10. SEGMENT INFORMATION

PHI is primarily a provider of helicopter transport services, including helicopter maintenance and repair services. We report our financial results through the three reportable segments further described below.

Each segment’s operating profit is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of our total selling, general and administrative expenses that is charged directly to the segment and a small portion that is allocated to that segment. Allocated selling, general and administrative expenses are based primarily on total segment direct expenses as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general and administrative expenses that we do not allocate to the reportable segments.

In January 2016, we offered a Voluntary Employee Retirement Package (“VERP”) to all pilots who had attained age 64. Fifteen employees accepted this VERP, resulting in severance costs of $1.6 million recorded in the first quarter of 2016. At September 30, 2016, the severance costs from these offerings had been paid.

During the quarter ended March 31, 2016, we also offered a voluntary furlough program to our Oil and Gas pilots whereby pilots who elect to participate in the program will receive severance pay and may continue medical coverage at their current employee-paid premiums. Twenty-six pilots accepted the offer with a total severance cost of $0.4 million. Under the terms of the furlough agreement, we must, no later than twelve months from the date of furlough, offer each furloughed employee a right to return to work.

Oil and Gas Segment. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major integrated and independent oil and gas production companies transporting personnel or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company, ExxonMobil Production Company, and ConocoPhillips Company, with whom we have worked for 30 or more years, and ENI Petroleum, with whom we have worked for more than 15 years. At September 30, 2016, we had available for use 139 aircraft in this segment.

Operating revenue from our Oil and Gas segment is derived mainly from contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. A small portion of our Oil and Gas segment revenue is derived from providing services on an “ad hoc” basis. Operating costs for our Oil and Gas segment are primarily aircraft operations costs, including costs for pilots and maintenance personnel. Total fuel cost is included in direct expense and any reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. For the quarters ended September 30, 2016 and 2015, respectively, approximately 49% and 56% of our total operating revenues were generated by our Oil and Gas segment. Our Oil and Gas segment generated approximately 51% and 57% of our total operating revenue for the nine months ended September 30, 2016 and 2015, respectively.

Air Medical Segment. The operations of our Air Medical segment are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment.

As of September 30, 2016, 104 aircraft were available for use by our Air Medical segment. At such date, we operated approximately 97 aircraft domestically, providing air medical transportation services for hospitals and emergency service agencies in 18 states at 72 separate locations. Through September 30, 2016, we also provided air medical transportation services for a customer overseas. For our overseas program, we deployed eight customer-owned aircraft at three locations, with four aircraft generating revenues during the quarter and nine months ended September 30, 2016.

Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the traditional provider model. Under the independent provider model, we have no fixed revenue stream and compete for transport referrals on a daily basis with other independent operators in the area. Under the traditional provider model, we contract directly with the customer to provide their transportation services, with the contracts typically awarded through competitive bidding. For the quarters ended September 30, 2016 and 2015, approximately 47% and 40% of our total operating revenues were generated by our Air Medical segment, respectively. For the nine months ended September 30, 2016 and 2015, approximately 45% and 37% of our total operating revenues were generated by our Air Medical segment, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per patient-loaded mile, regardless of aircraft model, and are typically compensated by private insurance, Medicaid or Medicare, or directly by transported patients who self-pay. As further described in Note 3, revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care at the time the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category (consisting mainly of insurance, Medicaid, Medicare, and self-pay). Estimates regarding the payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts fully closed, by category.

Provisions for contractual discounts and estimated uncompensated care for our Air Medical segment (expressed as a percentage of gross segment billings) were as follows:


	Revenue
	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Provision for contractual discounts		65	%		63	%		67	%		65	%
Provision for uncompensated care		9	%		11	%		6	%		9	%

These percentages are affected by various factors, including rate increases and changes in the number of transports by payor mix.

Net reimbursement per transport from commercial payors generally increases when a rate increase is implemented. Net reimbursement from certain commercial payors, as well as Medicare and Medicaid, generally does not increase proportionately with rate increases.

Net revenue attributable to Insurance, Medicare, Medicaid, and Self-Pay (expressed as a percentage of net Air Medical revenues) were as follows:


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Insurance		75	%		74	%		72	%		74	%
Medicare		17	%		17	%		18	%		17	%
Medicaid		8	%		8	%		9	%		8	%
Self-Pay		0	%		1	%		1	%		1	%

We also have several traditional provider contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generated approximately 27% and 34% of the segment’s revenues for the quarters ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, these contracts generated approximately 29% and 37% of the segment’s revenues, respectively.

Technical Services Segment. Our Technical Services segment provides maintenance and repairs for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments. Depending on when we commence and complete special projects for customers, our results for this segment can vary significantly from period to period, although these variances typically have a limited impact on our consolidated operating results. The Technical Services segment also conducts flight operations for the National Science Foundation in Antarctica, which are typically conducted in the first and fourth quarters each year. Also included in this segment are the results of our proprietary Helipass operations, which provides software as a service to certain of our Oil and Gas customers for the purpose of passenger check-in and compliance verification.

Approximately 4% of our total operating revenues were generated by our Technical Services segment during each of the three and nine-month periods ended September 30, 2016 and 2015.

Summarized financial information concerning our reportable operating segments for the quarters and nine months ended September 30, 2016 and 2015 is as follows:


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(Thousands of dollars)						(Thousands of dollars)
Segment operating revenues, net
Oil and Gas	$	77,551		$	121,190		$	249,173		$	354,425
Air Medical		74,482			85,516			220,089			239,543
Technical Services		6,060			8,027			19,983			23,509

Total operating revenues, net		158,093			214,733			489,245			617,477

Segment direct expenses ⁽¹⁾
Oil and Gas ⁽²⁾		82,832			109,500			262,148			310,093
Air Medical		56,562			65,474			172,603			189,089
Technical Services		5,742			7,165			15,432			21,166

Total direct expenses		145,136			182,139			450,183			520,348

Segment selling, general and administrative expenses
Oil and Gas		1,705			1,397			4,838			3,831
Air Medical		3,056			2,302			8,293			7,458
Technical Services		266			230			763			552

Total segment selling, general and administrative expenses		5,027			3,929			13,894			11,841

Total segment expenses		150,163			186,068			464,077			532,189

Net segment (loss) profit
Oil and Gas		(6,986	)		10,293			(17,813	)		40,501
Air Medical		14,864			17,740			39,193			42,996
Technical Services		52			632			3,788			1,791

Total		7,930			28,665			25,168			85,288

Other, net ⁽³⁾		377			637			5,425			1,739
Unallocated selling, general and administrative costs ⁽¹⁾		(8,354	)		(7,646	)		(22,938	)		(23,018	)
Interest expense		(7,719	)		(7,366	)		(22,792	)		(21,691	)

(Loss) earnings before income taxes	$	(7,766	)	$	14,290		$	(15,137	)	$	42,318

(1)	Included in direct expenses and unallocated selling, general, and administrative costs are the depreciation and amortization expense amounts below:


	Depreciation and Amortization Expense
	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Segment Direct Expense:
Oil and Gas	$	10,616	$	11,194	$	30,558	$	32,797
Air Medical		5,267		4,100		14,654		12,948
Technical Services		141		130		426		390

Total	$	16,024	$	15,424	$	45,638	$	46,135

Unallocated SG&A	$	2,269	$	2,376	$	7,416	$	8,177

(2)	Includes Equity in loss of unconsolidated affiliate.

(3)	Consists of gains on disposition of property and equipment, and other income.