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 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I 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. 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  estimates and assumptions used in the preparation of the Consolidated  Financial Statements. Fiscal year end  – The Company’s fiscal year ends on the Saturday  nearest December 31. Fiscal year 2003, the year ended January 3,  2004, contained 53 weeks, while fiscal year 2002, the year ended  December 28, 2002, and fiscal year 2001, the year ended December 29,  2001, contained 52 weeks. A 53-week year occurs approximately every  sixth year. Revenue recognition – Revenue is normally recognized upon  shipment of goods to customers. In certain circumstances revenue is  not recognized until the goods are received by the customer or upon  installation and customer acceptance based on the terms of the sale  agreement. Revenue includes freight charged to customers; related  32 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. 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. 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. 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. Critical Accounting Policies and Estimates GENERAL Overview