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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
The following discussion of the Company’s historical results of opera -
tions and of its liquidity and capital resources should be read in 
conjunction with the Consolidated Financial Statements of the 
Company and related notes.
Overview
The Company has two reportable core operating segments: office furni-
ture and hearth products. The Company is the second largest office 
furniture manufacturer in the United States and the nation’s leading 
manufacturer and marketer of gas- and wood-burning fireplaces.
From 2000 to 2003, the office furniture industry experi -
enced an unprecedented three-year decline due to the challenging 
economic environment. In 2003, this decline negatively impacted the 
Company’s office furniture segment. In contrast, the housing market 
was at record high levels during 2003, which positively impacted the 
Company’s hearth segment. The Company outperformed its peers in 
both segments in which it competes. The Company gained market 
share by providing strong brands, innovative products and services, 
and greater value to its end-users. Fiscal 2003 also included an extra 
week of activity due to the Company’s 52/53-week fiscal year.
Net sales were $1.8 billion in 2003, as compared to $1.7 bil-
lion in 2002. The increase in net sales reflects the 9% increase in the 
hearth segment and the additional week of business activity. In 2003 
and 2002, the Company recorded restructuring charges and accelerated 
depreciation related to the closure and consolidation of office furniture 
facilities totaling $15.2 million and $3.0 million, respectively. Gross 
margins increased to 36.4% in 2003 from 35.4% in 2002 due to benefits 
from restructuring initiatives and its rapid continuous improvement 
program, new products, and increased price realization. The Company 
also invested aggressively in brand building and selling initiatives in 
2003. Net income was $98.1 million or $1.68 per diluted share in 2003, 
as compared to $91.4 million or $1.55 per diluted share in 2002.
The Company generated $141.3 million in cash flow from 
operating activities and increased its cash position, including short-
term investments, by $48.6 million to $204.2 million. The Company 
paid dividends of $30.3 million and repurchased $21.5 million of its 
common stock, while investing $35.7 million in net capital expendi -
tures and repaying $20.2 million of debt.
Critical Accounting Policies and Estimates
G E N E R A L
Management’s Discussion and Analysis of Financial Condition and 
Results of Operations is based upon the Consolidated Financial 
Statements, which have been prepared in accordance with GAAP. The 
preparation of these financial statements requires management to 
make estimates and assumptions that affect the reported amounts of 
assets, liabilities, revenue and expenses, and related disclosure of con-
tingent assets and liabilities. Management bases its estimates on 
historical experience and on various other assumptions that are 
believed to be reasonable under the circumstances, the results of which 
form the basis for making judgments about the carrying values of assets 
and liabilities that are not readily apparent from other sources. Senior 
management has discussed the development, selection and disclosure 
of these estimates with the Audit Committee of our Board of Directors. 
Actual results may differ from these estimates under different assump-
tions or conditions.
An accounting policy is deemed to be critical if it requires an 
accounting estimate to be made based on assumptions about matters 
that are uncertain at the time the estimate is made, and if different 
estimates that reasonably could have been used, or changes in the 
accounting estimates that are reasonably likely to occur periodically, 
could materially impact the financial statements. Management believes 
the following critical accounting policies reflect its more significant