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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations, Basis of Consolidation, and Other General Principles

PHI, Inc. and its subsidiaries (“PHI,” the “Company,” “we,” “us,” or “our”) provide transportation services to, from, and among offshore facilities for customers engaged in the oil and gas exploration, development, and production industry. We provide these offshore services primarily in North America and to a lesser extent in West Africa, Trinidad, and the Middle East. We also provide air medical transportation services for hospitals and emergency service agencies, as well as aircraft maintenance and repair services to third parties in North America.

The consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries after the elimination of all intercompany accounts and transactions. We apply the equity method of accounting for investments in entities, if we have the ability to exercise significant influence over the operating and financial policies of the entity. We report our share of earnings or losses of equity investees in the accompanying Consolidated Statements of Operations as equity in earnings (loss) of unconsolidated affiliates.

At December 31, 2016, Al A. Gonsoulin, Chairman of the Board and Chief Executive Officer, beneficially owned stock representing approximately 70.9% of the total voting power. As a result, he exercises control over the election of PHI’s directors and the outcome of matters requiring a shareholder vote.

Use of Estimates

The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Significant estimates include:

Estimates of contractual allowances applicable to billings in the Air Medical segment,

Inventories of spare parts,

Valuation reserve related to obsolete and excess inventory,

Reserves related to unpaid accounts,

Depreciable lives and salvage values of property and equipment,

Valuation allowance for deferred tax assets,

Income taxes,

Healthcare insurance claims and workers’ compensation liability, and

Impairment of long-lived assets.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents.

Trade Receivables, net

Trade and other receivables are stated at net realizable value. Air Medical trade receivables are presented net of allowances for contractual discounts and uncompensated care. We estimate contractual allowances and uncompensated care based on historical collection experience by payor category. The main payor categories are Medicare, Medicaid, private insurance, and self-pay. We analyze our historical payment of accounts by payor category on a monthly basis, and adjust our accounts receivable allowance based upon each category’s historical collection percentage plus any adjustments for current trends in payor behavior.

Provisions for contractual discounts and uncompensated care that we applied to our Air Medical trade receivables (expressed as a percentage of total segment accounts receivable) at December 31 were as follows:


	2016			2015
Allowance for contractual discounts		56	%		56	%
Allowance for uncompensated care		23	%		23	%

Short-term Investments

Short-term investments consist of money market funds, commercial paper, debt issued by the U.S. government or its agencies, and corporate bonds and notes, which represent funds available for current operations. In accordance with GAAP, these short-term investments are classified as available for sale. We recorded less than $0.3 million in net unrealized losses in 2016. These losses are reflected as a separate component of stockholders’ equity.

Inventories of Spare Parts

The Company’s inventories are stated at average cost and consist primarily of spare aircraft parts. Portions of the Company’s inventories are used parts that are often exchanged with parts removed from aircraft, reworked to a useable condition according to manufacturers’ and FAA specifications, and returned to inventory. Reusable aircraft parts are included in inventory at the average cost of comparable parts. The rework costs are expensed as incurred. The Company also records an allowance for obsolete and slow-moving parts, relying principally on specific identification of such inventory. Valuation reserves related to obsolescence and slow-moving inventory were $17.3 million and $15.4 million at December 31, 2016 and 2015, respectively.

Property and Equipment

The Company records its property and equipment at cost less accumulated depreciation. For financial reporting purposes, the Company uses the straight-line method to compute depreciation based upon estimated useful lives of five to fifteen years for flight equipment and three to ten years for other equipment. Leasehold improvements are amortized over the shorter of the life of the respective asset or the term of the lease agreement and range from six to ten years. The salvage value used in calculating depreciation of aircraft ranges from 25% to 54% of the aircraft’s carrying value, based upon historical aircraft sales data (historical as of 2007). The cost of scheduled inspections and modifications for flight equipment are charged to maintenance expense as incurred. We charge maintenance and repair costs to earnings as the costs are incurred. The cost of certain aircraft components are covered under contractual arrangements with the applicable aircraft manufacturer, commonly referred to as “power-by-the-hour” contracts. Under these agreements, we are charged an agreed amount per hour of flying time. The costs charged under these contractual arrangements are recognized in the period in which the flight hours occur. To the extent that we have not yet been billed for costs incurred under these arrangements, these costs are included in accrued expenses on our consolidated balance sheets. Modifications that enhance the operating performance or extend the useful lives of the aircraft are capitalized and depreciated over the remaining life of the asset. Upon selling or otherwise disposing of property and equipment, the Company removes the cost and accumulated depreciation from the accounts and reflects any resulting gain or loss in earnings at the time of sale or other disposition.

