Revenue Recognition:

On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“the new revenue standard”) and applied it to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows (in millions):



BALANCE SHEET	Balance at December 31, 2017		Adjustments Due to ASC 606			Balance at January 1, 2018
ASSETS
Accounts and notes receivable, net	$	506.5	$	8.3		$	514.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	348.6		9.3			357.9
Retained earnings	1,575.9		(1.0		)	1,574.9

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our Consolidated Balance Sheet and Consolidated Statement of Operations was as follows (in millions):



	June 30, 2018
	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
BALANCE SHEET
ASSETS
Accounts and notes receivable, net	$	741.3	$	730.5	$	10.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	437.5		424.2		13.3
Retained earnings	1,722.8		1,725.3		(2.5		)
	For the Three Months Ended June 30, 2018
	As Reported		Activity Without Adoption of ASC 606		Effect of Change Higher/(Lower)
STATEMENT OF OPERATIONS
Net sales	$	1,175.4	$	1,175.5	$	(0.1	)
Net income	137.6		137.6		—



	For the Six Months Ended June 30, 2018
	As Reported		Activity Without Adoption of ASC 606		Effect of Change Higher/(Lower)
STATEMENT OF OPERATIONS
Net sales	$	2,010.2	$	2,010.4	$	(0.2	)
Net income	175.5		175.5		—

The following table disaggregates our revenue by business segment by geography which provides information as to the major source of revenue. See Note 16 for additional description of our reportable business segments and the products and services being sold in each segment.



	For the Three Months Ended June 30, 2018
Primary Geographic Markets	Residential Heating & Cooling		Commercial Heating & Cooling		Refrigeration		Consolidated
Americas	$	716.0	$	252.1	$	127.6	$	1,095.7
Europe	—		40.1		29.0		69.1
Asia Pacific	—		—		10.6		10.6
Total	$	716.0	292.2		167.2		1,175.4



	For the Six Months Ended June 30, 2018
Primary Geographic Markets	Residential Heating & Cooling		Commercial Heating & Cooling		Refrigeration		Consolidated
Americas	$	1,169.7	$	431.2	$	237.4	$	1,838.3
Europe	—		66.5		55.7		122.2
Asia Pacific	—		—		49.7		49.7
Total	$	1,169.7	497.7		342.8		2,010.2

Our revenue recognition practices for the sale of goods depend upon the shipping terms for each transaction. Shipping terms are primarily FOB Shipping Point and, therefore, revenue is recognized for these transactions when products are shipped to customers and title and control passes. Certain customers in our smaller operations, primarily outside of North America, have shipping terms where risks and rewards of ownership do not transfer until the product is delivered to the customer. For these transactions, revenue is recognized on the date that the product is received and accepted by such customers. We experience returns for miscellaneous reasons and record a reserve for these returns at the time we recognize revenue based on historical experience. Our historical rates of return are insignificant as a percentage of sales. We also recognize revenue net of sales taxes. We have elected to recognize the revenue and cost for freight and shipping when control over the sale of goods passes to our customers.

For our businesses that provide services, revenue is recognized at the time services are completed. Our Commercial Heating & Cooling segment also provides sales, installation, maintenance and repair services under fixed-price contracts. Revenue for services is recognized as the services are performed under the contract based on the relative fair value of the services provided. We allocate a portion of the revenue for extended labor warranty obligations and recognize the revenue over the term of the extended warranty. See Note 7 for more information on product warranties.

Residential Heating & Cooling - We manufacture and market a broad range of furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories to improve indoor air quality, comfort control products, replacement parts and supplies and related products for both the residential replacement and new construction markets in North America. These products are sold under various brand names and are sold either through direct sales to a network of independent installing dealers, including through our network of Lennox PartsPlus stores or to independent distributors. For the segment, for the three and six months ended June 30, 2018, direct sales represent approximately $546.7 million and $886.3 million of revenues and sales to independent distributors represent approximately $169.3 million and $283.4 million of revenues, respectively. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.

Commercial Heating & Cooling - In North America, we manufacture and sell unitary heating and cooling equipment used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools. These products are distributed primarily through commercial contractors and directly to national account customers in the planned replacement, emergency replacement and new construction markets. Revenue for the products sold is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Lennox National Account Service provides installation, service and preventive maintenance for commercial HVAC national account customers in the United States and Canada. Revenue related to service contracts is recognized as the services are performed under the contract based on the relative fair value of the services provided. In Europe, we manufacture and sell unitary products and applied systems. For the segment, for the three and six months ended June 30, 2018, equipment sales represent approximately $279.3 million and $457.2 million of revenues while $12.9 million and $40.5 million of our revenue is generated from our service business, respectively.

Refrigeration - We manufacture and market equipment for the global commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name. Our products are used in the food retail, food service, cold storage as well as non-food refrigeration markets. We sell these products to distributors, installing contractors, engineering design firms, original equipment manufacturers and end-users. Revenue for the products sold is $165.4 million and $339 million for the three and six months ended June 30, 2018 and and is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. The remaining segment revenue relates to service revenues related to start-up and commissioning activities.

Variable Consideration - We engage in cooperative advertising, customer rebate, and other miscellaneous programs that result in payments or credits being issued to our customers. We record these customer discounts and incentives as a reduction of sales when the sales are recorded. For certain cooperative advertising programs, we also receive an identifiable benefit (goods or services) in exchange for the consideration given, and, accordingly, record a ratable portion of the expenditure to Selling, general and administrative (“SG&A”) expenses. All other advertising, promotions and marketing costs are expensed as incurred.

Other Judgments and Assumptions - We apply the practical expedient in ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included in SG&A expenses. ASC 606-10-32-18 allows us to not adjust the amount of consideration to be received in a contract for any significant financing component if we expect to receive payment within twelve months of transfer of control of goods or services. We have elected this expedient as we expect all consideration to be received in one year or less at contract inception. We have also elected not to provide the remaining performance obligations disclosures related to service contracts in accordance with the practical expedient in ASC 606-10-55-18. We recognize revenue in the amount to which the entity has a right to invoice and have adopted this election to not provide the remaining performance obligations related to service contracts.

Contract Assets - We do not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. There are a small number of installation services that may occur over a period of time, but that period of time is generally very short in duration and right of payment does not exist until the installation is completed. Any contract assets that may arise are recorded in Other assets in our Consolidated Balance Sheet.

Contract Liabilities - Our contract liabilities consist of advance payments and deferred revenue. Our contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Generally all contract liabilities are expected to be recognized within one year and are included in Accounts payable in our Consolidated Balance Sheet. The noncurrent portion of deferred revenue is included in Other liabilities in our Consolidated Balance Sheet.

Net contract assets (liabilities) consisted of the following:



	June 30, 2018			December 31, 2017			$ change			% change
Contract assets	$	3.5		$	2.1		$	1.4		66.7	%
Contract liabilities - current	(5.0		)	(7.3		)	2.3			(31.5	)%
Contract liabilities - noncurrent	(5.6		)	(5.5		)	(0.1		)	1.8	%
Total	$	(7.1	)	$	(10.7	)	$	3.6

For the three and six months ended June 30, 2018, we recognized revenue of $1.3 million and $2.9 million related to our contract liabilities at January 1, 2018, respectively. Impairment losses recognized in our receivables and contract assets were de minimis in the second quarter of 2018.