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 the United States and to a lesser extent in Canada, Trinidad, Australia, New Zealand, the Philippines, West Africa 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 (loss) profit of unconsolidated affiliate.

At December 31, 2018, 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.

Chapter 11 Cases

As of December 31, 2018, the Company’s total senior indebtedness was $630 million, consisting of (i) $500.0 million principal amount of our 5.25% Senior Notes due March 15, 2019 and (ii) $130.0 million principal amount of borrowings under its two-year term loan with the financing affiliate of its controlling shareholder (in each case excluding debt issuance costs). The Company also had $19.8 million of letters of credit outstanding at December 31, 2018. As of December 31, 2018, the Company had approximately $159.5 million of aggregate lease commitments. As discussed further elsewhere herein, the Company borrowed an additional $70 million on March 13, 2019.

Beginning in late 2017, the Company considered its options for refinancing its unsecured senior notes due March 15, 2019. However, in light of the challenging operating environment for companies providing offshore energy services generally, the financing market was constrained and the Company was not able to identify a refinancing option that it believed provided a suitable capital platform to promote the best interests of the Company and its stakeholders.

In the fall of 2018, the Company announced that it had engaged financial advisors to assist the Company in exploring and evaluating a broad range of potential strategic alternatives. After working closely with the Company’s advisors, communicating with the Company’s various stakeholders, and carefully evaluating all possible options, the Board concluded that pursuing Chapter 11 protection was the most appropriate course of action to address the Company’s maturing debt and strengthen its balance sheet.

Prior to the maturity of the Company’s unsecured senior notes, on March 14, 2019 (the “Petition Date”), the Company and its principal U.S. subsidiaries. PHI Tech Services, Inc., AM Equity Holdings, L.L.C., PHI Air Medical, L.L.C. and PHI Helipass, L.L.C. (together with the Company, collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The Debtors have requested joint administration of their Chapter 11 Cases under the caption In re: PHI, Inc., et al., Main Case No. 19-30923. The Debtors continue to operate their businesses and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors have filed with the Bankruptcy Court motions seeking a variety of “first-day” relief (collectively, the “First Day Motions”), including authority to pay employee wages and benefits, honor customer programs, and pay utilities providers, insurance providers and other vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date.

We currently retain the exclusive right to propose a Chapter 11 plan of reorganization. If the Bankruptcy Court terminates that right, however, or the exclusivity period expires, our ability to achieve confirmation of a Chapter 11 plan of reorganization could be materially adversely affected.

Going Concern

The Company expects to continue operations in the normal course during the pendency of the Chapter 11 Cases described immediately above under the heading "Chapter 11 Cases".

The significant risks and uncertainties related to the company’s Chapter 11 Case raise substantial doubt about the company's ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

See Note 19 for further information and details on the Company’s restructuring and Chapter 11 proceedings.

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,

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,

Fair values of assets acquired and liabilities assumed,

Income taxes,

Healthcare insurance claims and workers’ compensation liability, and

Impairment of long-lived assets,

Impairment of Goodwill and Intangible 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:



	2018	2017
Allowance for contractual discounts	51%	53%
Allowance for uncompensated care	22%	24%

Short-term Investments

Short-term investments consist of 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.

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 $17.9 million and $20.9 million at December 31, 2018 and 2017, 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 5 to 15 years for flight equipment and 3 to 10 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 6 to 10 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. 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 aircraft. 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. 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 from 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, 2018, we sold or disposed of one heavy, three medium and one light aircraft and related parts inventory utilized in our Oil and Gas segment and one light aircraft in our Air Medical segment. Cash proceeds totaled $14.2 million, resulting in a loss of $0.8 million. These aircraft no longer met our strategic needs.

During the twelve months ended December 31, 2017, we sold or disposed of six medium, one fixed wing aircraft and related parts inventory previously utilized in our Oil and Gas segment. Cash proceeds totaled $1.3 million, resulting in a loss of $0.3 million. These aircraft no longer met our strategic needs.

