Revenue

The Company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. A majority of the Company's revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract. However, a portion of the Company's revenues are recognized over time as the customer simultaneously receives control as the Company performs work under a contract.

Performance Obligations

A performance obligation is a distinct good, service or a bundle of goods and services promised in a contract. The Company identifies performance obligations at the inception of a contract and allocates the transaction price to individual performance obligations to faithfully depict the Company’s performance in transferring control of the promised goods or services to the customer.

The following are the primary performance obligations identified by the Company:

Equipment and parts. The Company principally generates revenue from the sale of equipment and parts to customers and recognizes revenue at a point in time when control transfers to the customer. Transfer of control is generally determined based on the shipping terms of the contract. However, certain transactions within the Industrial segment include contracts to design, deliver and build highly engineered or customized equipment which have no alternative use for the Company in the event the customer cancels the contract. In addition, the Company has the right to payment for performance completed to date. As a result, revenues related to these contracts are recognized over time with progress towards completion measured using an input method as the basis to recognize revenue and an estimated profit. To-date efforts for work performed corresponds with and faithfully depicts transfer of control to the customer.

Contracting and Installation. The Company enters into various construction-type contracts to design, deliver and build integrated solutions to meet customer specifications. These transactions, primarily included within the Climate segment, provide services that range from the development and installation of new HVAC systems to the design and integration of critical building systems to optimize energy efficiency and overall performance. These contracts have a typical term of less than one year and are considered a single performance obligation as multiple combined goods and services promised in the contract represent a single output delivered to the customer. Revenues associated with contracting and installation contracts are recognized over time with progress towards completion measured using an input method as the basis to recognize revenue and an estimated profit. To-date efforts for work performed corresponds with and faithfully depicts transfer of control to the customer.

Services and Maintenance. The Company provides various levels of preventative and/or repair and maintenance type service agreements for its customers. The typical length of a contract is 12 months but can be as long as 60 months. Revenues associated with these performance obligations are primarily recognized over time on a straight-line basis over the life of the contract as the customer simultaneously receives and consumes the benefit provided by the Company. However, if historical evidence indicates that the cost of providing these services on a straight-line basis is not appropriate, revenue is recognized over the contract period in proportion to the costs expected to be incurred while performing the service. Certain repair services do not meet the definition of over time revenue recognition as the Company does not transfer control to the customer until the service is completed. As a result, revenue related to these services is recognized at a point in time.

Extended warranties. The Company enters into various warranty contracts with customers related to its products. A standard warranty generally warrants that a product is free from defects in workmanship and materials under normal use and conditions for a certain period of time. The Company’s standard warranty is not considered a distinct performance obligation as it does not provide services to customers beyond assurance that the covered product is free of initial defects. An extended warranty provides a customer with additional time that the Company is liable for covered incidents associated with its products. Extended warranties are purchased separately and can last up to five years. As a result, they are considered separate performance obligations for the Company. Revenue associated with these performance obligations are primarily recognized over time on a straight-line basis over the life of the contract as the customer simultaneously receives and consumes the benefit provided by the Company. However, if historical evidence indicates that the cost of providing these services on a straight-line basis is not appropriate, revenue is recognized over the contract period in proportion to the costs expected to be incurred while performing the service. Refer to Note 19, "Commitments and Contingencies," for more information related to product warranties.

The transaction price allocated to performance obligations reflects the Company’s expectations about the consideration it will be entitled to receive from a customer. The Company’s contracts with customers, dealers and distributors include several forms of sales incentive programs (variable consideration) which are estimated and included in the transaction price. They include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. The Company records an accrual (contra receivable) and a sales deduction for its best estimate determined using the expected value method. In addition, sales returns and customer disputes involving a question of quantity or price are also accounted for as variable consideration. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period of time, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability for its best estimate determined using the expected value method. The Company considers historical data in determining its best estimates of variable consideration. These estimates are reviewed regularly for appropriateness, considering also whether the estimates should be constrained in order to avoid a significant reversal of revenue recognition in a future period. If updated information or actual amounts are different from previous estimates of variable consideration, the revisions are included in the results for the period in which they become known through a cumulative effect adjustment to revenue. In addition, the Company’s contracts with customers generally do not include significant financing components or noncash consideration.

The Company enters into sales arrangements that contain multiple goods and services, such as equipment, installation and extended warranties. For these arrangements, each good or service is evaluated to determine whether it represents a distinct performance obligation. The total transaction price is then allocated to the distinct performance obligations based on their relative standalone selling price at the inception of the arrangement. If available, the Company utilizes observable prices for goods or services sold separately to similar customers in similar circumstances to determine its relative standalone selling price. Otherwise, list prices are used if they are determined to be representative of standalone selling prices. If neither of these items are available at contract inception, judgment may be required and the Company will estimate standalone selling price based on its best estimate. The Company recognizes revenue for delivered goods or services when the delivered good or service is distinct, control of the good or service has transferred to the customer, and only customary refund or return rights related to the goods or services exist. The Company excludes from revenues taxes it collects from a customer that are assessed by a government authority. Excluding noncurrent contract liabilities, unsatisfied (or partially unsatisfied) performance obligations as of the end of the reporting period are expected to be recognized as revenue within the next 12 months.

