Equity (Loss) Earnings of Joint Ventures

We hold a one-third interest in a joint venture company, VAST LLC, with WITTE and ADAC. VAST LLC exists to seek opportunities to manufacture and sell all three companies’ products in areas of the world outside of North America and Europe. Our investment in VAST LLC, for which we exercise significant influence but do not control and are not the primary beneficiary, is accounted for using the equity method.

The following are summarized statements of operations for VAST LLC (in thousands):

	Three Months Ended						Nine Months Ended
	March 27, 2016			March 29, 2015			March 27, 2016			March 29, 2015
Net Sales	$	28,001		$	30,025		$	85,751		$	96,686
Cost of Goods Sold		23,125			25,498			70,536			82,050
Gross Profit		4,876			4,527			15,215			14,636
Engineering, Selling and Administrative Expenses		3,991			3,686			12,107			12,474
Income From Operations		885			841			3,108			2,162
Other (Expense) Income, net		(104	)		170			(566	)		826
Income before Provision for Income taxes		781			1,011			2,542			2,988
Provision for Income Taxes		109			94			420			529
Net Income	$	672		$	917		$	2,122		$	2,459
STRATTEC’s Share of VAST LLC Net Income	$	224		$	306		$	707		$	820
Intercompany Profit Elimination		(13	)		(5	)		(18	)		(1	)
STRATTEC’s Equity Earnings of VAST LLC	$	211		$	301		$	689		$	819

During 2013, we acquired a 51% ownership interest in a newly formed joint venture company, SAL LLC, which was formed to introduce a new generation of biometric security products based upon the designs of Actuator Systems LLC, our partner and the owner of the remaining ownership interest. SAL LLC had a $1.5 million revolving credit facility (the “SAL Credit Facility”) with BMO Harris Bank N.A., which was fully guaranteed by STRATTEC. The SAL Credit Facility had a maturity date of February 16, 2016. Outstanding borrowings under the SAL Credit Facility as of February 16, 2016 and June 28, 2015 totaled $1.5 million and $995,000, respectively. SAL LLC did not have cash available to pay the outstanding debt balance as of the maturity date. Therefore, STRATTEC made a payment of $1.5 million on its guarantee on February 16, 2016. SAL LLC is considered a variable interest entity based on the STRATTEC guarantee. STRATTEC is not the primary beneficiary and does not control the entity. Accordingly, our investment in SAL LLC is accounted for using the equity method. Prior to making the guarantee payment, STRATTEC had a recorded liability related to the guarantee of $1.5 million and $995,000 at February 16, 2016 and June 28, 2015, respectively, which amounts were equal to the estimated fair value of the guarantee as of these dates. As of June 28, 2015, the guarantee liability was included in Other Current Liabilities in the accompanying Condensed Consolidated Balance Sheets. STRATTEC’s proportionate share of the guarantee based on our ownership percentage in SAL LLC totaled $765,000 and $507,000, respectively, as of February 16, 2016 and June 28, 2015, and accordingly, our investment in SAL LLC included these amounts as of these dates. Our joint venture partner did not guarantee their proportionate share of the SAL Credit Facility. As a result, we recorded a loss equal to our partner’s proportionate share of the fair value of the STRATTEC guarantee based upon our partner’s ownership interest in the joint venture of $488,000 during fiscal 2015 and $247,000 during the nine months ended March 27, 2016.

SAL LLC maintains a license agreement with Westinghouse allowing SAL LLC to do business as Westinghouse Security. Payments due Westinghouse under the license agreement were guaranteed by STRATTEC. As of March 27, 2016 and June 28, 2015, STRATTEC has a recorded liability equal to the estimated fair value of the future payments due under this guarantee of $250,000. The liability is included in Other Long-term Liabilities in the accompanying Condensed Consolidated Balance Sheets. STRATTEC’s proportionate share of the guarantee of these payments based on our ownership percentage in SAL LLC totals $127,000, and accordingly, our investment in SAL LLC as of March 27, 2016 and June 28, 2015 included this amount. Our joint venture partner did not guarantee their proportionate share of the payments required under the license agreement. As a result, we recorded a loss of $123,000 during the fourth quarter of fiscal 2015 which was equal to our partner’s proportionate share, based upon their ownership interest in the joint venture, of the fair value of the STRATTEC guarantee.

During fiscal 2015 and during the nine months ended March 27, 2016, loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amounts totaled $250,000 and $100,000 as of March 27, 2016 and June 28, 2015, respectively. A valuation reserve of $250,000 and $100,000 was recorded on STRATTEC’s financial statements as of March 27, 2016 and June 28, 2015, respectively, in connection with these loans. The corresponding loss related to this valuation reserve was included in Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income in each respective period.

Notwithstanding the existence of the SAL Credit Facility described herein, as a result of STRATTEC’s guarantee of such credit facility and as a result of borrowing limitations imposed by the bank under such credit facility, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by STRATTEC through loans and guarantees. Therefore, effective with our fiscal 2015 fourth quarter, STRATTEC began recognizing 100 percent of the losses of SAL LLC through Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.

The following are summarized statements of operations for SAL, LLC (in thousands):

	Three Months Ended						Nine Months Ended
	March 27, 2016			March 29, 2015			March 27, 2016			March 29, 2015
Net Sales	$	381		$	—		$	506		$	—
Cost of Goods Sold		206			—			301			—
Gross Profit		175			—			205			—
Engineering, Selling and Administrative Expenses		352			277			956			1,157
Loss From Operations		(177	)		(277	)		(751	)		(1,157	)
Other Expense, net		(9	)		(1	)		(27	)		(1	)
Net Loss	$	(186	)	$	(278	)	$	(778	)	$	(1,158	)
STRATTEC’s Share of Equity Loss of SAL LLC	$	(186	)	$	(141	)	$	(778	)	$	(590	)
Loss on Loan to SAL LLC		—			—			(150	)		—
Loss on SAL LLC Credit Facility Guarantee		(196	)		(367	)		(247	)		(367	)
STRATTEC’s Equity Loss of SAL LLC	$	(382	)	$	(508	)	$	(1,175	)	$	(957	)

We have sales of component parts to VAST LLC and SAL LLC, purchases of component parts from VAST LLC, expenses charged to VAST LLC for engineering and accounting services and expenses charged to us from VAST LLC for general headquarters expenses. The following table summarizes these related party transactions with VAST LLC and SAL LLC for the periods indicated below (in thousands):

	Three Months Ended				Nine Months Ended
	March 27, 2016		March 29, 2015		March 27, 2016		March 29, 2015
Sales to VAST LLC	$	—	$	879	$	210	$	1,650
Sales to SAL, LLC	$	99	$	30	$	143	$	52
Purchases from VAST LLC	$	50	$	41	$	113	$	121
Expenses Charged to VAST LLC	$	392	$	286	$	803	$	690
Expenses Charged from VAST LLC	$	353	$	406	$	1,150	$	1,346