During the twelve months ended December 31, 2016, we sold twelve light, eleven medium aircraft, and related parts inventory previously 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.

Impairment Losses for Aircraft

The Company estimates cash flows and asset appraisals based upon historical data adjusted for the Company’s best estimate of expected future market performance. If an asset group fails the undiscounted cash flow test or appraisal value, the Company compares the market value to the book value of each asset group in order to determine if impairment exists (considered Level 3, as defined by ASC 820, Fair Value Measurements and Disclosures). If impairment exists, the book value of the asset group is reduced to its estimated fair value. We recorded an impairment loss in the year ended December 31, 2018 for two light, seventeen medium and one heavy aircraft and related spare parts in our Oil and Gas segment. The carrying value of these aircraft was $109.6 million. Following a market analysis, we determined that the market value for these aircraft is $85.2 million (based on a Level 3 review, 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 $23.2 million for 2018. We had $0.4 million impairment losses in the year ended December 31, 2017. We had $0.4 million impairment losses for the year ended December 31, 2016. (see note 18)

Fair Value of Assets and Liabilities Acquired and Identification of Associated Goodwill and Intangible Assets

In conjunction with each acquisition we make, we must allocate the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition. As additional information becomes available, we may adjust the original estimates within a short time period subsequent to the acquisition. In addition, we are required to recognize intangible assets separately from goodwill. Determining the fair value of assets and liabilities acquired, as well as intangible assets that relate to such items as customer relationships, contracts, trade names and non-compete agreements involves professional judgment and is ultimately based on acquisition models and management’s assessment of the value of the assets acquired, and to the extent available, third party assessments. Intangible assets with finite lives are amortized over their estimated useful life as determined by management. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets will be reviewed for impairment. Goodwill is not amortized but instead is periodically assessed for impairment. Uncertainties associated with these estimates include fluctuations in economic obsolescence factors in the area and potential future sources of cash flow. We cannot provide assurance that actual amounts will not vary significantly from estimated amounts. (see note 2)

Goodwill

Goodwill represents the amount the purchase price exceeds the fair value of net assets acquired in a business combination. Goodwill has an indefinite useful life and is not amortized, but is assessed for impairment annually or when events or changes in circumstances indicate that a potential impairment exists.

The Company performs the goodwill impairment test on an annual basis during the fourth quarter or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. The company performed its goodwill impairment test in the fourth quarter. In order to estimate the fair value of the reporting units (which is consistent with the reported business segments), the Company used a weighting of the discounted cash flow method and the public company guideline method of determining fair value of each reporting unit. The Company weighted the discounted cash flow method 80% and the public company guideline method 20% due to differences between the Company’s reporting units and the peer companies’ size, profitability and diversity of operations. These fair value estimates were then compared to the carrying value of the reporting units. If the fair value of the reporting unit exceeds the carrying amount, no impairment loss is recognized. If the estimated fair value of the reporting unit is below the carrying value, then an impairment is recorded, which represents the amount by which a reporting unit’s carrying value exceeds its fair value. The inputs used to determine fair value were classified as level 3 in the fair value hierarchy. A significant amount of judgment was involved in performing these evaluations since the results are based on estimated future events. At December 31, 2018, the Company’s accumulated impairments of goodwill was $61.6 million. As of December 31, 2018 there is no remaining goodwill in our financial statements. (see note 18).