The Company reviews its long-lived tangible assets for impairment annually, or more frequently if events or a change of circumstances indicate that an impairment may have occurred. The Company reviews certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. In such evaluation, the estimated future undiscounted cash flows generated by a particular asset group are compared with the book value of the asset group to determine if an impairment charge is necessary. Similar aircraft model types are grouped together for impairment testing purposes. The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows that it expects the asset to generate. When the Company determines that an asset is impaired, the Company recognizes that impairment amount, which is measured by the amount that the carrying value of the asset exceeds its fair value. In addition to the periodic review of its active long-lived tangible assets for impairment when circumstances warrant, the Company also performs a review of its parked aircraft not expected to return to service annually or whenever changes in circumstances indicate the carrying amount of an aircraft may not be recoverable. Management estimates the fair value of each aircraft not expected to return to service by considering items such as the aircraft’s age, length of time parked, likelihood of return to active service, and actual recent sales of similar aircraft. For more significant aircraft carrying values, we obtain an estimate of the fair value of the parked aircraft form third-party appraisers for use in our determination of fair value estimates. The Company records an impairment charge when the carrying value of a parked aircraft not expected to return to active service exceeds its estimated fair market value.

During the twelve months ended December 31, 2016, we sold or disposed of twelve light, eleven medium aircraft, and related parts inventory utilized in our Oil and Gas segment. Cash proceeds totaled $15.0 million, resulting in a gain of $3.3 million. These aircraft no longer met our strategic needs.

During the twelve months ended December 31, 2015, we sold eight light and six medium aircraft previously utilized in our Oil and Gas segment. The carrying value of these assets prior to the sale was $3.7 million. These assets were sold for $3.7 million, which resulted in no gain. These aircraft no longer met our strategic needs. We also sold the associated spare parts inventory for these aircraft, which resulted in a $0.3 million loss.

Impairment Losses

In connection with our normal recurring impairment testing, we recorded an impairment loss in the year ended December 31, 2016 for two light aircraft in our Oil and Gas segment. The carrying value of these aircraft was $1.8 million. Following a market analysis, we determined that the market value for these aircraft is $1.4 million (considered Level 3, as defined by ASC 820, Fair Value Measurements and Disclosures). As a result of this analysis, we recorded an aggregate non-cash pre-tax impairment loss of $0.4 million for 2016. We had no impairment losses in the year ended December 31, 2015. For the year ended December 31, 2014, we recorded an impairment loss for 13 medium aircraft in our Air Medical segment. The carrying value of these aircraft was $16.5 million. Following a market analysis, we determined that the market value for these aircraft was $6.0 million. As a result of this analyses, we recorded an aggregate non-cash pre-tax impairment loss of $10.5 million for 2014. See Note 3 for additional information.

Deferred Financing Costs

Costs incurred to obtain long-term debt financing are deferred and amortized ratably over the term of the related debt agreement.

Self-Insurance

The Company maintains a self-insurance program for a portion of its healthcare costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. The Company’s insurance retention was $250,000 per claim through December 31, 2016. As of December 31, 2016 and 2015, the Company had $1.9 million of accrued liabilities related to healthcare claims.

There is also a $0.5 million deductible per incident on our workers’ compensation program. We have accrued $2.5 million and $2.6 million for the years 2016 and 2015, respectively, related to workers’ compensation claims.

