HNI Corporation Annual Report 2002

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FY2002 Annual Report · HNI Corporation

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H O N I N D U ST R I E S

2 0 0 2 A N N UA L R E P O RT

Strengths
into
Strategy

HO N I N D U ST R I E S I n c .

Contents

2 Financial Highlights

3 Letter to Shareholders

6 Strengths into Strategy

22 At a Glance

24 Management’s Discussion and Analysis

30 Consolidated Financial Statements and Notes

46 Eleven-Year Summary

48 Reports of Independent Accountants

50 Management’s Responsibility for Financial Statements

51 A Message from the Board of Directors

52 Board of Directors and Officers

IBC Investor Information and Our Vision

Attributes
into action.

We at HON INDUSTRIES see in the office

furniture market’s unprecedented down-

turn something surprising: Opportunity.

Because in 2002 we delivered solid finan-

cial performance and launched more new
products than at any time in our history. We have more
points of access to our markets
than virtually anybody. Our supply

chain expertise is second to none.

And we have built one of the most

talented leadership teams in the

business, who, combined with our dedicated members, make
people a significant differentiator.
Now, we are intensifying our focus

on converting our tremendous attrib-

utes into action; on continuing to turn

our strengths into a solid strategy for
profitable, long-term growth.

Financial Highlights

Amounts in thousands, except for per share data

2002

2001

Change

Income Statement Data
Net sales
Gross profit
Selling and administrative expenses
Restructuring related charges
Operating income
Net income
Net income as a % of:

Net sales
Average shareholders’ equity

Per common share:

Net income
Book value
Cash dividends

Balance Sheet Data
Current assets
Total assets
Current liabilities
Current ratio
Long-term debt and capital lease obligations
Debt/capitalization ratio
Shareholders’ equity
Average shareholders’ equity
Working capital

Other Data
Capital expenditures
Cash flow from operations
Weighted-average shares outstanding during year
Price/earnings ratio at year-end
Number of shareholders at year-end
Members (employees) at year-end

* Includes acquisitions completed during year.

$÷1,692,622
599,879
454,189
3,000
142,690
91,360

$÷1,792,438
611,298
464,206
24,000
123,092
74,407

5.4%
14.7%

4.2%
12.8%

$÷÷÷÷÷«1.55
11.08
.50

$÷÷«405,054
1,020,552
298,680
1.36
$÷««÷÷«9,837
1.5%
$÷÷«646,893
619,787
106,374

$÷÷÷«25,885
202,391
58,789,851
18
6,777
8,828

$÷÷÷÷÷«1.26
10.10
.48

$÷÷«319,657
961,891
230,443
1.39
$÷÷÷«80,830
12.0%
$÷÷«592,680
583,011
89,214

$÷÷÷«36,851
227,800
59,087,963
22
6,694
9,029*

%
(5.6)
%
(1.9)
%
(2.2)
(87.5)
%
15.9 %
22.8 %

23.0 %
9.7 %
4.2 %

26.7 %
6.1 %
29.6 %

(87.8)

9.1 %
6.3 %
19.2 %

(29.8)
(11.2)
(0.5)

%
%
%

1.2 %
%
(2.2)

7
0
7
1

1
0
8
1

6
4
0

2
9
7
1

2
9
6

6
0
1

7
8

6
0
1

4
7

1
9

5
2

8
1

9
1

2
1

4
1

2
7

4
4

7
7

6
2

5
5

8
9
9
1

9
9
9
1

0
0
0
2

1
0
0
2

2
0
0
2

8
9
9
1

9
9
9
1

0
0
0
2

1
0
0
2

2
0
0
2

8
9
9
1

9
9
9
1

0
0
0
2

1
0
0
2

2
0
0
2

8
9
9
1

9
9
9
1

0
0
0
2

1
0
0
2

2
0
0
2

Net Sales
Millions of dollars

Net Income
Millions of dollars

Return on Average
Shareholders’ Equity
Percent

Earnings Per Share
Dollars

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Dear
Shareholders:

It might surprise you to hear that in

spite of a negative environment in the

office furniture market, we have a

very positive story to tell. We emerged

from a second consecutive year of

double-digit industry decline with a

solid balance sheet, strong margins,

excellent cash flow and low debt. We

launched more new products than ever,

set records in service and quality, and

gained significant share in a number

of our markets. You’d be right to ask us

a simple question: Where from here?

HO N I N D U ST R I E S I n c .

Thanks to solid performance by our office furniture and hearth businesses,

we excelled by virtually every financial measure in 2002 and gained market

share, despite a decline in overall sales. Earnings per share: well above last

year. Working capital: number one in the industry. Cash flow: a five-year

compounded annual growth rate of 7.4 percent. Gross profits: record perform-

ance in the worst market environment anyone can remember. And our stock

price remained stable throughout the year, outperforming the S&P 500.

It’s time to intensify our efforts to grow. We have proven that we can

insulate our shareholders from extremely difficult economic conditions. Now

we must prove that we can deliver growth. To accomplish this, we have

established five strategic priorities for 2003–2005:

Priority one: Understand and respond to end-users. In every one of our

businesses, we are working to better understand the people who ultimately

buy and use our products. We are investing to find out more than just their

level of satisfaction with our products; we want to learn about what they

value and want; how and where they buy; and how they feel about the

purchase, delivery and installation experience.

JAC K D. M I C H A E L S

We also must find appropriate ways to increase our influence in the

C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R

channels through which our businesses reach their markets. This will bring us

closer to end-users and put us in a better position to respond to their needs.

Priority two: Build brand power. It is critical to establish strong brands

in our markets. As you read this letter, we are implementing aggressive,

comprehensive strategies to accomplish it. Each HON INDUSTRIES business

has a unique position it seeks to capture; the common objective among all

is to create that strong and lasting bond with buyers that every successful

brand enjoys.

Priority three: Implement profitable and aggressive growth strategies.

Our financial performance puts us in an excellent position to pursue growth.

We have a number of powerful avenues within our core businesses to

achieve it profitably, whether through new market niches or through logical

extensions of our expertise and product portfolio. And we are always evaluat-

ing opportunities to build our business through acquisition.

Priority four: Respond to global competition. We are operating in an

increasingly global competitive environment. Low-cost imports are having

more impact on our business every day. Globalization adds urgency to the

need to build our brands and evolve from a manufacturer to a solutions

provider. It also represents opportunities to enhance our competitiveness

through sourcing arrangements and alliances overseas.

ST R E N G T H S I N TO ST R AT E G Y

Priority five: Enhance our culture and values. To me, the HON INDUSTRIES

culture is about fairness, respect and learning. Management’s job is to engage

all members in the improvement process – to listen, learn from them, and

give them opportunities to grow and enhance their skills. When we get mem-

bers to share their ideas to make their jobs more productive and act on those

ideas, we achieve something powerful: 8,828 people actively working to

make this company better. Evidence of their success can be found in our

recognition recently by FORTUNE magazine as the most-admired company

in our industry and our inclusion in Forbes’ Platinum 400 list.

