending cash, cash equivalents and restricted cash and cash equivalents	$	190,274		$	18,037		$	8,457		$	—		$	216,768

	Three Months Ended March 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities	$	(37,529	)	$	29,554		$	(11,315	)	$	39,320		$	20,030
Cash flows from investing activities:
Additions to properties, plants, equipment and mineral interests		—			(27,860	)		(5,211	)		—			(33,071	)
Other investing activities, net		23,115			1			—			(23,115	)		1
Cash flows from financing activities:
Dividends paid to stockholders		(1,347	)		—			—			—			(1,347	)
Borrowings on debt		58,000			—			—			—			58,000
Payments on debt		(58,000	)		(1,261	)		—			—			(59,261	)
Other financing activity		12,896			(12,467	)		15,737			(16,205	)		(39	)
Effect of exchange rate changes on cash		—			95			—			—			95
Changes in cash, cash equivalents and restricted cash and cash equivalents		(2,865	)		(11,938	)		(789	)		—			(15,592	)
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	$	3,401		$	6,320		$	3,101		$	—		$	12,822