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 Liquidity and Capital Resources OFFICE FURNITURE HEARTH PRODUCTS INVESTMENTS Office furniture comprised 74% of consolidated net sales for 2003 and  76% of consolidated net sales for 2002 and 2001. Net sales for office  furniture increased 2% in 2003 and decreased 6% in 2002. The  increase in 2003 is due to the increased week from the Company’s  52/53-week fiscal year. The office furniture industry has experienced an  unprecedented three-year decline in shipments. The Business and  Institutional Furniture Manufacturer’s Association (BIFMA) reported  2003 shipments down over 5% and 2002 shipments down 19%. The  Company’s estimated share of the market based on reported office  furniture shipments increased to 15.3% in 2003 compared to 14.4%  in 2002 and 12.4% in 2001. This increase was achieved by provid- ing strong brands, innovative products and services, and greater value  to end-users. Operating profit as a percent of sales was 10.0% in 2003,  10.2% in 2002, and 8.2% in 2001. Included in 2003 were $15.2 million  of net pretax charges related to the closure of two office furniture  facilities, which impacted operating margins by 1.1 percentage points.  Included in 2002 were $3.0 million of restructuring charges, which  impacted operating margins by 0.2 percentage points, and 2001  included $22.5 million of restructuring charges, which impacted oper- ating margins by 1.7 percentage points. The increase in operating  margins is due to increased gross profit from the benefits of restructur- ing initiatives, rapid continuous improvement programs, and increased  price realization, offset by additional investments in brand building and  selling initiatives and increased freight expense. Hearth products sales increased 9% in 2003 and decreased 3% in 2002,  respectively. The growth in 2003 was attributable to strong housing  starts, growth in market share in both the new construction and retail  channels, strengthening alliances with key distributors and dealers, as  well as focused new product introductions. The decrease in 2002 was  mainly due to pruning out less profitable product lines. Operating profit as a percent of sales in 2003 was 12.1% com- pared to 10.8% and 9.2% in 2002 and 2001, respectively. The improved  profitability in 2003 was the result of leveraging fixed costs over a  higher sales volume and increased sales through company-owned dis- tribution offset by increased freight costs and higher labor costs from  increased use of overtime and temporary labor to meet record levels of  demand. The increase in 2002 was mainly due to discontinuance of  goodwill and indefinite-lived intangible amortization of approximately  $7 million due to the adoption of SFAS 142. The Company has investments in investment grade equity and debt  securities. Management classifies investments in marketable securities  at the time of purchase and reevaluates such classification at each bal- ance 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 2003 and 2002 is  During 2003, cash flow from operations was $141.3 million, which  along with funds from stock option exercises under employee stock  plans, provided the funds necessary to meet working capital needs,  invest in capital improvements, repay long-term debt, repurchase com- mon stock, and pay increased dividends. Cash, cash equivalents, and short-term investments totaled  $204.2 million at the end of 2003 compared to $155.5 million at the  end of 2002 and $78.8 million at the end of 2001. The Company used  approximately $80 million of cash to acquire Paoli Inc. on January 5,  2004. These remaining funds, coupled with cash from future opera- tions and additional long-term debt, if needed, are expected to be  adequate to finance operations, planned improvements, and internal  growth. The Company is not aware of any known trends or demands,  commitments, events, or uncertainties that are reasonably likely to  result in its liquidity increasing or decreasing in any material way. The Company places special emphasis on the management  and reduction of its working capital with a particular focus on trade  receivables and inventory levels. The success achieved in managing  receivables is in large part a result of doing business with quality cus- tomers and maintaining close communication with them. Trade  receivables at year-end 2003 were virtually unchanged from the prior  year. Trade receivable days outstanding have averaged approximately  37 to 38 days over the past three years. The Company’s inventory turns  were 23, 23, and 18 for 2003, 2002, and 2001, respectively. Increased  imports of raw materials and finished goods may negatively affect  inventory turns in the future but the Company is constantly looking for  ways to add efficiency to its supply chain. The decrease in accounts pay- able and accrued expenses is due to timing of vendor and marketing  program payments and the payment of additional purchase consider- ation and debenture earn out related to a prior acquisition. The  Company also funded the retiree medical portion of its postretirement  benefit obligation in 2003. 36