Part of our culture of learning is the role our board members play in our

success. With all the attention being paid to governance issues today, it

would be easy to overlook the tremendous value our Board of Directors brings

to our company beyond corporate oversight. There is a great deal to be

learned from the wealth of experience each HON INDUSTRIES director pos-

sesses. Their counsel is as valuable to us as their integrity and commitment

are to representing your interests.

In 2002, we were very pleased to welcome Ronald V. Waters, III, Senior

Vice President and Chief Financial Officer of Wm. Wrigley Jr. Company, to

our board. Ron’s knowledge of finance and accounting, global sourcing, supply

chain and logistics management will be of particular value to the company.

On February 13, 2003, we announced the appointment of Stanley A. Askren

as the new President of HON INDUSTRIES and a member of its Board of

Directors. This appointment resulted from the normal, ongoing succession

planning process utilized by the Board of Directors. It is an indication of the

strength of our team that Stan was selected from a field made up entirely

of internal candidates; it’s an equal indication of the team’s strength that this

was doubtless the most difficult decision the board has ever had to make.

Although we see continued economic challenge and global uncertainty

immediately ahead, I believe the office furniture and hearth and home indus-

tries both have bright and vibrant long-term futures. I’m very proud of what

we achieved in 2002, and I’m looking forward to working with Stan to take

this company to the next level of performance and growth. I know he feels as

strongly as I do that for HON INDUSTRIES, its members and shareholders,

the best is yet to come.

JAC K D. M I C H A E L S

C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R

HO N I N D U ST R I E S I n c .

S T R E N G T H S

We have
the products.

Solid financial performance has

enabled us to maintain a high level of

investment in new product develop-

ment and marketing. We spent wisely,

as evidenced by an extraordinary

group of exciting new products we

launched in 2002. We developed each

in a disciplined process that carefully

defines end-user needs and helps

ensure immediate and ongoing contri-

bution to our bottom line. But great

products are only part of the value

equation, just one element of solutions

designed to enhance the work and

home environments.

ST R E N G T H S I N TO ST R AT E G Y

The 19th Part

Allsteel’s award-winning #19 chair is a beautiful union of form and function. Its design is the sum

of 18 custom-designed, integral parts. The equally integral 19th part? The person sitting in it.

HO N I N D U ST R I E S I n c .

Moving from just a manufacturer
to a provider of solutions.

Without question, we have the products. At

The challenge now is to develop solutions that

The HON Company, at Gunlocke, at Allsteel, at

support the larger purpose in which our products

Hearth & Home Technologies – at every company

play a part. In some channels, it’s offering a

in the HON INDUSTRIES family – our focus

combination of products to enable single sourcing

over the past few years on developing beautiful,

for maximum workplace performance and value.

functional, innovative products is winning awards

In others, it’s providing related services, including

and serving notice to the competition.

space design, asset and lifecycle management,

among others. And at Hearth & Home Technologies,

it’s expanding our focus beyond fireplaces to offer

products for a healthy home.

ST R E N G T H S I N TO ST R AT E G Y

HO N I N D U ST R I E S I n c .

S T R E N G T H S We have

the presence.

It’s one thing to have an exciting new

portfolio of highly desirable products;

it’s quite another to get them efficiently

to market. At HON INDUSTRIES, this

is where a second strength comes into

play: We are without peer in our number

of sales channels and in our supply

chain efficiency and performance. We

have established an exceedingly strong

market position through the multitude

of ways we reach customers, and the

superior quality and dependability of

our service.

ST R E N G T H S I N TO ST R AT E G Y

Selling to Them, Then Getting It to Them

We’ve made it a priority to establish a strong presence in each of our markets’ many different buying

processes. It’s an equal priority to get our product to end-users and channel partners where and when

they want it, every single time.

HO N I N D U ST R I E S I n c .

ST R E N G T H S I N TO ST R AT E G Y

Mastering the total buying experience,
from selection and purchase to
delivery and installation.

In our office furniture and hearth businesses, chan-

From a small business owner needing a few

nels and buying processes vary as widely as the

pieces of office furniture to a multinational corpora-

players involved in each. Small retailers. “Big box”

tion making a large and complex contract purchase,

mass merchandisers. Wholesalers. Dealers. Archi-

from a homeowner looking for a gas fireplace to a

tects and designers. Home builders. Individual home-

contractor who builds 15,000 homes a year, the

owners. Business people. Small businesses. Large

companies of HON INDUSTRIES are there for them.

government agencies. Multinational corporations.

But once the sale is made, the critical fulfill-

HON INDUSTRIES has done more than just

ment part of the purchase process begins. HON

recognize the different segments; it has worked

INDUSTRIES has mastered the physical distribu-

very effectively to position itself in the multiple

tion of its broad and deep range of products

channels that serve them. It takes an extraordinary

through an operational infrastructure that includes

amount of skill, discipline and versatility to manage

manufacturing, logistics and customer service.

different relationship dynamics while maintaining

Across our entire business, we take demand from

and continually improving upon the ability to meet

an end-user or channel partner, turn it around more

each channel’s distinct requirements.

efficiently and deliver it faster and more dependably

than any of our competition. We measure it in

complete-and-on-time performance that exceeds

90 percent, industry-best lead times and, most

important, delighted customers.

With strategically placed

leading complete-and-on-

techniques and a company-

distribution centers across

time performance. But it’s

wide commitment to

the United States, national
presence is an important

only a part of a larger
competency that includes

factor in our industry-

innovative manufacturing

service excellence.

HO N I N D U ST R I E S I n c .

S T R E N G T H S We have

the people.

“Our people are our greatest asset.”

Certainly, it’s become a cliché. But in

the cliché dwells a fundamental truth:

The difference between success

and failure always comes down to the

human factor, from the leaders who

develop strategy to the people who

execute it. At HON INDUSTRIES, we

have quietly assembled one of the

best leadership teams in the industry,

and our workforce is so vested in the

company’s success that we call them

members, not employees.

ST R E N G T H S I N TO ST R AT E G Y

The Meaning of Member

Since the company was founded, HON INDUSTRIES employees have been known as members. Because everyone with at

least a year’s service shares in the company profits and owns company stock, “member” reflects more than a unique designation.
It reflects – and drives – a unique level of commitment to the company’s success throughout the entire workforce.

HO N I N D U ST R I E S I n c .

HON INDUSTRIES senior management
represents a unique combination of
focused leadership and teamwork.

Dave Burdakin joined HON

INDUSTRIES in 1993 after

serving in operations, sales

management, marketing

and general management

positions at ITW, Bendix and

American Can Corporation.