The Company owns an offshore insurance company to realize savings in reinsurance costs on its insurance premiums. We paid $0.6 million and $1.0 million, respectively, to this captive company in 2016 and 2015, which were eliminated in consolidation. The results of the captive are fully consolidated in the accompanying consolidated financial statements.

Revenue Recognition

The Company recognizes revenue related to aviation transportation services after the services are performed or the contractual obligations are met. Aircraft maintenance services revenues are recognized at the time the repair or services work is completed. Revenues related to the Company’s Air Medical segment independent provider model services are recorded net of contractual allowances under agreements with third party payors, and also recorded net of uncompensated care allowances when the services are provided. Revenues generated under the traditional provider model consist of a fixed monthly rate for aircraft availability and an hourly rate for flight time. We estimate contractual allowances and uncompensated care based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, private insurance, and self-pay. Changes in payor mix, reimbursement rates and uncompensated care rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. In our Air Medical Segment, the allowance for contractual discounts against outstanding accounts receivable was $111.9 million, $103.6 million, and $96.6 million as of December 31, 2016, 2015, and 2014, respectively, and the allowance for uncompensated care against outstanding accounts receivable was $46.3 million, $41.9 million, and $41.9 million as of December 31, 2016, 2015, and 2014, respectively. Included in the allowance for uncompensated care above is the value of services to patients who are unable to pay when it is determined that they qualify as charity care. The value of these services was $8.8 million, $9.3 million, and $9.1 million for the years ended December 31, 2016, 2015, and 2014, respectively. The estimated cost of providing charity services was $1.9 million, $2.0 million, and $2.1 million for the years ended December 31, 2016, 2015, and 2014, respectively. The estimated costs of providing charity services are based on a calculation that applies a ratio of costs to the charges for uncompensated charity care. The ratio of costs to charges is based on the Air Medical independent provider model’s total expenses divided by gross patient service revenue.

In determining the allowance estimates for our Air Medical segment’s billing, receivables and revenue, we utilize the prior twelve months’ payment history and current trends in payor behavior by each separate payor group, which we evaluate on a state by state basis. A percentage of amounts collected compared to the total invoice is determined from this process and applied to the current month’s billings and receivables. If a receivable related to the self-pay category is outstanding nine months or greater, we record a reserve equal to 100% of the receivable. Receivables related to other payor categories are scrutinized when they are outstanding for nine months or longer and additional allowances are recorded if warranted.

Provisions for contractual discounts and estimated uncompensated care that we applied to our Air Medical revenues (expressed as a percentage of total independent provider model billings) were as follows:


	Year Ended December 31,
	2016			2015			2014
Provision for contractual discounts		67	%		65	%		72	%
Provision for uncompensated care		6	%		8	%		2	%

Amounts attributable to Medicaid, Medicare, private insurance, and self-pay as a percentage of net Air Medical independent provider model revenues were as follows:


	Year Ended December 31,
	2016			2015			2014
Insurance		72	%		74	%		74	%
Medicare		18	%		17	%		18	%
Medicaid		9	%		8	%		8	%
Self-Pay		1	%		1	%		0	%

Under a contract that commenced on September 29, 2012, our Air Medical affiliate provided multiple products and services to a customer in the Middle East, including helicopter leasing, emergency medical helicopter flight services, aircraft maintenance, provision of spare parts and insurance coverage for the customer-owned aircraft, training services, and base construction. The initial contract expired in late September 2015 and was extended through September 30, 2016, when it lapsed. Each of the major deliverables mentioned above qualify as separate units of accounting under the accounting guidance for such arrangements. The selling price for each service was determined based upon third-party evidence and estimates.

Income Taxes

Income taxes are accounted for in accordance with the provisions of Accounting Standards Codification 740, Income Taxes. The Company provides for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities measurement uses enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect of any tax rate changes in income of the period that includes the enactment date.

In connection with recording deferred income tax assets and liabilities, the Company establishes valuation allowances when necessary to reduce deferred income tax assets to amounts that it believes are more likely than not to be realized. The Company evaluates its deferred tax assets quarterly to determine whether positive or negative adjustments to its valuation allowances are appropriate in light of changes in facts or circumstances, such as changes in tax law or interactions with taxing authorities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Adjustments to the amount of our valuation allowances can materially impact our financial condition and results of operations.

