Revenue

The Company recognizes revenue on a wide range of filtration solutions sold to customers in many industries around the globe. The vast majority of the Company’s performance obligations within customer sales contracts are for manufactured filtration systems and replacement parts. The Company does perform limited services, such as installation. Customer contracts may include multiple performance obligations and the transaction price is allocated to each distinct performance obligation based on its relative standalone selling price.

Revenue Disaggregation

Net sales disaggregated by geography based on the location where the customer’s order was placed (in millions):



	Year Ended July 31,
	2019		2018		2017
United States	$	1,192.6	$	1,120.8	$	990.4
Europe, Middle East and Africa	826.8		791.5		679.1
Asia Pacific	597.9		599.2		500.5
Latin America	227.6		222.7		201.9
Total net sales	$	2,844.9	$	2,734.2	$	2,371.9

Net sales disaggregated by product group (in millions):



	Year Ended July 31,
	2019		2018		2017
Engine Products segment
Off-Road	$	315.1	$	327.4	$	252.1
On-Road	179.8		154.2		110.7
Aftermarket	1,315.3		1,261.9		1,086.2
Aerospace and Defense	115.8		105.5		104.3
Engine Products segment net sales	1,926.0		1,849.0		1,553.3

Industrial Products segment
Industrial Filtration Solutions	641.8		594.3		533.2
Gas Turbine Systems	106.3		115.5		122.9
Special Applications	170.8		175.4		162.5
Industrial Products segment net sales	918.9		885.2		818.6
Total net sales	$	2,844.9	$	2,734.2	$	2,371.9

Contract Assets and Liabilities

The satisfaction of performance obligations and the resulting recognition of revenue typically corresponds with billing of the customer. In limited circumstances, the customer may be billed at a time later than when revenue is recognized, resulting in contract assets, which are reported in prepaid expenses and other current assets on the Consolidated Balance Sheets. Contract assets were $12.4 million as of July 31, 2019. In other limited circumstances, the Company will require a down payment from the customer prior to the satisfaction of performance obligations. This results in contract liabilities, or deferred revenue, which is reported in other current liabilities and other long-term liabilities on the Consolidated Balance Sheets, depending on when revenue is expected to be recognized. Contract liabilities were $10.4 million and $10.5 million as of July 31, 2019 and 2018, respectively.

The Company will recognize revenue in future periods related to remaining performance obligations for certain open contracts. Generally, these contracts have terms of one year or less. The amount of revenue related to unsatisfied performance obligations in which the original duration of the contract is greater than one year is not significant.

Adoption of ASC 606

Note 1 describes the requirements of the new revenue recognition standard, ASC 606. The cumulative effect of the adoption on the Company’s August 1, 2018 opening balance sheet is as follows (in millions):



	Balance at July 31, 2018		Adjustments for ASC 606			Balance at August 1, 2018
Assets
Inventories, net	$	334.1	$	(7.3	)	$	326.8
Prepaid expense and other current assets	52.3		14.0			66.3
Liabilities
Other current liabilities	86.6		0.3			86.9
Deferred income taxes	4.2		1.1			5.3
Equity
Retained earnings	1,122.1		5.3			1,127.4

These adjustments primarily related to certain contracts that qualify for revenue recognition over time under the new standard. This change does not have a material impact on revenue recognized during the year ended July 31, 2019.

In addition, the adoption of ASC 606 impacted one set of contracts within the Engine Products segment in which Donaldson is now deemed to be the principal under the new standard because the Company has control through the manufacturing of products prior to the sale of those products to the customer. For these contracts, the previous practice of recognizing revenue on a net basis, in which the amount of net sales recorded is the net amount retained after paying product costs to suppliers, has changed under ASC 606 to recognizing revenue on a gross basis, in which the amount of net sales recorded is the gross amount received from the customer, with corresponding product costs recorded as cost of sales. This change did not result in a cumulative effect adjustment under the modified retrospective method of adoption since there is no impact to the timing of revenue recognition but it has increased net sales and cost of sales on a prospective basis. The increase in net sales and cost of sales for this change was $16.1 million for the year ended July 31, 2019.