Dave worked in management

across a number of HON

INDUSTRIES product areas,

including seating, metal case

goods and wood, before

assuming his current position.

DAV I D C . B U R DA K I N

E V P, H O N I N D U ST R I E S

P R E S I D E NT, T H E H O N C O M PA N Y

Stan Askren was appointed

by the Board of Directors as

President in February 2003.

He has served as President

of Allsteel since 1999 after

serving in general manage-

ment, marketing and human

resources roles across the

businesses, including the

role of President of Heatilator.

He also held positions

with Emerson Electric and

Thomson S.A. before joining

HON INDUSTRIES in 1992.

DAV I D C . B U R DA K I N

E V P, H O N I N D U ST R I E S

P R E S I D E NT, T H E H O N C O M PA N Y

“My focus is on establishing a

brand for The HON Company

that truly reflects who we

are: providers of the highest

quality products and solutions

to meet the needs of busi-

ness, from the back room

to the executive suite.”

STA N L E Y A . AS K R E N

P R E S I D E NT, H O N I N D U ST R I E S

P R E S I D E NT, A L L ST E E L

“ At HON INDUSTRIES, we

have a tremendous opportu-

nity to apply our extraordinary

organizational capabilities

and great products to drive

market share growth.

The biggest challenge is

in getting the word out.”

ST R E N G T H S I N TO ST R AT E G Y

Phil Martineau has led the

Wood Products Group since

joining HON INDUSTRIES in

2000 and assumed responsi-

bility for the corporation’s

international business in 2001.

His background includes expe-

rience as a senior executive

in engineering, marketing and

sales, international operations

and finance, as well as general

management at ITW, Emerson

Electric and Cummins.

Dan Shimek co-founded

Heat-N-Glo in 1976; he came

to HON INDUSTRIES in

1996 with the merger of

Heat-N-Glo and Heatilator.

He held a variety of manage-

ment positions in a 15-year

career at 3M prior to leaving

in 1986 to devote his time

to the Heat-N-Glo business.

P H I L L I P M . M A RT I N E AU

E V P, H O N I N D U ST R I E S

P R E S I D E NT, WO O D P R O D U C T S G R O U P

P R E S I D E NT, H O N I NT E R N AT I O N A L

DA N I E L C . S H I M E K
DA N I E L C . S H I M E K

E V P, H O N I N D U ST R I E S
E V P, H O N I N D U ST R I E S

P R E S I D E NT, H E A RT H &
P R E S I D E NT, H E A RT H A N D

H O M E T E C H N O LO G I E S
H O M E T E C H N O LO G I E S

Jerry Dittmer joined HON

INDUSTRIES in 1991. He

oversees the corporation’s

accounting, information tech-

nology, business analysis,

mergers and acquisitions and

investor relations functions,

among others. He held IT,

operations and financial man-

agement positions in our

office furniture business

before becoming CFO. He

came to HON INDUSTRIES

from Coopers & Lybrand.

P H I L L I P M . M A RT I N E AU

E V P, H O N I N D U ST R I E S

P R E S I D E NT, WO O D P R O D U C T S G R O U P

P R E S I D E NT, H O N I NT E R N AT I O N A L

“This is a great group of exec-

utives. HON INDUSTRIES’

split-and-focus model enables

us to concentrate on our

respective businesses and

develop closeness to our

customers. Yet we work

together as a highly cohesive

team to support our mutual

success.”

“HON INDUSTRIES’ greatest

strength comes from a Rapid

Continuous Improvement

process that’s ingrained in

virtually every part of the

company. This supports

Hearth & Home Technologies’

current business and its

pursuit of growth opportunities

in and around the home.”

J E R A L D K . D I TT M E R

V P A N D C F O, H O N I N D U ST R I E S

“I spend a great deal of my

time involved in the develop-

ment and implementation

of aggressive and profitable

growth strategies for the

corporation. With our people,

our culture and our core skills,

there’s a lot of opportunity.”

HO N I N D U ST R I E S I n c .

S T R AT E G Y

We have
the vision.

Vision, like talk, is often cheap. Many com-

panies claim to have vision, but surprisingly

few actually deliver on it. The only rele-

vance of vision to investors is the extent

to which it supports performance. We

have delivered solid financial performance;

the next deliverable is steady, measurable

growth. Our growth initiatives are focused

in four areas: building our brands, expand-

ing our existing markets, thinking globally,

and creating new markets. And for the

record, our vision is defined on the inside

back cover of this report.

ST R E N G T H S I N TO ST R AT E G Y

Building
Our Brands
Brands are about people. Brand
recognition and loyalty among buyers,
channel partners and end-users are
critical factors in the success of
every HON INDUSTRIES business.
Brand power helps us reach specific
target markets more efficiently,
effectively and profitably – bolstering
it will remain a top priority over the
next three years. The HON Company,
Allsteel, Gunlocke, Hearth & Home
Technologies and others in the
HON INDUSTRIES family are in the
midst of aggressive, comprehensive
strategies to build their brands.

HO N I N D U ST R I E S I n c .

Thinking Globally
The steadily increasing competitive
presence of low-cost imports in
our domestic markets means more
pressure on HON INDUSTRIES
companies to enhance differentiating
aesthetics, quality and value while
continuing to evaluate strategies
to improve cost basis. At the same
time, globalization can represent
growth potential as domestic cus-
tomers expand their businesses
overseas and require support. As
the market evolves, we will formu-
late our strategies accordingly,
looking not only at challenges but
opportunities as well.

Extending
Existing Markets
One of the objectives of our intensi-
fied focus on end-users is to identify
ways we can leverage our core busi-
ness processes and products to drive
growth with existing customers.
We are seeking to translate excel-
lence into expanded relationships,
operational performance into a
higher percentage of the customer
dollar. We also are actively pursuing
specific niches where our product
and service mix can bring real value:
niches like hospitality, government,
education and a number of others.

ST R E N G T H S I N TO ST R AT E G Y

Developing
New Markets
At HON INDUSTRIES, we will con-
tinue to evaluate ways to expand
our business through acquisitions,
alliances and new product line devel-
opment consistent with our expertise
and culture. An excellent example
can be seen in Hearth Technologies’
name change to Hearth & Home
Technologies, reflecting a strategy to
extend its product focus to the entire
home – making it more comfortable,
healthier and more beautiful – with
heat recovery ventilator technology,
central vacuum systems and outdoor
lifestyle products.

HO N I N D U ST R I E S I n c .

HON INDUSTRIES at a Glance

Office Furniture
The office furniture segment

consists of five operating

companies marketing under

various brand names. Each

company is uniquely positioned

to focus on distinct market

segments and distribution

channels.

Hearth & Home
Technologies
The hearth and home segment

is organized under a single

operating company, Hearth &

Home Technologies Inc., which

oversees four brands. In late

2002, the company, which is

the world’s largest fireplace

manufacturer, changed its name

from Hearth Technologies Inc.

to better reflect an expanded

commitment to healthy home

and lifestyle offerings.

