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Note 14 - Guarantor Subsidiaries

9 Months Ended

Sep. 30, 2019

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). 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. 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 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 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 September 30, 2019
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Assets
Cash and cash equivalents	$	18,983		$	9,608		$	4,404		$	—		$	32,995
Other current assets		7,031			113,542			25,430			(72	)		145,931
Properties, plants, equipment and mineral interests - net		1,913			2,438,137			15,461			—			2,455,511
Intercompany receivable (payable)		143,248			(709,012	)		149,616			416,148			—
Investments in subsidiaries		1,499,318			—			—			(1,499,318	)		—
Other non-current assets		284,380			25,380			(120,645	)		(150,374	)		38,741
Total assets	$	1,954,873		$	1,877,655		$	74,266		$	(1,233,616	)	$	2,673,178
Liabilities and Stockholders' Equity
Current liabilities	$	(298,754	)	$	165,564		$	10,704		$	268,329		$	145,843
Long-term debt		584,618			19,159			876			—			604,653
Non-current portion of accrued reclamation		—			95,674			8,147			—			103,821
Non-current deferred tax liability		—			146,069			—			(2,627	)		143,442
Other non-current liabilities		52,365			5,393			1,017			—			58,775
Shareholders' equity		1,616,644			1,445,796			53,522			(1,499,318	)		1,616,644
Total liabilities and stockholders' equity	$	1,954,873		$	1,877,655		$	74,266		$	(1,233,616	)	$	2,673,178

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, equipment and mineral interests, 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

Unaudited Interim Condensed Consolidating Statements of Operations

	Three Months Ended September 30, 2019
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	1,049		$	144,999		$	15,484		$	—		$	161,532
Cost of sales		(472	)		(85,829	)		(9,577	)		—			(95,878	)
Depreciation, depletion, amortization		—			(47,448	)		(3,326	)		—			(50,774	)
General and administrative		(2,951	)		(4,722	)		(305	)		—			(7,978	)
Exploration and pre-development		(3	)		(4,315	)		(1,371	)		—			(5,689	)
Research and development		—			37			(90	)		—			(53	)
Loss on derivative contracts		(4,718	)		—			—			—			(4,718	)
Foreign exchange gain (loss)		(3,201	)		5,129			(1,155	)		—			773
Lucky Friday suspension-related costs		—			(3,722	)		—			—			(3,722	)
Acquisition costs		(100	)		(83	)		—			—			(183	)
Equity in earnings of subsidiaries		(6,761	)		—			—			6,761			—
Other (expense) income		(2,359	)		(9,930	)		1,606			(3,757	)		(14,440	)
Income (loss) before income taxes		(19,516	)		(5,884	)		1,266			3,004			(21,130	)
(Provision) benefit from income taxes		—			(625	)		(1,518	)		3,757			1,614
Net income (loss)		(19,516	)		(6,509	)		(252	)		6,761			(19,516	)
Preferred stock dividends		(138	)		—			—			—			(138	)
Income (loss) applicable to common shareholders		(19,654	)		(6,509	)		(252	)		6,761			(19,654	)
Net income (loss)		(19,516	)		(6,509	)		(252	)		6,761			(19,516	)
Changes in comprehensive income (loss)		(3,288	)		—			—			—			(3,288	)
Comprehensive income (loss)	$	(22,804	)	$	(6,509	)	$	(252	)	$	6,761		$	(22,804	)

Nine Months Ended September 30, 2019

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

(in thousands)

Revenues
$ (136
)
$ 409,339 $ 39,118 $ — $ 448,321

Cost of sales
(1,190
)
(280,397
)
(29,615
)
— (311,202
)

Depreciation, depletion, amortization
— (132,104
)
(6,934
)
— (139,038
)

General and administrative
(12,110
)
(13,571
)
(1,174
)
— (26,855
)

Exploration and pre-development
(22
)
(10,645
)
(5,424
)
— (16,091
)

Research and development
— (521
)
(93
)
— (614
)

Loss on derivative contracts
(2,719
)
— — — (2,719
)

Foreign exchange gain (loss)
7,820 (14,636
)
75 — (6,741
)

Lucky Friday suspension-related costs
— (8,766
)
— — (8,766
)

Acquisition costs
(221
)
(219
)
(153
)
— (593
)

Equity in earnings of subsidiaries
(77,563
)
— — 77,563 —

Other (expense) income
(5,438
)
(31,573
)
2,308 (12,589
)
(47,292
)

Income (loss) before income taxes
(91,579
)
(83,093
)
(1,892
)
64,974 (111,590
)

(Provision) benefit from income taxes
(2
)
6,864 558 12,589 20,009

Net income (loss)
(91,581
)
(76,229
)
(1,334
)
77,563 (91,581
)

Preferred stock dividends
(414
)
— — — (414
)

Income (loss) applicable to common shareholders
(91,995
)
(76,229
)
(1,334
)
77,563 (91,995
)

Net income (loss)
(91,581
)
(76,229
)
(1,334
)
77,563 (91,581
)

Changes in comprehensive income (loss)
4,511 — — — 4,511

Comprehensive income (loss)
$ (87,070
)
$ (76,229
)
$ (1,334
)
$ 77,563 $ (87,070
)

Three Months Ended September 30, 2018

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

Revised

Revised

(in thousands)

Revenues
$ 5,020 $ 124,497 $ 14,132 $ — $ 143,649

Cost of sales
(157
)
(80,876
)
(12,576
)
— (93,609
)

Depreciation, depletion, amortization
— (41,669
)
(1,795
)
— (43,464
)

General and administrative
(4,802
)
(5,082
)
(443
)
— (10,327
)

