Credit Losses

6 Months Ended

Jun. 30, 2020

CREDIT LOSSESThe Company is exposed to credit losses primarily through its accounts receivable, investments in available-for-sale debt securities, and contract assets. See Note 3 for additional information related to the Company's contract assets.

Accounts receivable, net

The Company's accounts receivable, which are typically due within one year, consist of the following (in thousands):


	June 30, 2020
Accounts receivable, gross	$	634,285
Less: allowance for returns	(4,886)
Less: allowance for credit losses	(15,249)
Accounts receivable, net	$	614,150

The allowance for credit losses on accounts receivable is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmentally determined using loss rates based on historical write-offs by geography and customer accounts subject to credit check versus non-credit check status and consideration of recent forecasted information, including underlying economic expectations. The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying economic expectations, which for the first half of 2020 included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic. The Company will compare its current estimate of expected credit losses with the estimate of credit losses from the prior period and will report in net income the amount necessary to adjust the allowance for current expected credit losses. The Company recorded $2.8 million and $9.1 million of credit loss expense during the three and six months ended June 30, 2020, respectively, which is included within General and administrative expenses in the accompanying condensed consolidated statements of income.

The activity in the Company's allowance for credit losses for the six months ended June 30, 2020 is summarized as follows (in thousands):


	Total
Balance of allowance for credit losses at January 1, 2020	$	6,161
Adjustment for ASC 326 adoption	1,245
Current period provision for expected losses	9,057
Write-offs charged against allowance	(1,214)

Balance of allowance for credit losses at June 30, 2020	$	15,249

As of June 30, 2020, one distributor, the Arrow Group, accounted for 13% of the Company's total gross accounts receivable.

Available-for-sale Investments

The allowance for credit losses on the Company's investments in available-for-sale debt securities is determined using a quantitative discounted cash flow analysis if impairment triggers exist after a qualitative screen is completed. Impairment on available-for-sale debt securities is determined on an individual security basis and the security is subject to impairment when its fair value declines below its amortized cost basis. If the fair value is less than the amortized cost basis, management must then determine whether it intends to sell the security or whether it is more likely than not that it will be required to sell the security before it recovers its value. If management intends to sell the security or will more-likely-than-not be required to sell the impaired security before it recovers its value, a credit loss is recorded to Other income (expense), net in the accompanying condensed consolidated statements of income. If management does not intend to sell the security, nor will it more-likely-than-not be required to sell the security before the security recovers its value, management must then determine whether the loss is due to credit loss or other factors. For impairment indicators due to credit loss factors, management establishes an allowance for credit losses with a charge to Other income (expense), net. On the contrary, for impairment indicators due to other factors, management records the loss with a charge to Other comprehensive loss in the accompanying condensed balance sheets.

Upon adoption of the credit loss standard, the Company established an allowance for credit losses and did not have any credit loss expense recorded related to available-for-sale debt securities for the three and six months ended June 30, 2020, respectively. See Note 6 for more information on allowances for credit losses related to available-for-sale debt securities. The Company has available-for-sale debt securities that have fair values below amortized cost; however, the Company does not consider a credit allowance necessary as (i) the Company does not intend to sell the securities, (ii) it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, and (iii) the unrealized losses are due to market factors rather than credit loss factors.