ST R E N G T H S I N TO ST R AT E G Y

™

The HON Company is one of America’s leading providers of workplace

solutions, including panel systems, seating, desks, storage files and tables.

The company focuses on the transactional and commercial segments of

the industry and generally targets small to medium-sized businesses.

Allsteel Inc. is one of the industry’s best-recognized brands. It is a leader

in the design, manufacture and marketing of modern, purposeful solutions

that include panel systems, desks, storage products and seating. Allsteel

targets the contract market, which is project-driven and design-oriented.

The Gunlocke Company handcrafts high-quality, natural wood office furniture

that includes executive case goods, a wide range of seating, lounge furniture

and conference tables. Its focus is primarily on the contract market.

Maxon Furniture Inc. targets small to medium-sized businesses with a

broad range of office furniture systems, tables, storage products and seating.

It focuses on the commercial and contract markets. In 2002, the BPI® and

Panel Concepts® brands were consolidated to create Maxon.

Holga Inc. focuses on specialized filing and storage products targeted at

the commercial, contract and institutional markets. Its products range from

traditional lateral and vertical files to space-efficient high-density shelving,

storage and mobile systems uniquely designed to provide application solutions.

HON International Inc. is responsible for sales and business development

outside of the United States and Canada. It markets select products of

the office furniture brands and operates business development offices in

global locations.

Heatilator is America’s premier fireplace brand, consistently identified as

the most recognized and preferred brand among home builders. Heatilator

has extended beyond its strong hearth offerings to include functional home

products engineered to enhance a healthy home environment.

™

Heat-N-Glo invented the direct-vent fireplace and continues to be a leader in

innovative technology and unique design. The brand strives to create “aspira-
tional” fireplace and lifestyle products for all areas of the home, including the

family room, kitchen, bedroom and outdoor spaces.

Quadra-Fire, which was formerly referred to as Aladdin Hearth Products, is

the innovative leader in wood fuel technology and hearth heating products.

The brand offers the most complete line of high-efficiency gas-, wood- and

pellet-burning hearth products in the industry.

Fireside Hearth & Home is a new distribution and retail brand. Covering

10 states, Fireside Hearth & Home provides consumers and builders a
systematic sales and installation process with dependable, cost-effective
service. This brand was formerly referred to as Hearth Services.

Selected New HON® Products: Perpetual™ Seating, which received the “Best Of Show

The HON Company

Neocon ‘02” award, uses a unique frame design that automatically responds to the user for

200 Oak Street

563.264.7100

enhanced comfort and continual support. The Park Avenue Collection™ offers veneer desks,

Muscatine, Iowa 52761

hon.com

storage and seating products with sophisticated, traditional styling.

Selected New Allsteel® Products: #19™ Seating, winner of several design awards, incorporates

Allsteel Inc.

the most advanced ergonomic information and technology to date. Landscape™ Surfaces for the

2210 Second Avenue

563.262.4800

Terrace® panel system provides unique expression and customization by allowing designers and

Muscatine, Iowa 52761

allsteeloffice.com

end-users to vary color, texture and contrast.

Selected New Gunlocke® Products: Inspired by the celebrated Adirondack chair, the Seneca™

Chair brings the outside in, landscaping an office with natural beauty and a rich, earthy

disposition. Tapas™ Occasional Tables have a checkerboard pattern with opposing grains that

The Gunlocke Company
One Gunlocke Drive
Wayland, New York 14572

800.828.6300
gunlocke.com

catch and play with light, underscoring the elegance of any environment.

Selected New Maxon™ Products: The Whidbey Executive Chair combines top-grain leather
and brushed aluminum with 21st century ergonomics and outstanding quality and style.

Maxon Furniture Inc.

21606 86th Place South

800.876.4274

Versé® QuickConnect Connectors simplify the process of specifying and installing Versé

Kent, Washington 98031

maxonfurniture.com

partitions, making it one of the industry’s most user-friendly products.

Selected New Holga® Products: WireFlex™ Chrome Wire Shelving is a flexible utility storage

Holga Inc.

product that can be configured and accessorized to satisfy endless applications, from box

7901 Woodley Avenue

800.544.4623

storage to home office use. The Holga Deluxe Vertical File offers premium features and smooth,

Van Nuys, California 91406

holga.com

clean styling to gain acceptance as a designer-caliber product.

Selected New HON International Inc. Initiatives: Opened new business development

HON International Inc.

offices in Singapore, Mexico City and Tokyo with a focus on international opportunities and

200 Oak Street

563.262.7900

supporting customers worldwide.

Muscatine, Iowa 52761

honinternational.com

Selected New Heatilator® Products: The HRV Integrated Fireplace, a Vesta Award winner,
combines the heat recovery function of a fireplace with a home ventilation system to maintain

Heatilator

1915 West Saunders Street

800.843.2848

heating efficiency and indoor air quality. The Caliber-nXt Gas Fireplace utilizes innovative flame

Mt. Pleasant, Iowa 52641

heatilator.com

technology and provides design flexibility with three optional front styles and finishes.

Selected New Heat-N-Glo® Products: The GEM-36 and GEM-42 (gas energy masters) are

Heat-N-Glo

revolutionary hearth products, offering an authentic arched front and a heat management
system to fit any lifestyle. Heat-N-Glo Outdoor Living Builder Sets have expanded the family’s

20802 Kensington Boulevard
Lakeville, Minnesota 55044

888.427.3973
heatnglo.com

living space to the outdoors with fireplaces, grills and firepits.

Selected New Quadra-Fire™ Products: The Vesta Award-winning Castile Insert is Quadra-
Fire’s first cast-iron pellet insert. It is fully automatic, thermostatically controlled and available

Quadra-Fire

1445 North Highway

800.234.2508

in five beautiful finishes. The Topaz, Quadra-Fire’s largest cast-iron direct-vent gas stove and a

Colville, Washington 99114

quadrafire.com

2002 Vesta Award finalist, produces up to 40,000 BTUs of clean, efficient heat.

Selected New Fireside Hearth & HomeSM Initiatives: In early 2003, Hearth & Home Technologies
launched a new Fireside Hearth & Home “destination” retail store concept, which features
extensive product offerings displayed in full-room settings. The intent is to help visitors better
understand the products and experience how they can be utilized in their own home.

Fireside Hearth & Home

20802 Kensington Boulevard
Lakeville, Minnesota 55044

800.669.4328
firesideusa.com

HO N I N D U ST R I E S I n c .

Management’s Discussion and Analysis

The following discussion of the Company’s historical results of

GROSS PROFIT

operations and of its liquidity and capital resources should be read

Gross profit dollars decreased 2% to $599.9 million in 2002 from

in conjunction with the Consolidated Financial Statements of the

$611.3 million in the prior year. The gross margin percentage increased

Company and related notes.

