34 35
H O N  I N D U S T R I E S  I n c .  a n d  S U B S I D I A R I E S
Self-insurance reserves – The Company is partially self-insured 
for general liability, product liability, workers’ compensation, and 
certain employee health benefits. The general, product, and workers’ 
compensation liabilities are managed using a wholly owned insurance 
captive; the related liabilities are included in the accompanying finan-
cial statements. The Company’s policy is to accrue amounts in 
accordance with the actuarially determined liabilities. The actuarial 
valuations are based on historical information along with certain 
assumptions about future events. Changes in assumptions for such 
matters as claims, medical costs, and changes in actual experience 
could cause these estimates to change in the near term. 
Stock-based compensation  – The Company accounts for its 
stock-option plan using Accounting Principles Board Opinion No. 25, 
“Accounting for Stock Issued to Employees,” which results in no charge 
to earnings when options are issued at fair market value. SFAS No. 123, 
“Accounting for Stock-Based Compensation” issued subsequent to APB 
No. 25 and amended by SFAS No. 148 “Accounting for Stock-Based 
Compensation – Transition and Disclosure” defines a fair value-based 
method of accounting for employee stock options but allows companies 
to continue to measure compensation cost for employee stock options 
using the intrinsic value based method described in APB No. 25.
The Company has no immediate plans at this time to volun-
tarily change its accounting policy to the fair value based method; 
however, the Company continues to evaluate this alternative. In accor-
dance with SFAS No. 148, the Company has been disclosing in the Notes 
to the Consolidated Financial Statements the impact on net income and 
earnings per share had the fair value based method been adopted. If the 
fair value method had been adopted, net income for 2003, 2002, and 
2001 would have been $3 million, $2.2 million, and $1.4 million lower 
than reported and earnings per share would have been reduced approx-
imately $0.06, $0.04 and $0.02 per diluted share, respectively.
Recent Accounting Pronouncements
See the Notes to the Consolidated Financial Statements for a full 
description of recent accounting pronouncements including the respec-
tive expected dates of adoption and effects on results of operations and 
financial conditions.
Results of Operations
The following table sets forth the percentage of consolidated net sales 
represented by certain items reflected in the Company’s statements of 
income for the periods indicated.
Fiscal 2003 2002 2001
Net sales   100.0% 100.0% 100.0%
Cost of products sold 63.6 64.6 65.9
Gross profit 36.4 35.4 34.1
Selling and 
 administrative expenses 27.4 26.8 25.9
Restructuring related charges 0.5 0.2 1.3
Operating income 8.5 8.4 6.9
Interest income (net) 0.1 (0.1) (0.4)
Income before income taxes 8.6 8.3 6.5
Income taxes 3.0 2.9 2.3
Net income 5.6% 5.4% 4.2%
N E T  S A L E S
Net sales increased 3.7% in 2003 and decreased 5.6% in 2002. The 
increase in 2003 was due to the extra week in 2003 as a result of the 
Company’s 52/53-week fiscal year and strong performance in the hearth 
products segment. The decrease in 2002 was due to the decline in the 
office furniture market due to unstable economic conditions and the 
deletion of less profitable product lines in the hearth products segment.
G R O S S  P R O F I T
Gross profit as a percent of net sales improved 1.0 percentage point in 
2003 as compared to fiscal 2002 and 1.3 percentage points in 2002 as 
compared to 2001. The improvement in both periods was a result of the 
continued net benefits of rapid continuous improvement, restructuring 
initiatives, business simplification, new products, and improved price 
realization. Included in 2003 gross profit was $6.7 million of acceler -
ated depreciation, which reduced gross profits 0.4 percentage points.