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ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2016

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates, including those related to product returns, bad debts, carrying value of inventories, intangible and other long-lived assets, income taxes, pensions and other postretirement benefits. Actual results could differ from those estimates.

Fiscal Year

The Company’s year ends on the Saturday nearest to December 31. Fiscal 2016 was a 52 week year, 2015 was a 52 week year and 2014 was a 53 week year.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions are eliminated.

Cash Equivalents

Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Approximately 51% of available cash is located outside of the United States in our foreign subsidiaries.

Reclassification

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income.

Foreign Currency

For foreign operations balance sheet accounts are translated at the current year-end exchange rate; income statement accounts are translated at the average exchange rate for the year. Resulting translation adjustments are made directly to a separate component of shareholders’ equity – “Accumulated other comprehensive income (loss) – Foreign currency translation”. Foreign currency exchange transaction gains and losses are not material in any year.

Recognition of Sales

Sales are recognized when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred, and there is a reasonable assurance of collection of the sales proceeds. The Company obtains written purchase authorizations from its customers for a specified amount of product at a specified price and delivery occurs at the time of shipment. Credit is extended based on an evaluation of each customer’s financial condition; collateral is not required. Sales are recorded net of returns and allowances. Accounts receivable are recorded net of applicable allowances. No customer accounted for 10% of net sales during 2016, 2015 or 2014. No customer exceeded 10% of total accounts receivable at year end 2016 or 2015.

Accounts Receivable

Accounts receivable are stated at their net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis taking into account a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. Write-offs have been within management’s estimates.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method in the U.S. ($28,052,368 for U.S. inventories at December 31, 2016) and by the first-in, first-out (FIFO) method for inventories outside the U.S. ($5,977,918 for inventories outside the U.S. at December 31, 2016). Cost exceeds the LIFO carrying value by approximately $6,121,286 at December 31, 2016 and $6,297,368 at January 2, 2016. There was no material LIFO quantity liquidation in 2016, 2015 and 2014. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.

Property, Plant and Equipment and Related Depreciation

Property, plant and equipment (including equipment under capital lease) are stated at cost. Depreciation ($3,371,694 in 2016, $3,460,516 in 2015, $3,237,426 in 2014) is computed generally using the straight-line method based on the following estimated useful lives of the assets: Buildings 10 to 39.5 years; Machinery and equipment 3 to 10 years.

Goodwill, Intangibles and Impairment of Long-Lived Assets

Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are generally amortized on a straight-line basis over periods ranging from 5 to 17 years. Non-compete agreements and customer relationships are being amortized using the straight-line method over a period of 5 years. Amortization expense in 2016, 2015 and 2014 was $442,699, $460,922 and $248,876, respectively. Total amortization expense for each of the next five years is estimated to be as follows: 2017 - $406,000; 2018 - $406,000; 2019 - $406,000; 2020 - $173,000 and 2021 - $147,000. Trademarks are not amortized as their lives are deemed to be indefinite.

The gross carrying amount and accumulated amortization of amortizable intangible assets:

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total		Weighted-Average Amortization Period (Years)
2016 Gross Amount
Patents and developed technology	$	2,159,060	$	1,035,374	$	—	$	3,194,434		15.6
Customer relationships		—		449,706		—		449,706		5.0
Non-compete agreements		—		407,000		—		407,000		5.0
Intellectual property		—		307,370		—		307,370		5.0
Total Gross Intangibles	$	2,159,060	$	2,199,450	$	—	$	4,358,510		12.3

2016 Accumulated Amortization
Patents and developed technology	$	1,529,675	$	598,756	$	—	$	2,128,431
Customer relationships		—		179,882		—		179,882
Non-compete agreements		—		162,800		—		162,800
Intellectual property		—		122,948		—		122,948
Accumulated Amortization	$	1,529,675	$	1,064,386	$	—	$	2,594,061

Net 2016 per Balance Sheet	$	629,385	$	1,135,064	$	—	$	1,764,449

2015 Gross Amount
Patents and developed technology	$	2,206,852	$	1,029,181	$	—	$	3,236,033		15.9
Customer relationships		—		449,706		—		449,706		5.0
Non-compete agreements		—		407,000		—		407,000		5.0
Intellectual property		—		307,370		—		307,370		5.0
Total Gross Intangibles	$	2,206,852	$	2,193,257	$	—	$	4,400,109		12.6

2015 Accumulated Amortization
Patents and developed technology	$	1,478,692	$	575,026	$	—	$	2,053,718
Customer relationships		—		89,941		—		89,941
Non-compete agreements		—		81,400		—		81,400
Intellectual property		—		61,474		—		61,474
Accumulated Amortization	$	1,478,692	$	807,841	$	—	$	2,286,533

Net 2015 per Balance Sheet	$	728,160	$	1,385,416	$	—	$	2,113,576

In the event that facts and circumstances indicate that the carrying value of long-lived assets, including definite life intangible assets, may be impaired, an evaluation is performed to determine if a write-down is required. No events or changes in circumstances have occurred to indicate that the carrying amount of such long-lived assets held and used may not be recovered.

