Equity 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						Six Months Ended
	December 31, 2017			January 1, 2017			December 31, 2017			January 1, 2017
Net Sales	$	45,333		$	34,007		$	83,843		$	59,016
Cost of Goods Sold		35,263			27,124			64,276			47,217
Gross Profit		10,070			6,883			19,567			11,799
Engineering, Selling and Administrative Expenses		6,325			5,212			12,346			9,227
Income From Operations		3,745			1,671			7,221			2,572
Other Income, net		636			730			786			1,171
Income before Provision for Income Taxes		4,381			2,401			8,007			3,743
Provision for Income Taxes		162			405			684			577
Net Income	$	4,219		$	1,996		$	7,323		$	3,166
STRATTEC’s Share of VAST LLC Net Income	$	1,406		$	665		$	2,441		$	1,055
Intercompany Profit Elimination		(2	)		(23	)		(2	)		(23	)
STRATTEC’s Equity Earnings of VAST LLC	$	1,404		$	642		$	2,439		$	1,032

We hold a 51% ownership interest in a 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. SAL LLC is considered a variable interest entity based on loans from STRATTEC as discussed below. 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.

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 December 31, 2017 and July 2, 2017, 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 Accrued Liabilities: Other in the accompanying Condensed Consolidated Balance Sheets.

Loans were made from STRATTEC to SAL LLC in support of operating expenses and working capital needs. The outstanding loan amounts totaled $2.6 million as of December 31, 2017 and July 2, 2017. As of each balance sheet date, the outstanding loan amount was eliminated against STRATTEC’s Investment in SAL LLC in the preparation of the consolidated financial statements.

Even though we maintain a 51 percent ownership interest in SAL LLC, effective with our fiscal 2015 fourth quarter, 100 percent of the funding for SAL LLC was being made by loans from STRATTEC to SAL LLC. Therefore, STRATTEC recognized 100 percent of the losses of SAL LLC up to our committed financial support through Equity (Loss) Earnings of Joint Ventures in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for all periods presented in this report. The equity earnings reported for the quarter and year to date periods ended December 31, 2017 was the result of a reduction in our estimated required financial support needed to satisfy the liabilities of SAL LLC.

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

	Three Months Ended						Six Months Ended
	December 31, 2017			January 1, 2017			December 31, 2017			January 1, 2017
Net Sales	$	122		$	96		$	230		$	196
Cost of Goods Sold		259			97			411			184
Gross (Loss) Profit		(137	)		(1	)		(181	)		12
Engineering, Selling and Administrative Expenses		(15	)		369			(25	)		706
Loss From Operations		(122	)		(370	)		(156	)		(694	)
Other Expense, net		(64	)		(35	)		(129	)		(47	)
Net Loss	$	(186	)	$	(405	)	$	(285	)	$	(741	)
STRATTEC’s Equity Earnings (Loss) of SAL LLC	$	69		$	(413	)	$	60		$	(741	)

Currently, we, along with our joint venture partner, are winding down operating the business of SAL LLC.

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				Six Months Ended
	December 31, 2017		January 1, 2017		December 31, 2017		January 1, 2017
Sales to VAST LLC	$	987	$	50	$	1,583	$	103
Sales to SAL, LLC	$	147	$	52	$	182	$	127
Purchases from VAST LLC	$	84	$	71	$	129	$	102
Expenses Charged to VAST LLC	$	171	$	226	$	383	$	454
Expenses Charged from VAST LLC	$	312	$	349	$	530	$	758