Disaggregated Revenue

A summary of Net revenues by destination for the three and six months ended June 30, 2018 is as follows:



In millions	Three months ended		Six months ended
Climate
United States	$	2,410.4	$	4,122.2
Non-U.S.	1,083.4		1,981.4
Total Climate	$	3,493.8	$	6,103.6
Industrial
United States	$	450.6	$	865.2
Non-U.S.	413.3		773.4
Total Industrial	$	863.9	$	1,638.6

A summary of Net revenues by major type of good or service for the three and six months ended June 30, 2018 is as follows:



In millions	Three months ended		Six months ended
Climate
Equipment	$	2,454.8	$	4,226.3
Services and parts	1,039.0		1,877.3
Total Climate	$	3,493.8	$	6,103.6
Industrial
Equipment	$	534.9	$	1,005.5
Services and parts	329.0		633.1
Total Industrial	$	863.9	$	1,638.6

Revenue from goods and services transferred to customers at a point in time accounted for approximately 85% of the Company's revenue for the six months ended June 30, 2018.

Contract Balances

The opening and closing balances of contract assets and contract liabilities arising from contracts with customers for the period ended June 30, 2018 and December 31, 2017 were as follows:



In millions	June 30, 2018		December 31, 2017
Contract assets	$	199.6	$	166.0
Contract liabilities	864.6		814.2

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheet. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Contract assets relate to the conditional right to consideration for any completed performance under the contract when costs are incurred in excess of billings under the percentage-of-completion methodology. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities relate to payments received in advance of performance under the contract or when the Company has a right to consideration that is unconditional before it transfers a good or service to the customer. Contract liabilities are recognized as revenue as (or when) the Company performs under the contract. During the three and six months ended June 30, 2018, changes in contract asset and liability balances were not materially impacted by any other factors.

Approximately 75% of the contract liability balance at the beginning of the period is expected to be recognized as revenue during 2018. 10% of this amount was recognized during the three months ended June 30, 2018 and 40% of this amount was recognized during the six months ended June 30, 2018. The remaining 25% of the contract liability balance at the beginning of the period is included within Other noncurrent liabilities and expected to be recognized as revenue during 2019 or thereafter.

ASC 606 adoption impact

Under ASC 606, the majority of the Company’s revenue continues to be recognized on a similar basis as previous accounting standards. However, certain highly engineered products sold to customers within the Industrial segment for which revenue was previously recognized at a point in time meet the criteria of a performance obligation satisfied over time. These contracts consist of equipment that is highly engineered or customized to meet the customer’s requirements. In the event the customer cancels the contract, the Company will have no alternative use for the equipment as well as the right to payment for performance completed to date. This change results in accelerated recognition of revenue and increases the balance of contract assets compared to the previous revenue recognition standard.

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach with a cumulative effect adjustment to increase Retained earnings by $2.4 million. As a result, the Company applied ASC 606 only to contracts that were not completed as of January 1, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods presented. The Company elected to reflect the aggregate effect of all contract modifications that occurred before the beginning of the earliest period presented in determining the transaction price, identifying the satisfied and unsatisfied performance obligations and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. The effects of this relief are immaterial.

The following table summarizes the impact of adopting ASC 606 on the Company’s Condensed Consolidated Statements of Comprehensive Income:



	Three months ended June 30, 2018								Six months ended June 30, 2018
In millions	As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)		As Reported			Balances Without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenues	$	4,357.7		$	4,353.7		$	4.0	$	7,742.2		$	7,734.9		$	7.3
Cost of goods sold	(2,964.1		)	(2,960.9		)	3.2		(5,384.3		)	(5,377.9		)	6.4
Selling and administrative expenses	(753.3		)	(753.3		)	—		(1,474.2		)	(1,474.2		)	—
Operating income	640.3			639.5			0.8		883.7			882.8			0.9
Interest expense	(50.3		)	(50.3		)	—		(123.2		)	(123.2		)	—
Other income/(expense), net	(3.5		)	(3.5		)	—		(7.5		)	(7.5		)	—
Earnings before income taxes	586.5			585.7			0.8		753.0			752.1			0.9
Provision for income taxes	(128.0		)	(127.8		)	0.2		(161.0		)	(160.8		)	0.2
Earnings from continuing operations	$	458.5		$	457.9		$	0.6	$	592.0		$	591.3		$	0.7

The following table summarizes the impact of adopting ASC 606 on the Company’s Balance Sheet:



	June 30, 2018
In millions	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Assets
Accounts and notes receivable, net	$	2,946.9	$	2,949.7	$	(2.8	)
Inventories, net	1,733.3		1,739.7		(6.4		)
Other current assets	512.0		501.4		10.6
Other noncurrent assets	863.4		863.4		—

Liabilities
Accrued expenses and other current liabilities	$	1,892.6	$	1,891.9	$	0.7
Deferred and noncurrent income taxes	735.4		735.4		—
Other noncurrent liabilities	1,079.5		1,079.5		—

Equity
Retained earnings	$	9,109.9	$	9,109.2	$	0.7