The Company performed qualitative assessments as of the end of fiscal 2016 and fiscal 2015 and determined it is more likely than not that no impairment of goodwill existed at the end of 2016 or 2015. The Company will perform annual qualitative assessments in subsequent years as of the end of each fiscal year. Additionally, the Company will perform interim analysis whenever conditions warrant.

Goodwill or trademarks would be considered impaired whenever the historical carrying amount exceeds the fair value. Pursuant to the qualitative assessment performed, goodwill and trademarks were not impaired in 2016, 2015 or 2014. Should we reach a different conclusion in the future, additional work would be performed to determine the amount of the non-cash impairment charge to be recognized. The maximum future impairment of goodwill or trademarks that could occur is the amount recognized on our balance sheet.

The following is a roll-forward of goodwill for 2016 and 2015:

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total
2016
Beginning balance	$	1,731,751	$	13,059,042	$	—	$	14,790,793
Foreign exchange		29,042		—		—		29,042
Ending balance	$	1,760,793	$	13,059,042	$	—	$	14,819,835

	Industrial Hardware Segment			Security Products Segment		Metal Products Segment		Total
2015
Beginning balance	$	1,901,312		$	13,059,042	$	—	$	14,960,354

Foreign exchange		(169,561	)		—		—		(169,561	)
Ending balance	$	1,731,751		$	13,059,042	$	—	$	14,790,793

Cost of Goods Sold

Cost of goods sold reflects the cost of purchasing, manufacturing and preparing a product for sale. These costs generally represent the expenses to acquire or manufacture products for sale (including an allocation of depreciation and amortization) and are primarily comprised of direct materials, direct labor, and overhead, which includes indirect labor, facility and equipment costs, inbound freight, receiving, inspection, purchasing, warehousing and any other costs related to the purchasing, manufacturing or preparation of a product for sale.

Shipping and Handling Costs

Shipping and handling costs are included in cost of goods sold.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating costs of the Company that are not directly related to the cost of purchasing, manufacturing and preparing a product for sale. These expenses generally represent the cost of selling or distributing the product once it is available for sale, as well as administrative expenses for support functions and related overhead.

Research & Development Costs

Research & development costs, charged to expense as incurred, were $1,525,650 in 2016, $1,218,948 in 2015 and $1,079,557 in 2014.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $441,853 in 2016, $496,066 in 2015 and $494,267 in 2014.

Income Taxes

The Company accounts for uncertain tax positions pursuant to the provisions of FASB Accounting Standards Codification (“ASC”) 740 which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. These provisions detail how companies should recognize, measure, present and disclose uncertain tax positions that have or are expected to be taken. As such, the financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. See Note 8 Income Taxes.

The Company and its U.S. subsidiaries file a consolidated federal income tax return.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Earnings per Share

The denominators used in the earnings per share computations follow:

	2016		2015		2014
Basic:
Weighted average shares outstanding		6,251,535		6,245,057		6,225,068

Diluted:
Weighted average shares outstanding		6,251,535		6,245,057		6,225,068
Dilutive stock options		—		—		12,846
Denominator for diluted earnings per share		6,251,535		6,245,057		6,237,914

There were no anti-dilutive stock equivalents in 2016, 2015 or 2014.

Stock Based Compensation

The Company accounts for stock based compensation pursuant to the fair value recognition provisions of ASC 718. No stock options were granted in 2016, 2015 or 2014, and, since all outstanding options were fully vested in each year presented, there was no impact on the financial statements.

Under the terms of the Director’s Fee Program, the directors can elect to receive their director’s fees in cash or in common shares of the Company. This election is made at the beginning of each fiscal year and remains in effect for the entire year.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted

assets or liabilities.

Level 2

Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for

substantially the full term of the asset or liability.

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and

unobservable.

The carrying amounts of other financial instruments (cash and cash equivalents, accounts receivable, accounts payable and debt) as of December 31, 2016 and January 2, 2016, approximate fair value. Fair value was based on expected cash flows and current market conditions.