Results of Operations

The following table sets forth the percentage of consolidated net

sales represented by certain items reflected in the Company’s state-

ments of income for the periods indicated.

Fiscal

Net sales

Cost of products sold

Gross profit

Selling and administrative expenses

Restructuring related charges

Operating income

Interest expense (net)

Income before income taxes

Income taxes

Net income

2002

100.0%

64.6

35.4

26.8

0.2

8.4

0.1

8.3

2.9

5.4%

2001

100.0%

65.9

34.1

25.9

1.3

6.9

0.4

6.5

2.3

4.2%

2000

100.0%

67.5

32.5

23.8

–

8.7

0.6

8.1

2.9

5.2%

The Company has two reportable core operating segments: office

furniture and hearth products. The Operating Segment Information note

included in the Notes to Consolidated Financial Statements provides

more detailed financial data with respect to these two segments.

Fiscal Year Ended December 28, 2002,
Compared to Fiscal Year Ended December 29, 2001

NET SALES

to 35.4% for 2002 from 34.1% in 2001 despite a negative impact from

increased steel prices, due to steel tariffs, of approximately $5 million

during the second half of the year. The improvement in gross margin

was a direct result of the continued net benefits of rapid continuous

improvement, business simplification, new product introductions, and

restructuring initiatives. During 2002, the Company recognized a loss

on asset disposals into cost of products sold in the amount of approx-

imately $5 million in relation to its continued rapid continuous

improvement initiatives.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses decreased by 2% to $454.2 mil-

lion in 2002 from $464.2 million in 2001. Selling and administrative

expenses, as a percent of net sales, increased to 26.8% in 2002 from

25.9% in the prior year. This increase was due to lower overall sales

volume, increased investment in brand equity building and new prod-

uct development, and increased incentive compensation of which a

portion was for a debenture earn-out related to a prior acquisition.

Included in 2001 was $9 million of goodwill and certain other intangi-

ble amortization that is not included in 2002 due to a change in

accounting standards effective December 30, 2001.

Selling and administrative expenses include freight expense for ship-

ments to customers, product development costs, and amortization

expense of intangible assets. The Selling and Administrative Expenses

note included in the Notes to Consolidated Financial Statements pro-

vides further information regarding the comparative expense levels

for these major expense items.

Net sales, on a consolidated basis, decreased by 5.6% to $1.69 billion in

RESTRUCTURING RELATED CHARGES

2002 from $1.79 billion in 2001. Office furniture net sales decreased

During 2002, the Company recorded a pretax charge of approxi-

6.4% in 2002 to $1.28 billion from $1.37 billion in 2001. The decline in

mately $5.4 million due to the shutdown of an office furniture facility

sales occurred in all sectors. The Business and Institutional Furniture

in Jackson, Tennessee. A total of 125 members were terminated and

Manufacturer’s Association (BIFMA) reported a decrease in office fur-

received severance due to this shutdown. During the second quarter

niture shipments of 19% in 2002 compared to 2001. The Company’s

of 2002, a restructuring credit of approximately $2.4 million was taken

share of the market based on reported office furniture shipments

back into income relating to a restructuring charge of $24.0 million

increased to 14.4% versus 12.4% in 2001. Net sales of hearth prod-

that was recorded in second quarter 2001 for a restructuring plan that

ucts decreased 2.9% to $.41 billion in 2002 from $.43 billion in 2001.

included consolidating physical facilities, discontinuing low-volume

The decrease was mainly due to the effect of pruning out less

product lines, and reducing the workforce. This credit was mainly due

profitable product lines.

to the fact that the Company was able to exit a lease with a lessor at

more favorable terms than originally estimated and the Company’s

ability to minimize the number of members terminated as compared

to the original plan. The Restructuring Related Charges note included

in the Notes to Consolidated Financial Statements provides further

information.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Management’s Discussion and Analysis

OPERATING INCOME

GROSS PROFIT

Operating income increased 16% to $142.7 million in 2002 from

Gross profit dollars decreased 8% to $611.3 million in 2001

$123.1 million in 2001. This increase is due to a $24 million restructur-

from $665.9 million in the prior year. The gross margin percentage

ing charge in 2001 compared to a $3 million restructuring charge in

increased to 34.1% for 2001 from 32.5% in 2000. The improvement

2002 and goodwill and indefinite-lived intangibles amortization of

in gross margin percentage is due to new product introductions,

$9 million that is not included in 2002 due to a change in accounting

and rapid continuous improvement, cost containment, and business

standards. Operating profit in the office furniture segment increased

simplification initiatives.

in 2002 as a percent of net sales to 10.2% compared to 8.2% in 2001.

The increase is due to cost reduction, new product introductions, and

restructuring initiatives. Operating profit in the hearth products seg-

ment as a percent of sales increased to 10.8% compared to 9.2% in

2001 due to discontinuance of goodwill and indefinite-lived intangible

amortization of approximately $7 million.

NET INCOME

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses decreased by 5% to $464.2 million

in 2001 from $487.8 million in the prior year. Selling and administrative

expenses, as a percent of net sales, increased to 25.9% in 2001 from

23.8% in 2000. This increase was due to lower overall sales volume,

development of new products, and continued investment in sales and

marketing expenses associated with the Company’s business simpli-

Net income increased by 23% to $91.4 million in 2002 from $74.4 mil-

fication, end-user focus, and branding strategies.

lion in the prior year. Included in 2001 was $5.8 million of goodwill

and other intangible amortization expense that was not included in

2002 due to a change in accounting standards effective December 30,

2001. Also included in 2001 was an after-tax restructuring charge

of $15.4 million. Net income in 2002 was favorably impacted by a

decrease in interest expense and a decrease in the effective tax rate

in the fourth quarter to 35% from 36% in 2001 due to tax benefits

Selling and administrative expenses include freight expense for

shipments to customers, product development costs, and amortiza-

tion expenses of intangible assets. The Selling and Administrative

Expenses note included in the Notes to Consolidated Financial

Statements provides further information regarding the comparative

expense levels for these major expense items.

associated with various federal and state tax credits. The Company

RESTRUCTURING RELATED CHARGE

currently expects the effective tax rate to remain at this level in 2003;

During the second quarter of 2001, the Company recorded a pretax

however, the resolution of certain federal and state tax credits could

charge of $24.0 million, $15.4 million after tax or $0.26 per common

further affect the rate.

Net income per common share increased by 23% to $1.55 in 2002

from $1.26 in 2001.