Other Intangible Assets

In connection with our acquisition of the HNZ Offshore Business, we also recognized in the fourth quarter of 2017 intangible assets for customer relationship, non-compete and tradenames. Intangible assets with finite useful lives are amortized over estimated useful lives on a straight-line basis. The Company reviews its intangible assets for impairment annually, or more frequently if events or a change of circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows. 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. 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. The estimated fair values for these assets were determined using discounted future cash flows. The significant level 3 unobservable inputs used in the determination of the fair value of these assets were the estimated future cash flows and the weighted average cost of capital ("WACC"). During the fourth quarter of 2018, the Company recorded $15.5 million in impairments of values of intangibles in the Oil & Gas segment (see note 18)

Our intangible assets by types consist of the following (in thousands):



	Estimated Useful Lives	Gross Amount	Accumulated Amortization		Impairments of assets		Net Balance
Customer Relationship	15	11,622	(581	)	(11,041	)	—
Non-Compete Agreements	5	900	(135	)	(765	)	—
Tradenames	7	4,201	(450	)	(3,751	)	—
Total		16,723	(1,166	)	(15,557	)	—

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, 2018. As of December 31, 2018 and 2017, the Company had $1.8 million and $1.3 million, respectively, 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 $1.9 million and $2.9 million for the years 2018 and 2017, 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 $0.3 million and $0.5 million, respectively, to this captive company in 2018 and 2017, which were eliminated in consolidation. The results of the captive are fully consolidated in the accompanying consolidated financial statements.

Revenue Recognition

In 2014, the Financial Accounting Standard Board ("the FASB") issued ASC 606, Revenue from Contracts with Customers (“ASC 606”), replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the new standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 became effective on January 1, 2018 and we adopted it using the modified retrospective method applied to open contracts and only to the version of the contracts in effect as of January 1, 2018. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting. There was no impact on the condensed consolidated financial statements and no cumulative effect adjustment was recognized.

In general, under ASC 606, we recognize revenue when a service or good is sold to a customer and there is a contract. At contract inception, we assess the goods and services promised in our contracts with customers and identify all performance obligations for each distinct promise that transfers a good or service (or bundle of goods or services) to the customer. To identify the performance obligations, we consider all goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. Revenue is recognized when control of the identified distinct goods or services has been transferred to the customer, the transaction price has been determined and allocated to the performed performance obligations and we have determined that collection has occurred or is probable of occurring.

We measure revenue as the amount of consideration we expect to receive in exchange for the services provided. Taxes collected from customers and remitted to governmental authorities and revenues are reported on a net basis in the financial statements. Thus, we exclude taxes imposed on the customer and collected on behalf of governmental agencies to be remitted to these agencies from the transaction price in determining the revenue related to contracts with a customer.

Oil & Gas Revenue Recognition - We provide helicopter services to oil and gas customers operating in the Gulf of Mexico and a number of foreign countries. Revenues are recognized when performance obligations are satisfied over time in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered.

Air Medical Revenue Recognition - We provide helicopter services to hospitals and emergency service providers in several U.S. states, or to individual patients in the U.S. in which case we are paid by either a commercial insurance company, federal or state agency, or the patient. Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the traditional provider model. Revenues related to the independent provider model services are recorded in the period in which we satisfy our performance obligations under contracts by providing our services to our customers based upon established billing rates net of contractual allowances under agreements with third party payors and net of uncompensated care allowances. These amounts are due from patients, third-party payors (including health insurers and government programs), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. Generally, we bill the patients and third-party payors several days after the services are performed. Revenues generated under the traditional provider model are recognized as performance obligations are satisfied over time in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled in exchange for services rendered.

