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 March 31, 2016, $0.8 million of severance costs from these offerings remained unpaid.

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 March 31, 2016, we operated 154 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 March 31, 2016 and 2015, approximately 54% and 59% of our total operating revenues were generated by our Oil and Gas segment.

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 March 31, 2016, 105 aircraft were assigned to our Air Medical segment. At such date, we operated approximately 100 aircraft domestically, providing air medical transportation services for hospitals and emergency service agencies in 19 states at 70 separate locations. We also provide air medical transportation services for a customer overseas. For our overseas program, we have deployed five aircraft at four locations, with four aircraft generating revenues as of March 31, 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 March 31, 2016 and 2015, approximately 43% and 35% of our total operating revenues were generated by our Air Medical segment.

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 March 31,
	2016			2015
Gross Air Medical segment billings		100	%		100	%
Provision for contractual discounts		71	%		74	%
Provision for uncompensated care		3	%		0	%

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 March 31,
	2016			2015
Insurance		66	%		75	%
Medicare		19	%		17	%
Medicaid		15	%		8	%
Self-Pay		0	%		0	%

We also have a limited number of 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 31% and 42% of the segment’s revenues for the quarters ended March 31, 2016 and 2015, 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.

For the three month periods ended March 31, 2016 and 2015, approximately 3% and 6%, respectively, of our total operating revenues were generated by our Technical Services segment.

Summarized financial information concerning our reportable operating segments for the quarters ended March 31, 2016 and 2015 is as follows:


	Quarter Ended March 31,
	2016			2015
	(Thousands of dollars)
Segment operating revenues
Oil and Gas	$	88,437		$	120,396
Air Medical		70,060			72,385
Technical Services		5,519			11,416

Total operating revenues		164,016			204,197

Segment direct expenses ⁽¹⁾
Oil and Gas ⁽²⁾		91,916			100,331
Air Medical		57,044			60,039
Technical Services		3,594			8,905

Total segment direct expenses		152,554			169,275
Segment selling, general and administrative expenses
Oil and Gas		1,528			1,159
Air Medical		2,595			2,629
Technical Services		224			114

Total selling, general and administrative expenses		4,347			3,902

Total direct and selling, general and administrative expenses		156,901			173,177

Net segment (loss) profit
Oil and Gas		(5,007	)		18,906
Air Medical		10,421			9,717
Technical Services		1,701			2,397

Total net segment profit		7,115			31,020
Other, net ⁽³⁾		256			469
Unallocated selling, general and administrative costs ⁽¹⁾		(7,326	)		(7,335	)
Interest expense		(7,533	)		(7,170	)

(Loss) earnings before income taxes	$	(7,488	)	$	16,984

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


	Depreciation and Amortization Expense
	Quarter Ended March 31,
	2016		2015
Segment Direct Expense:
Oil and Gas	$	9,918	$	11,280
Air Medical		4,256		4,097
Technical Services		128		128

Total	$	14,302	$	15,505

Unallocated SG&A	$	2,671	$	2,646

(2)	Includes Equity in loss of unconsolidated affiliate.

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