Earnings per Share

Basic earnings per share is computed by dividing earnings (loss) during the period by the weighted average number of voting and non-voting shares outstanding during each period. Diluted earnings per share is computed by dividing net income (loss) during the period by the weighted average number of shares of common stock that would have been outstanding assuming the issuance of potentially dilutive shares of common stock, as if such shares were outstanding during the reporting period, net of shares to be repurchased using the treasury stock method. Dilutive shares for this purpose assumes restricted stock unit awards have vested.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivables. The Company does not believe significant credit risk existed with respect to these trade accounts receivable at December 31, 2016.

PHI conducts a majority of its business with major and independent oil and gas exploration and production companies with operations in the Gulf of Mexico. The Company also provides services to major medical centers. The Company continually evaluates the financial strength of its customers, but generally does not require collateral to secure its customer receivables. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, current market conditions, and other information. Amounts are charged off as uncollectible when collection efforts have been exhausted. The allowance for doubtful accounts was $6.0 million and $5.2 million at December 31, 2016 and 2015, respectively.

Trade receivables representing amounts due pursuant to air medical independent provider model services are carried net of an allowance for estimated contractual adjustments and uncompensated care on unsettled invoices. The Company monitors its collection experience by payor category within the Air Medical segment and updates its estimated collections to be realized as deemed necessary. In our Air Medical segments, the allowance for contractual discounts was $111.9 million, $103.6 million, and $96.6 million as of December 31, 2016, 2015, and 2014, respectively, and the allowance for uncompensated care was $46.3 million, $41.9 million, and $41.9 million as of December 31, 2016, 2015, and 2014, respectively.

The Company’s two largest oil and gas customers accounted for 24% of consolidated operating revenues for the year ended December 31, 2016, 26% for the year ended December 31, 2015, and 30% for the year ended December 31, 2014. The Company also carried accounts receivable from these same customers totaling 16% and 15% of net trade receivables on December 31, 2016 and 2015, respectively. The Company’s largest Air Medical customer accounted for 5% and 9% of consolidated operating revenues for the years ended December 31, 2016 and 2015, respectively. The Company also carried accounts receivable from this customer totaling 13% and 15% of net trade receivables on December 31, 2016 and 2015, respectively.

Substantially all of the Company’s cash is maintained in one financial institution in amounts that typically exceed federally insured limits. The Company has not experienced any losses in such accounts and based on current circumstances does not believe that it is exposed to significant credit risk.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The standard is effective for us beginning January 1, 2018, with early adoption permitted as of January 1, 2017. Revenues from our Oil and Gas segment and Air Medical segment hospital contracts are primarily comprised of a fixed monthly fee for a particular model of aircraft, plus a variable component based on flight time. As an independent provider of air medical services, our revenues are based on a flat rate plus a variable charge per patient-loaded mile, and are recorded net of contractual allowances. We also generate revenue on a cost-plus basis in our Technical Services segment. We are continuing to assess the effects of this standard on each revenue stream of our business and the overall effect on our financial position, results of operations and cash flows and have not yet selected a method of adoption. We intend to adopt the standard beginning January 1, 2018.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess the entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. ASU 2014-15 is effective for annual periods beginning after December 15, 2016, and annual and interim periods thereafter. The impact of the implementation of this new guidance on our consolidated financial statements and disclosures is not significant.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. We do not expect this ASU to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which replaces the existing guidance on leasing transactions in ASC 840 to require recognition of the assets and liabilities for the rights and obligations created by those leases on the balance sheet. We plan to adopt this standard no later than January 1, 2019. We are currently evaluating the effects of this standard, and expect the adoption of this standard will result in a material change to our consolidated assets and liabilities based on our lease portfolio as of December 31, 2016.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. We do not expect this ASU to have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The effects of this standard on our financial position, results of operations, and cash flows are not yet known.