Oil & Gas Performance Obligations - A performance obligation arises under contracts with customers to render services and is the unit of account under ASC 606. Operating revenue from our Oil and Gas segment is derived mainly from fixed-term contracts with our customers, a substantial portion of which are competitively bid. A small portion of our Oil and Gas segment revenue is derived from providing services on an "ad-hoc" basis. Our fixed-term contracts typically have original terms of one to seven years (subject to provisions permitting early termination on relatively short notice by the customers), with payment in U.S. dollars. We account for services rendered separately if they are distinct and the services are separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Within this contract type for helicopter services, we determined that each contract has a single distinct performance obligation. These services include a fixed monthly rate for a particular model of aircraft, and flight hour services, which represents the variable component of a typical contract with a customer. Rates for these services vary depending on the type of services provided and can be based on a per flight hour, per day, or per month basis. We also provide services to clients on an “ad hoc” basis, which usually entails a shorter contract notice period and duration. The charges for ad hoc services are based on an hourly rate or a daily or monthly fixed fee plus additional fees for each hour flown. The nature of our variable charges within our flight services contracts are not effective until a customer-initiated flight order and the actual hours flown are determined; therefore, the associated flight revenue generally cannot be reasonably and reliably estimated beforehand. A contract’s standalone selling prices are determined based upon the prices that we charge for our services rendered. The majority of our revenue is recognized as performance obligations satisfied over time, by measuring progress towards satisfying the contracted services in a manner that best depicts the transfer of services to the customer, which is generally represented by a period of 30 days or less. We typically invoice customers on a monthly basis with the term between invoicing and when the payment is due typically being between 30 and 60 days.

Air Medical Performance Obligations - Performance obligations are determined based upon the nature of the services provided. Under the independent provider model, we measure the performance obligation from the moment the patient is loaded into the aircraft until it reaches its destination. Under this model, we have no fixed revenue stream and compete for transport referrals on a daily basis with other independent operators in the area. 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. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patients receiving air medical services when: (1) services are provided; and (2) we do not believe the patient requires additional services. For the independent provider model, we determine the transaction price based upon gross charges for services provided reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with Company policy, and/or implicit price concessions provided to uninsured patients. We determine estimates of contractual adjustments and discounts based upon contractual agreements, our discount policy, and historical experience. We determine our estimate of implicit price concessions based upon our historical collection experience with these classes of patients using a portfolio approach as a practical expedient to account for patient contracts as collective groups, rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach.

Under the traditional provider model, we contract directly with the customer to provide their transportation services. These contracts are typically awarded or renewed through competitive bidding and typically permit early termination by the customer on relatively short notice. As a traditional provider, we typically bill a fixed monthly rate for aircraft availability and an hourly rate for flight time. For each of these types of helicopter services, we have determined that each has a single distinct performance obligation. Traditional provider models services include fixed monthly rate for a particular model of aircraft, and flight hour services, which represents the variable component of a typical contract with a customer. Rates for these services vary depending on the type of services provided and can be based on a per flight hour, per day, or per month basis. The variable charges within such contracts are not effective until the customer initiates a flight order and the actual hours flown are determined; therefore, the associated revenue generally cannot be reasonably and reliably estimated beforehand. For the traditional provider model, we determine the transaction price based upon standard charges for goods and services provided.

Independent provider 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 private insurance, Medicaid, Medicare, and self-pay). The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. Agreements with third-party payors typically provide for payments at amounts less than established charges.

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 $123.8 million, $117.8 million, and $111.9 million as of December 31, 2018, 2017, and 2016, respectively, and the allowance for uncompensated care against outstanding accounts receivable was $51.9 million, $52.5 million, and $46.3 million as of December 31, 2018, 2017, and 2016, 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 $7.2 million, $7.1 million, and $8.8 million for the years ended December 31, 2018, 2017, and 2016, respectively. The estimated cost of providing charity services was $1.7 million, $1.6 million, and $1.9 million for the years ended December 31, 2018, 2017, and 2016, 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 twelve 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,
	2018		2017		2016
Provision for contractual discounts	67	%	66	%	67	%
Provision for uncompensated care	8	%	7	%	6	%

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,
	2018		2017		2016
Insurance	71	%	72	%	72	%
Medicare	20	%	18	%	18	%
Medicaid	8	%	9	%	9	%
Self-Pay	1	%	1	%	1	%

As of December 31, 3018 and December 31, 2017, receivables related to our (i) Oil and Gas segment were $74.1 million and $86.9 million, (ii) Air Medical segment were $90.2 million and $76.6 million and (iii) Technical Services segment were $4.1 million and $4.7 million, respectively. Contract assets and contract liabilities were immaterial as of December 31, 2018. Our contracts typically include termination clauses that allow both parties to terminate existing contracts with a 30 to 180 day notice period.