Exploration and pre-development
(1
)
(11,227
)
(2,378
)
— (13,606
)

Research and development
— (732
)
(537
)
— (1,269
)

Gain on derivative contracts
19,460 — — — 19,460

Foreign exchange gain (loss)
4,640 (7,629
)
777 — (2,212
)

Lucky Friday suspension costs
— (6,519
)
— — (6,519
)

Acquisition costs
(5,741
)
(386
)
(12
)
— (6,139
)

Equity in earnings of subsidiaries
(54,618
)
— — 54,618 —

Other expense
13,016 (4,756
)
(262
)
(19,825
)
(11,827
)

Income (loss) before income taxes
(23,183
)
(34,379
)
(3,094
)
34,793 (25,863
)

(Provision) benefit from income taxes
(1
)
(17,530
)
385 19,825 2,679

Net income (loss)
(23,184
)
(51,909
)
(2,709
)
54,618 (23,184
)

Preferred stock dividends
(138
)
— — — (138
)

Income (loss) applicable to common shareholders
(23,322
)
(51,909
)
(2,709
)
54,618 (23,322
)

Net income (loss)
(23,184
)
(51,909
)
(2,709
)
54,618 (23,184
)

Changes in comprehensive income (loss)
3,746 — — — 3,746

Comprehensive income (loss)
$ (19,438
)
$ (51,909
)
$ (2,709
)
$ 54,618 $ (19,438
)

Nine Months Ended September 30, 2018

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

Revised

Revised

(in thousands)

Revenues
$ 8,332 $ 381,556 $ 40,729 $ — $ 430,617

Cost of sales
245 (219,497
)
(27,666
)
— (246,918
)

Depreciation, depletion, amortization
— (99,749
)
(3,586
)
— (103,335
)

General and administrative
(13,250
)
(13,247
)
(1,352
)
— (27,849
)

Exploration and pre-development
(128
)
(22,571
)
(8,525
)
— (31,224
)

Research and development
— (3,702
)
(1,340
)
— (5,042
)

Gain/(loss) on derivative contracts
40,271 — — — 40,271

Foreign exchange gain (loss)
(9,795
)
12,230 421 — 2,856

Lucky Friday suspension costs
— (18,337
)
— — (18,337
)

Acquisition costs
(9,041
)
(454
)
(161
)
— (9,656
)

Equity in earnings of subsidiaries
(31,105
)
— — 31,105 —

Other (expense) income
11,602 (19,034
)
722 (29,027
)
(35,737
)

Income (loss) before income taxes
(2,869
)
(2,805
)
(758
)
2,078 (4,354
)

(Provision) benefit from income taxes
(1
)
(26,348
)
(1,194
)
29,027 1,484

Net income (loss)
(2,870
)
(29,153
)
(1,952
)
31,105 (2,870
)

Preferred stock dividends
(414
)
— — — (414
)

Income (loss) applicable to common shareholders
(3,284
)
(29,153
)
(1,952
)
31,105 (3,284
)

Net income (loss)
(2,870
)
(29,153
)
(1,952
)
31,105 (2,870
)

Changes in comprehensive income (loss)
(3,520
)
38 — (38
)
(3,520
)

Comprehensive income (loss)
$ (6,390
)
$ (29,115
)
$ (1,952
)
$ 31,067 $ (6,390
)

Unaudited Interim Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2019

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

(in thousands)

Cash flows from operating activities
$ (140,110
)
$ 92,042 $ (15,242
)
$ 126,919 $ 63,609

Cash flows from investing activities:

Additions to properties, plants, equipment and mineral interests
— (56,329
)
(41,009
)
— (97,338
)

Other investing activities, net
72,128 42 1,415 (72,128
)
1,457

Cash flows from financing activities:

Dividends paid to shareholders
(4,070
)
— — — (4,070
)

Borrowings on debt
245,000 — — — 245,000

Payments on debt
(195,000
)
(4,965
)
(519
)
— (200,484
)

Other financing activity, net
34,769 (38,672
)
55,869 (54,791
)
(2,825
)

Effect of exchange rates on cash
— 257 — — 257

Changes in cash, cash equivalents and restricted cash and cash equivalents
12,717 (7,625
)
514 — 5,606

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
$ 18,983 $ 10,633 $ 4,404 $ — $ 34,020

Nine Months Ended September 30, 2018

Parent

Guarantors

Non-Guarantors

Eliminations

Consolidated

Revised

Revised

(in thousands)

Cash flows from operating activities
$ (29,868
)
$ 88,853 $ (40,161
)
$ 56,386 $ 75,210

Cash flows from investing activities:

Additions to properties, plants, equipment and mineral interests
20,710 (101,147
)
(2,848
)
— (83,285
)

Acquisitions of other companies, net of cash acquired
(139,326
)
— — (139,326
)

Other investing activities, net
(398,101
)
4,309 — 431,815 38,023

Cash flows from financing activities:

Dividends paid to shareholders
(3,607
)
— — — (3,607
)

Borrowings on debt
78,024 — — — 78,024

Payments on debt
(47,000
)
(41,028
)
— — (88,028
)

Other financing activity, net
443,372 26,051 16,709 (488,201
)
(2,069
)

Effect of exchange rates on cash
— (215
)
— (215
)

Changes in cash, cash equivalents and restricted cash and cash equivalents
(75,796
)
(23,177
)
(26,300
)
— (125,273
)

Beginning cash, cash equivalents and restricted cash and cash equivalents
103,877 46,619 36,643 — 187,139

Ending cash, cash equivalents and restricted cash and cash equivalents
$ 28,081 $ 23,442 $ 10,343 $ — $ 61,866