Quarterly report pursuant to Section 13 or 15(d)

Equity Joint Venture - Intellectual Property Licensing Agreement

Equity Joint Venture - Intellectual Property Licensing Agreement
6 Months Ended
Jun. 25, 2016
Equity Method Investments and Joint Ventures [Abstract]  
Equity Joint Venture - Intellectual Property Licensing Agreement
Equity Joint Venture - Intellectual Property Licensing Agreement
In February 2016, the Company and Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner) formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the China JVs). The Company’s equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by the Company’s contribution of certain of its patents. The JV Partner is responsible for the initial and on-going financing of the China JVs’ operations. The Company has no obligations to fund the China JVs. The China JVs’ primary purpose is to support the Company’s expansion into the server and workstation product market in China. The Company licensed certain of its intellectual property (Licensed IP) to the China JVs for a total of approximately $293 million in license fees payable over several years contingent upon achievement of certain milestones. The Company also expects to receive a royalty based on the sales of the China JVs’ products to be developed on the basis of such Licensed IP. The Company will also provide certain engineering and technical support to the China JVs in connection with the product development.
The Company concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by JV Partner. The Company determined that it is not the primary beneficiary of either China JV1 or China JV2 and will not consolidate either of these entities. The Company accounts for its investments in the China JVs under the equity method of accounting.
Income related to the Licensed IP will be recognized over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that requires the Company’s continuing involvement in the product development process, and thereafter, together with royalty payments, will be recognized in income once earned. The Company will classify Licensed IP income and royalty income as other operating income. During the quarter and six months ended June 25, 2016, the Company recognized $26 million and $33 million, respectively, of operating income related to the Licensed IP.
The Company’s total exposure to losses through its investment into the China JVs is limited to the Company’s investments in the China JVs, which was zero as of June 25, 2016. The Company’s share in the net losses of the China JVs for the quarter and six months ended June 25, 2016 was not material and is not recorded in the Company’s condensed consolidated statement of operations since the Company is not obligated to fund the China JVs losses in excess of the Company’s investment in the China JVs.
As of June 25, 2016, the total assets and liabilities of the China JVs were not material.