We generally have a right to consideration in an amount that corresponds directly with the value to the customer of the entity's performance completed to date and may recognize revenue in the amount to which the entity has a right to invoice. We have elected to use the invoice practical expedient for revenue recognized when performance obligations are satisfied over time. In addition, payment for goods and services rendered is typically due in the subsequent month following satisfaction of our performance obligation.

Our Technical Services segment provides helicopter flight services and helicopter repair and overhaul services for existing flight operations customers that own their own aircraft. Under this segment, we periodically provide certain services to governmental customers, including our agreement to operate six aircraft for the National Science Foundation in Antarctica. Under this segment, we also offer certain software as a service to our Oil and Gas customers. Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration we expect to be entitled to in exchange for services rendered. For these helicopter services, we determined that each has a single distinct performance obligation.

The following table presents the Company’s revenues by segment disaggregated by type (in thousands):



	For the Year Ended December 31,
	2018		2017
Service Revenue
Oil & Gas	$	380,238	$	298,398
Air Medical	257,132		257,273
Technical Services	37,053		23,874
Total Services	$	674,423	$	579,545

Air Medical Revenue
Traditional provider model	$	45,220	$	44,147
Independent provider model	211,912		213,126
Total Air Medicals Revenues	$	257,132	$	257,273

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.

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%. Following the enactment of Tax Reform Legislation in December 2017, the SEC staff issued Staff Accounting Bulletin 118 - "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. In connection with the initial analysis of the Act, the Company remeasured its net deferred tax liability at December 31, 2017 and provisionally recognized a net benefit of $49.2 million in its consolidated statement of operations for the year ended December 31, 2017. In the fourth quarter of 2018, the Company finalized it accounting under the Act and recorded immaterial differences from the provisional amounts previously recorded.

The Act also includes provisions to tax a new class of income called Global Intangible Low-Taxed Income (“GILTI”). Under GAAP, the Company is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (ii) factoring such amounts into the measurement of deferred taxes. The Company has evaluated each of the alternatives and has elected to account for GILTI as a current period expense. The Company does not have a GILTI inclusion in 2018; therefore, no tax expense with respect to GILTI has been recorded for the year ended December 31, 2018.

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. Approximately 10.7% of our trade accounts receivables at December 31, 2018 were owed by an overseas customer. For a variety of reasons, the Company believes it will be paid all or substantially all of the amounts due under these receivables. Accordingly, the Company does not believe that it had significant credit risk at December 31, 2018 with respect to these overseas trade accounts receivable specifically or its aggregate trade accounts receivable generally.

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 $6.1 million and $7.2 million at December 31, 2018 and 2017, 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 $123.8 million, $117.8 million, and $111.9 million as of December 31, 2018, 2017, and 2016, respectively, and the allowance for uncompensated care was $51.9 million, $52.5 million, and $46.3 million as of December 31, 2018, 2017, and 2016, respectively.

The Company’s two largest oil and gas customers accounted for 24% of consolidated operating revenues for the year ended December 31, 2018, 23% for the year ended December 31, 2017, and 24% for the year ended December 31, 2016. The Company also carried accounts receivable from these same customers totaling 20% and 16% of net trade receivables on December 31, 2018 and 2017, respectively. The customer base of our Air Medical and Technical Services operations has traditionally been less concentrated than the customer base of our Oil and Gas operations. Over the past three years, none of our current Air Medical or Technical Services customers accounted for more than 2% of our consolidated operating revenues. One of our former Air Medical customers, however, did account for 5% of our consolidated operating revenues for 2016. The Company also carried accounts receivable from its largest customer totaling 13.5% and 10.0% of net trade receivables on December 31, 2018 and 2017, 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.

