2. Accounting Policies

Use of Estimates

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 2017 was a 52 week year, 2016 was a 52 week year and 2015 was a 52 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 64% of available cash is located outside of the United States in our foreign subsidiaries.

Reclassification

Commencing with the third quarter of 2017, engineering expenses have been separately identified for all periods presented. These expenses have been reclassified from cost of products sold to selling and administrative expenses. Engineering expense is not necessarily a cost of product sold. Rather, these expenses are related to product development.

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 one customer accounted for 10% of net sales during 2017, 2016 or 2015. No one customer exceeded 10% of total accounts receivable at year end 2017 for 2016.

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.

Inventories

Inventories are valued at the lower of cost or market or net realizable value. Cost is determined by the last-in, first-out (LIFO) method in the U.S. ($26,280,620 for U.S. inventories at December 30, 2017 excluding Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S. ($8,034,924 for inventories outside the U.S. at December 30, 2017). Cost exceeds the LIFO carrying value by approximately $6,476,073 at December 30, 2017 and $6,121,286 at December 31, 2016. There was no material LIFO quantity liquidation in 2017, 2016 and 2015. 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 ($3,948,728 in 2017, $3,371,694 in 2016, $3,460,516 in 2015) 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 2017, 2016 and 2015 was $770,457, $442,699 and $460,922, respectively. Total amortization expense for each of the next five years is estimated to be as follows: 2018 - $1,228,000; 2019 - $1,228,000; 2020 - $995,000; 2021 - $995,000 and 2022 - $853,000. Trademarks are not amortized as their lives are deemed to be indefinite.

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total		Weighted-Average Amortization Period (Years)
2017 Gross Amount
Patents and developed technology	$	7,074,456	$	1,021,918	$	—	$	8,096,374		12.3
Customer relationships		3,650,000		449,706		—		4,099,706		9.5
Non-compete agreements		—		407,000		—		407,000		5.0
Intellectual property		—		307,370		—		307,370		5.0
Total Gross Intangibles	$	10,724,456	$	2,185,994	$	—	$	12,910,450		10.8

2017 Accumulated Amortization
Patents and developed technology	$	2,007,418	$	630,784	$	—	$	2,638,202
Customer relationships		298,645		269,823		—		568,468
Non-compete agreements		—		244,200		—		244,200
Intellectual property		—		184,422		—		184,422
Accumulated Amortization	$	2,306,063	$	1,329,229	$	—	$	3,635,292

Net 2017 per Balance Sheet	$	8,418,393	$	856,765	$	—	$	9,275,158

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

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total		Weighted-Average Amortization Period (Years)
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

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 2017 and fiscal 2016 and determined it is more likely than not that no impairment of goodwill existed at the end of 2017 or 2016. 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 2017, 2016 or 2015. 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 2017 and 2016:

	Industrial Hardware Segment		Security Products Segment		Metal Products Segment		Total
2017
Beginning balance	$	1,760,793	$	13,059,042	$	—	$	14,819,835
Investment in Velvac		17,340,946		—		—		17,340,946
Foreign exchange		68,110		—		—		68,110
Ending balance	$	19,169,849	$	13,059,042	$	—	$	32,228,891

	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

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.

Engineering Costs

Engineering costs, charged to expense as incurred, were $5,622,829 in 2017, $2,568,307 in 2016 and $2,459,062 in 2015.

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 $3,678,481 in 2017, $1,525,650 in 2016 and $1,218,948 in 2015.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $526,651 in 2017, $441,853 in 2016 and $496,066 in 2015.

Software Development Costs

Software development costs, including costs to develop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of technological feasibility are capitalized if significant. Costs incurred during the application development stage for internal-use software are capitalized if significant. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. Such software development costs required to be capitalized have not been material to date.

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 7 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.

On December, 22, 2017, SAB 118 was issued due to the complexities involved in accounting for the recently enacted Tax Act. SAB 118 requires the company to include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118. The company is continuing to assess the impact from the Tax Act and will record adjustments in 2018. The final impact on the company from the Tax Act's transition tax legislation may differ from the reasonable estimate due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition tax's reasonable estimate.

Earnings per Share

The denominators used in the earnings per share computations follow:

	2017		2016		2015
Basic:
Weighted average shares outstanding		6,259,139		6,251,535		6,245,057

Diluted:
Weighted average shares outstanding		6,259,139		6,251,535		6,245,057
Dilutive stock options		35,634		—		—
Denominator for diluted earnings per share		6,294,773		6,251,535		6,245,057

There were no anti-dilutive stock equivalents in 2017, 2016 or 2015.

Stock Based Compensation

The Company accounts for stock based compensation pursuant to the fair value recognition provisions of ASC 718. For the year ended December 30, 2017, there were 174,500 SARs and options of common stock granted under the 2010 Plan. No stock options were granted in 2016 or 2015, and, since all outstanding options in those years 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 30, 2017 and December 31, 2016, approximate fair value. Fair value was based on expected cash flows and current market conditions.

The Company's interest rate swap is not an exchange-traded instrument. However, it is valued based on observable inputs for similar liabilities and accordingly is classified as Level 2. The amount of the interest rate swap is included in other accrued liabilities.