Fiscal Year Ended December 29, 2001,
Compared to Fiscal Year Ended December 30, 2000

NET SALES

Net sales, on a consolidated basis, decreased by 12% to $1.8 billion

in 2001 from $2.0 billion in 2000. Office furniture net sales decreased

17% in 2001 to $1.37 billion from $1.65 billion in 2000. The decline

in sales occurred in the retail, commercial, and contract sectors. The

office furniture industry reported a decrease in shipments of 17% in

2001 compared to 2000. Net sales of hearth products increased 8%

to $.43 billion in 2001 from $.40 billion in 2000.

share, for a restructuring plan that involved consolidating physical

facilities, discontinuing low-volume product lines, and reduction of

workforce. Included in this charge was the closedown of three of its

office furniture facilities located in Williamsport, Pennsylvania; Tupelo,

Mississippi; and Santa Ana, California. The charge included $16.2 mil-

lion of asset impairments for manufacturing equipment that will be

disposed of and $7.8 million of restructuring expenses. Included in

the $7.8 million is $3.1 million for severance arising from the elim-

ination of approximately 600 plant member positions, $0.8 million for

other member-related costs, and $3.9 million for certain other expenses

associated with the closing of facilities. The Restructuring Related

Charges note included in the Notes to Consolidated Financial

Statements provides further information.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Management’s Discussion and Analysis

OPERATING INCOME

The Company places special emphasis on the management and

Operating income decreased almost 31% to $123.1 million in 2001

reduction of its working capital with a particular focus on trade

from $178.0 million in 2000. This decrease is due to lower overall

receivables and inventory levels. The success achieved in managing

sales volume, increased selling and administrative expenses, and a

receivables is in large part a result of doing business with quality

$24 million restructuring charge. Operating profit in the office furni-

customers and maintaining close communications with them. Trade

ture segment decreased in 2001 as a percent of net sales to 8.2%,

receivables decreased from year-end 2000 levels due to decreased

compared to 10.4% in 2000. The decrease is due to lower overall

sales volume. The increase at year-end 2002 is due to increased sales

sales volume and a $22.5 million restructuring charge. Operating

volume in the fourth quarter compared to fourth quarter 2001. Trade

profit in the hearth products segment increased in 2001 as a per-

receivable days outstanding have averaged approximately 37 days

cent of net sales to 9.2% compared to 7.6% in the prior year. This

over the past three years. Inventory levels also decreased from year-

improvement is due to increased sales volume, simplification of the

end 2000 due to decreased sales volume. However, the Company is

business structure, and cost containment offset by a $1.5 million

able to continue to improve inventory levels and turns as a result of a

restructuring charge.

NET INCOME

Net income decreased by 30% to $74.4 million in 2001 from

$106.2 million in the prior year. The decrease is due to lower overall

more efficient supply chain. Inventory turns were 23, 18, and 17 for

2002, 2001, and 2000, respectively. The increase in accounts payable

and accrued expenses is due to increased accruals for warranty,

marketing programs, and incentive based compensation.

sales volume, increased selling and administrative expenses, and

INVESTMENTS

an after-tax restructuring charge of $15.4 million offset by reduced

The Company acquired investments in 2002 that consist of

interest expense.

Net income per common share decreased by 29% to $1.26 in 2001

from $1.77 for 2000. The Company’s net income per share perfor-

mance for 2001 benefited from the Company’s common stock

repurchase program.

Liquidity and Capital Resources

During 2002, cash flow from operations was $202.4 million, which

provided the funds necessary to meet working capital needs, invest

investment grade equity and debt securities. Management classifies

investments in marketable securities at the time of purchase and

reevaluates such classification at each balance sheet date. Equity

securities are classified as available-for-sale and are stated at current

market value with unrealized gains and losses included as a separate

component of equity, net of any related tax effect. Debt securities

are classified as held-to-maturity and are stated at amortized cost.

A table of holdings as of year-end 2002 is included in the Cash,

Cash Equivalents, and Investments note included in the Notes to

Consolidated Financial Statements.

in capital improvements, repay long-term debt, repurchase common

CAPITAL EXPENDITURE INVESTMENTS

stock, and pay increased dividends.

Capital expenditures were $25.9 million in 2002, $36.9 million in

CASH MANAGEMENT

Cash, cash equivalents, and short-term investments totaled $155.5 mil-

lion at the end of 2002 compared to $78.8 million at the end of 2001

and $3.2 million at the end of 2000. These funds, coupled with cash

from future operations and additional long-term debt, if needed, are

2001, and $59.8 million in 2000. Expenditures during 2002, 2001, and

2000 have been consistently focused on machinery and equipment

that is needed to support new products, process improvements, cost-

savings initiatives, and creating more efficient production and

warehousing capacity.

expected to be adequate to finance operations, planned improvement,

ACQUISITIONS

and internal growth. The Company is not aware of any known trends

During 2001, the Company completed the acquisition of three small

or demands, commitments, events, or uncertainties that are reason-

hearth products distributors for a total purchase price of approximately

ably likely to result in its liquidity increasing or decreasing in any

$7.6 million. The acquisitions were accounted for using the purchase

material way.

method, and the results of the three distributors have been included

in the Company’s financial statements since the date of acquisition.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Management’s Discussion and Analysis

On February 29, 2000, the Company completed the acquisition

Other long-term obligations include $14,537,000 of future minimum

of two leading hearth products distributors, American Fireplace

payments under a transportation agreement, $266,000 of financial

Company (AFC) and the Allied Group (Allied), establishing the

guarantees with customers, $9,757,000 earn-out on convertible

Company as the leading manufacturer and distributor in the hearth

debentures included in current liabilities, and $7,796,000 of payments

products industry, for a purchase price of approximately $135 million.

included in long-term liabilities, due to members who are participants

LONG-TERM DEBT

in the Company’s salary deferral program.

Long-term debt, including capital lease obligations, was 2% of total

RELATED PARTY TRANSACTIONS

capitalization at December 28, 2002, 12% at December 29, 2001, and

The Company has convertible debentures, with earn-out features, in

18% at December 30, 2000. The reduction in long-term debt during

the amount of $40.4 million that are payable to former owners of

2002 was due to debentures from an acquisition now being classified

businesses that were acquired by the Company. These individuals

as current liabilities based on current due date and the retirement of

remain as members of the Company following the acquisitions. The

Industrial Revenue Bonds and Urban Development Action Grants. The

obligation associated with the earn-out provision is approximately

Company does not expect future capital resources to be a constraint

$9.8 million at December 28, 2002.

on planned growth. Additional borrowing capacity of $136 million, less

amounts used for designated letters of credit, is available through a

revolving bank credit agreement in the event cash generated from

operations should be inadequate to meet future needs. Certain of

the Company’s credit agreements include covenants that limit the

The Company has operating leases for office and production facilities

with annual rentals totaling $450,000 with the former owners of a

business acquired in 1996. One of these individuals continues as an

officer of a subsidiary of the Company following the acquisition.

assumption of additional debt and lease obligations. The Company

CASH DIVIDENDS

has been and currently is in compliance with the covenants related

Cash dividends were $0.50 per common share for 2002, $0.48

to the debt agreements.