Foreign Currency Translation

Our consolidated financial statements are reported in U.S. dollars. Our foreign subsidiaries maintain their records primarily in the currency of the country in which they operate. Assets and liabilities of foreign subsidiaries in non-highly inflationary economies are translated into U.S. dollars using rates of exchange at the balance sheet date. Translation adjustments are recorded in other comprehensive income (loss). Revenues and expenses are translated at rates of exchange in effect during the year. Transaction gains and losses are recorded in net earnings (loss).

Recently Adopted Accounting Pronouncements

Effective January 1, 2017, we adopted Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which was issued by the Financial Accounting Standards Board (“FASB”) in March 2016. This new standard requires that excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in capital. As a result, during the first quarter of 2017 we recorded a cumulative-effect adjustment of $1.0 million increasing retained earnings and decreasing deferred tax liability on our balance sheet dated December 31, 2017. Accordingly, we recorded income tax expense of $0.9 million in our consolidated statement of operations for the year ended December 31, 2017, in recognition of excess tax deficiencies related to equity compensation. Under this new standard, the corresponding cash flows are now reflected in cash provided by operating activities instead of financing activities, as was previously required.

On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with the carrying amount as part of Step 2 of the goodwill impairment test. Under the new standard, the goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value, not exceeding the total amount of goodwill allocated to that reporting unit, which may increase the frequency of goodwill impairment charges if a future goodwill impairment test does not pass the Step 1 evaluation. ASU 2017-04 is effective prospectively for periods beginning on or after December 15, 2019, with early adoption permitted. The Company adopted ASU 2017-04 effective January 1, 2018. The Company performed its goodwill impairment test under the new standard in fourth quarter of 2018.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. PHI, Inc. adopted this ASU in the fourth quarter of 2017 on a prospective basis. Beginning with the December 31, 2017 balances, all deferred taxes were classified as non-current. Periods prior to December 31, 2017 were not retrospectively adjusted.

In 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 eliminates the need to reflect transfers between cash and restricted cash in operating, investing, and financing activities in the statements of cash flows. In addition, the net change in cash and cash equivalents during the period includes amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 retrospectively effective January 1, 2018.

The following tables provide a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that total to the amounts shown in the statements of cash flows for the Company at December 31, 2018:



	Year Ended December 31,
	2018		2017		2016
Cash and Cash Equivalents	$	50,874	$	8,770	$	2,596
Restricted Cash	7,690		—		—
Total Cash, Cash Equivalents and Restricted Cash	$	58,564	$	8,770	$	2,596

New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASC 842). ASC 842 replaces the existing guidance on leasing transactions in ASC 840 and requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASC 842 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. ASC 842 is effective for fiscal years beginning after December 15, 2018 and the Company adopted the new standard effective January 1, 2019.

The Company elected the transition methodology provided by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, whereby it applied the requirements of ASC 842 on a prospective basis as of the adoption date of January 1, 2019, without retrospectively adjusting prior periods. The Company elected the package of practical expedients provided by ASC 842 that allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the consolidated statement of operations on a straight-line basis over the lease term. The Company also made an accounting policy election to combined lease and non-lease components in the computations of lease obligations and right-of-use assets. During our evaluation of ASU 2016-02, we concluded that certain of our helicopter service contracts contain a lease component. Our typical helicopter service contracts qualify for a practical expedient, which is available to lessors under certain circumstances, to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant component. We have applied this practical expedient and will combine the lease and service components of our standard revenue contracts and continue to account for the combined component under Topic 606, Revenue from Contracts with Customers.

The Company completed the implementation of an information technology system to track and account for its leases and updated its accounting policies to support the accounting for leases under ASC 842. The Company completed its lease inventory and determined its most significant leases involve aircraft and facilities. In the first quarter 2019, the adoption of ASC 842 resulted in recording on the Company's consolidated balance sheet, lease liabilities of approximately $172.9 million and right-of-use assets of approximately $172.1 million with no material impact on the Company's consolidated statement of operations and consolidated cash flow statement. To the extent applicable, we may be required to comply with expanded disclosure requirements.