How are the OEM incentives recognized?
The impact of original equipment incentives offered in the Aerospace division this year has been around $0.25 for Honeywell (HON). The recognition of the incentive is triggered whenever a milestone governing the incentive is reached. For example, the milestone could be a first test flight, entry into service, or other engineering milestones. The company’s management stated that 2016 is the peak year for such incentives. They’re expected to slow down starting next year.
An interesting point to note is that higher incentives don’t mean faster shipments. The milestones are associated with development costs and bringing the aircraft into production. Orders and cycle times usually aren’t impacted by the pattern in recognition.
Solstice fundamentals are solid
On October 15, 190 countries signed an international agreement in Rwanda to phase out HFCs (hydrofluorocarbons) over the next 30 years. HFCs are a class of refrigerants used extensively in the air conditioning and refrigerant industries. Honeywell’s Solstice molecule is an HFO (hydrofluoroolefin). According to Honeywell, HFCs are 1,300x worse compared to a molecule of carbon dioxide. In Honeywell’s invention, the HFO is only 0.8x the pollutant as a single molecule carbon dioxide. HFOs are 1,500x better than HFCs. With regulatory backing becoming more of a reality, the structural demand for Honeywell’s Solstice refrigerant continues to support the growth in its sales.