Surging materials "havoc" for Honeywell margin: CFO

BOSTON (Reuters) - Honeywell International Inc (HON.N) has offset surging energy and metals costs by passing much of the increases along to customers, though rising costs continue to "play havoc" with its profit margins, the company's chief financial officer said on Friday.

One of the company's strategies for handling rising expenses, used primarily at its specialty materials chemicals unit, is formula pricing -- contracts that allow it to pass on each dollar of rising input costs directly to customers, CFO Dave Anderson said in a phone interview.

"It does play havoc with margin rates because as the raw material costs in formula pricing go up, they are passed through dollar for dollar," said Anderson. "We preserve the dollars of earnings, but what happens is that it erodes the rate."

So, a theoretical pound of chemicals that used $11 of raw materials and sold for $20 would have a 45 percent profit margin. That margin would drop to 43 percent when the raw material cost and selling price rose by $1.

The company has "basically offset all" of the materials and energy cost increases it has seen, either through price hikes, changing buying patterns, or hedges, Anderson said.

Honeywell, which is the world's largest maker of cockpit electronics and also makes systems to manage large buildings and automotive components, reported profit that topped analysts' expectations on Friday. Its shares were little changed, however, after analysts cited concerns about profit margins at three of its four divisions.

Like other major manufacturers, Honeywell has had to deal with surging costs of metals and energy, particularly steel, aluminum, nickel and platinum -- the last of which is a component of spark plugs -- Anderson said.

"Within a reasonable range, we're confident of our ability to preserve our earnings through what we do on the procurement side and what we do on the pricing side," he said.

(Reporting by Scott Malone; editing by Gunna Dickson)