CONTRACTUAL OBLIGATIONS

The following table discloses the Company’s obligations and commit-

ments to make future payments under contracts:

(In thousands)

Long-term debt

Capital lease
obligations

Operating leases

Other long-term
obligations

Total

Payments Due by Period

Less
than 1
year

1–3
years

Total

$÷49,117

40,564

5,946

4 –5
years

161

After 5
years

2,446

2,041

269

535

1,237

–

63,495

14,128

21,346

12,287

15,734

32,356

15,802

11,496

848

4,210

$147,009

70,763

39,323

14,533

22,390

for 2001, and $0.44 for 2000. Further, the Board of Directors

announced a 4.0% increase in the quarterly dividend from $0.125

to $0.13 per common share effective with the February 28, 2003,

dividend payment for shareholders of record at the close of business

February 21, 2003. The previous quarterly dividend increase was

from $0.12 to $0.125, effective with the March 1, 2002, dividend pay-

ment for shareholders of record at the close of business February 22,

2002. A cash dividend has been paid every quarter since April 15,

1955, and quarterly dividends are expected to continue. The average

dividend payout percentage for the most recent three-year period

has been 31% of prior year earnings.

COMMON SHARE REPURCHASES

During 2002, the Company repurchased 614,580 shares of its

common stock at a cost of approximately $15.7 million, or an

average price of $25.60. The Board of Directors authorized an

additional $100.0 million on February 14, 2001, for repurchases

of the Company’s common stock. As of December 28, 2002,

approximately $62.8 million remained unspent. During 2001, the

Company repurchased 1,472,937 shares at a cost of approximately

$35.1 million, or an average price of $23.80. During 2000, the

Company repurchased 837,552 shares at a cost of approximately

$18.0 million, or an average price of $21.46.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Management’s Discussion and Analysis

LITIGATION AND UNCERTAINTIES

Inventory valuation – The Company values its inventory at the lower

The Company has contingent liabilities that have arisen in the

of cost or market primarily by the last-in, first-out (LIFO) method.

course of its business, including pending litigation, preferential

Additionally, the Company evaluates its inventory reserves in terms

payment claims in customer bankruptcies, environmental remedi-

of excess and obsolete exposures. This evaluation includes such

ation, taxes, and other claims. The Company currently has one

factors as anticipated usage, inventory turnover, inventory levels,

preferential payment claim outstanding totaling approximately

and ultimate product sales value. As such, these factors may change

$7.6 million. The Company intends to vigorously contest this claim;

over time causing the reserve level to adjust accordingly.

however, the ultimate outcome or likelihood of this specific claim

cannot be determined at this time. It is our opinion, after consultation

with legal counsel, that additional liabilities, if any, resulting from

these matters are not expected to have a material adverse effect on

our financial condition, although such matters could have a material

effect on our quarterly or annual operating results and cash flows

when resolved in a future period.

CRITICAL ACCOUNTING POLICIES

The Company’s critical accounting policies include:

Revenue recognition – The Company normally recognizes revenue

upon the shipment of goods. In certain circumstances revenue is

Long-lived assets – 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 considerable management judgment

and are based upon assumptions about expected future operating

performance. The actual cash flows could differ from management’s

estimates due to changes in business conditions, operating perfor-

mance, and economic conditions.

not recognized until the goods are received by the customer or

Goodwill and other intangibles – The Company adopted Statement

upon installation and customer acceptance based on the terms of

of Financial Accounting Standards (SFAS) No. 142, “Goodwill and

the sale agreement. Revenue includes freight charged to customers;

Other Intangible Assets,” on December 30, 2001, the beginning of its

related costs are included in selling and administrative expense.

2002 fiscal year. The Company has determined that the fair value of its

Rebates, discounts, and other marketing program expenses that

reporting units exceeds the carrying values and therefore, no impair-

are directly related to the sale are recorded as a deduction to net

ment of goodwill was recorded. The impairment tests performed

sales. Marketing program accruals require the use of management

require that the Company determine the fair market value of its trade-

estimates and the consideration of contractual arrangements that

marks and the fair market value of its reporting units for comparison

are subject to interpretation. Customer sales that reach certain award

to the carrying value of such net assets to assess whether an impair-

levels can affect the amount of such estimates, and actual results

ment exists. The methodologies used to estimate fair market value

could differ from these estimates.

Allowance for doubtful accounts – The allowance for receivables is

developed based on several factors including overall customer credit

quality, historical write-off experience, and specific account analyses

involve the use of estimates and assumptions, including projected cash

flows, royalty rates, and discount rates. Also pursuant to the standard,

the Company has ceased recording goodwill and indefinite-lived

intangibles amortization in 2002.

that project the ultimate collectibility of the account. As such, these

Self-insurance reserves – The Company is partially self-insured

factors may change over time causing the reserve level to adjust

for general liability, workers’ compensation, and certain employee

accordingly. Additionally, in certain circumstances the Company may

health benefits. The general and workers’ compensation liabilities

be subject to preferential payment claims that arise in customer

are managed through a wholly owned insurance captive; the related

bankruptcies, for which the ultimate outcome cannot be estimated

liabilities are included in the accompanying financial statements.

and for which an estimated loss cannot be recorded until it is deter-

The Company’s policy is to accrue amounts equal to the actuarially

mined to be probable and reasonably estimable.

determined liabilities. The actuarial valuations are based on historical

information along with certain assumptions about future events.

Changes in assumptions for such matters as legal actions, medical

costs, and changes in actual experience could cause these estimates

to change in the near term.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Management’s Discussion and Analysis

Looking Ahead

Global Insight (formerly DRI-WEFA), the Business and Institutional

Furniture Manufacturer’s Association (BIFMA) forecasting consultant,

is projecting the office furniture industry to be up over 5% in 2003

compared to 2002, with a 2% decline in the first quarter in its fore-

cast dated January 15, 2003. The Company expects to continue to

outperform the industry; however, management anticipates that

the unstable political and economic conditions will continue to

challenge growth and profitability during the first half of 2003.

The two primary channels for hearth products are the new home

construction channel and the remodel/retail channel. Indications

are that the housing market will remain at the current healthy level

while the retail side, which is dependent on consumer confidence,

is being hampered by political instability. The Company feels that the

first half of the year will be challenging for this segment as well.

The Company is optimistic about the growth opportunities from new

products and brand extensions into new markets. These markets

include outdoor living products such as outdoor cooking systems

and healthy home products such as a heat recovery system and

a central vacuum system.

The Company continues to see pressure on gross margins due to

increased steel prices as a result of steel tariffs that were enacted in

2002. The Company continues to work to mitigate the potential nega-

tive impact through various initiatives, including alternative materials

and suppliers.

