44 45
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
project the ultimate collectibility of the account. As such, these factors 
may change over time, causing the reserve level to adjust accordingly.
I N V E N T O R I E S
The Company values 96% of its inventory by the last-in, first-out 
(LIFO) method. Additionally, the Company evaluates its inventory 
reserves in terms of excess and obsolete exposures. This evaluation 
includes such factors as anticipated usage, inventory turnover, inven -
tory levels, and ultimate product sales value. As such, these factors may 
change over time, causing the reserve level to adjust accordingly.
P R O P E R T Y ,  P L A N T ,  A N D  E Q U I P M E N T
Property, plant, and equipment are carried at cost. Depreciation has 
been computed using the straight-line method over estimated useful 
lives: land improvements, 10–20 years; buildings, 10–40 years; and 
machinery and equipment, 3–12 years. 
L O N G - L I V E D  A S S E T S
Long-lived assets are reviewed for impairment as events or changes in 
circumstances occur indicating that the amount of the asset reflected in 
the Company’s balance sheet may not be recoverable. An estimate of 
undiscounted cash flows produced by the asset, or the appropriate 
group of assets, is compared to the carrying value to determine whether 
impairment exists. The estimates of future cash flows involve consider-
able management judgment and are based upon assumptions about 
expected future operating performance. The actual cash flows could dif-
fer from management’s estimates due to changes in business conditions, 
operating performance, and economic conditions. Asset impairment 
charges connected with the Company’s restructuring activities are dis-
cussed in the Restructuring Related Charges note. These assets included 
real estate, manufacturing equipment, and certain other fixed assets. 
The Company’s continuous focus on improving the manufacturing pro-
cess tends to increase the likelihood of assets being replaced; therefore, 
the Company is constantly evaluating the expected lives of its equipment 
and accelerating depreciation where appropriate. The Company 
recorded losses on the disposal of assets in the amount of approximately 
$1 million and $5 million during 2003 and 2002, respectively, as a 
result of its rapid continuous improvement initiatives.
G O O D W I L L  A N D  O T H E R  I N T A N G I B L E  A S S E T S
In accordance with SFAS No. 142, the Company evaluates its goodwill 
for impairment on an annual basis based on values at the end of third 
quarter, or whenever indicators of impairment exist. The Company has 
evaluated its goodwill for impairment and has determined that the fair 
value of reporting units exceeds their carrying value, so no impairment 
of goodwill was recognized. Management’s assumptions about future 
cash flows for the reporting units requires significant judgment, and 
actual cash flows in the future may differ significantly from those fore-
casted today.
The Company also determines the fair value of an indefinite 
lived trademark on an annual basis, or whenever indications of impair-
ment exist. The Company has evaluated its trademark for impairment 
and has determined that the fair market value of the trademark exceeds 
its carrying value, so no impairment was recognized.
P R O D U C T  W A R R A N T I E S
The Company issues certain warranty policies on its furniture and 
hearth products that provide for repair or replacement of any covered 
product or component that fails during normal use because of a defect 
in design, materials, or workmanship. A warranty reserve is determined 
by recording a specific reserve for known warranty issues and an addi-
tional reserve for unknown claims that are expected to be incurred 
based on historical claims experience. Actual claims incurred could dif-
fer from the original estimates, requiring adjustments to the reserve.