The Company continues to focus on long-term shareholder value

by making investments for the future. These investments include

new products, building brand equity, investigating new markets,

and expanding distribution.

RECENT ACCOUNTING PRONOUNCEMENTS

During 2002, the Financial Accounting Standards Board finalized

SFAS No. 146, “Accounting for Costs Associated with Exit or

Disposal Activities,” for exit and disposal activities that are initiated

after December 31, 2002. This Statement requires that a liability

for a cost associated with an exit or disposal activity be recognized

when the liability is incurred.

The Financial Accounting Standards Board also issued SFAS No. 148,

“Accounting for Stock-Based Compensation – Transition and Disclosure,”

during 2002. This Statement amends SFAS No. 123, “Accounting

for Stock-Based Compensation,” to provide alternative methods of

transition for a voluntary change to the fair value based method of

accounting for stock-based employee compensation and amends

the disclosure requirements to require prominent disclosure in both

annual and interim financial statements about the method of account-

ing for stock-based employee compensation and the effect of the

method used on reported results. The Company adopted the disclo-

sure requirements of this Statement as of December 28, 2002.

The Financial Accounting Standards Board also issued Interpretation

No. 45, “Guarantor’s Accounting and Disclosure Requirements for

Guarantees, Including Indirect Guarantees of Indebtedness to Others”.

FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for

Contingencies,” relating to the guarantor’s accounting for and disclo-

sure of the issuance of certain types of guarantees. The provisions

for initial recognition and measurement are effective on a prospective

basis for guarantees that are issued or modified after December 31,

2002. The disclosure provisions are effective for financial statements

with years ending after December 15, 2002. The Company has

included these disclosures in the Warranty and the Commitments

and Contingencies notes.

During 2001, the Financial Accounting Standards Board finalized

SFAS No. 143, “Accounting for Asset Retirement Obligations,”

and SFAS No. 144, “Accounting for the Impairment or Disposal of

Long-Lived Assets”. The Company adopted Statement No. 144

on December 30, 2001, the beginning of its 2002 fiscal year. The

Company intends to adopt Statement No. 143 on December 29,

2002, the beginning of its 2003 fiscal year. The adoption of SFAS

No. 143 is not expected to have a material impact on the Company’s

financial statements.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Consolidated Statements of Income

(Amounts in thousands, except for per share data)

For the Years

2002

2001

2000

Net sales

Cost of products sold

Gross profit

Selling and administrative expenses

Restructuring related charges

Operating income

Interest income

Interest expense

Income before income taxes

Income taxes

Net income

Net income per common share – basic and diluted

The accompanying notes are an integral part of the consolidated financial statements.

$1,692,622

1,092,743

$1,792,438

1,181,140

$2,046,286

1,380,404

599,879

454,189

3,000

142,690

2,578

4,714

140,554

49,194

611,298

464,206

24,000

123,092

1,717

8,548

116,261

41,854

665,882

487,848

–

178,034

1,945

14,015

165,964

59,747

$÷÷«91,360

$÷÷«74,407

$÷«106,217

$÷÷÷÷«1.55

$÷÷÷÷«1.26

$÷÷÷÷«1.77

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Consolidated Balance Sheets

(Amounts in thousands of dollars and shares)

As of Year-End

2002

2001

2000

Assets

Current Assets

Cash and cash equivalents

Short-term investments

Receivables

Inventories

Deferred income taxes

Prepaid expenses and other current assets

Total current assets

Property, plant, and equipment

Goodwill

Other assets

Total assets

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable and accrued expenses

Income taxes

Note payable and current maturities of long-term debt

Current maturities of other long-term obligations

Total current liabilities

Long-term debt

Capital lease obligations

Other long-term liabilities

Deferred income taxes

Commitments and contingencies

Shareholders’ Equity

Preferred stock – $1 par value

Authorized: 1,000

Issued: None

Common stock – $1 par value

Authorized: 200,000

Issued and outstanding: 2002 – 58,374; 2001– 58,673; 2000 – 59,797

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income

Total shareholders’ equity

Total liabilities and shareholders’ equity

The accompanying notes are an integral part of the consolidated financial statements.

$÷«139,165

$÷78,838

$÷÷÷«3,181

16,378

181,096

46,823

10,101

11,491

405,054

353,270

192,395

69,833

–

161,390

50,140

14,940

14,349

319,657

404,971

214,337

22,926

–

211,243

84,360

19,516

11,841

330,141

454,312

216,371

21,646

$1,020,552

$961,891

$1,022,470

$÷«252,145

$216,184

$÷«240,540

3,740

41,298

1,497

298,680

8,553

1,284

28,028

37,114

6,112

6,715

1,432

230,443

79,570

1,260

18,306

39,632

12,067

10,408

1,853

264,868

126,093

2,192

18,749

37,226

–

58,374

58,673

59,797

–

549

587,731

239

646,893

–

891

532,555

561

592,680

–

17,339

495,796

410

573,342

$1,020,552

$961,891

$1,022,470

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Consolidated Statements of Shareholders’ Equity

(Amounts in thousands)

Balance, January 1, 2000

Comprehensive income:

Net income

Other comprehensive income

Comprehensive income

Cash dividends

Common shares – treasury:

Shares purchased

Shares issued under Members Stock
Purchase Plan and stock awards

Balance, December 30, 2000

Comprehensive income:

Net income

Other comprehensive income

Comprehensive income

Cash dividends

Common shares – treasury:

Shares purchased

Shares issued under Members Stock
Purchase Plan and stock awards

Balance, December 29, 2001

Comprehensive income:

Net income

Other comprehensive income (loss)

Comprehensive income

Cash dividends

Common shares – treasury:

Shares purchased

Shares issued under Members Stock
Purchase Plan and stock awards

Balance, December 28, 2002

Common
Stock

$60,172

Additional
Paid-in
Capital

$«24,981

(838)

463

59,797

(17,135)

9,493

17,339

Retained
Earnings

$416,034

106,217

(26,455)

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity

$÷«84

$501,271

326

106,217

326

106,543

(26,455)

(17,973)

9,956

495,796

410

573,342

74,407

(28,373)

151

(1,473)

(24,311)

(9,275)

74,407

151

74,558

(28,373)

(35,059)

8,212

349

58,673

7,863

891

(614)

315

(8,324)

7,982

532,555

561

592,680

(322)

91,360

(29,386)

(6,798)

91,360

(322)

91,038

(29,386)

(15,736)

8,297

$58,374

$÷÷÷549

$587,731

$«239

$646,893

The accompanying notes are an integral part of the consolidated financial statements.

HO N I N D U ST R I E S I n c . a n d S U B S I D I A R I E S

Consolidated Statements of Cash Flows

(Amounts in thousands)

For the Years

2002

2001

2000

Net Cash Flows From (To) Operating Activities

Net income

Noncash items included in net income:

Depreciation and amortization