Cray

Fellow Shareholders,

As we look back on 2014, I’m excited by our progress and how well our company is positioned for the road

ahead.

2014 was marked by a number of major milestones, including another year of record revenue and contract
awards, strong international growth including expansion into some new regions for Cray, and a full refresh of our
entire product line. In the second half of the year alone we introduced new products in each of our three target
markets of supercomputing, storage and analytics. We now have two compelling offerings in each of these
markets and we continue to focus on our long-term goal of growing in each of these markets at double the annual
market growth rates, while also increasing our profitability.

Our momentum of new business accelerated significantly in 2014. We were selected by the U.S.
Department of Energy to deliver future flagship systems to the Los Alamos National Laboratory in New Mexico
and the National Energy Research Scientific Computing Center in California. Internationally, in Saudi Arabia,
the King Abdullah University of Science and Technology chose multiple Cray systems spanning our entire line
of compute, storage and analytics products; in the U.K., we were awarded our largest international win ever at
the Met Office — a prestigious national weather service whose customers span government, commercial
businesses as well as the general public. We’ve now made strong in-roads in the production weather industry
across the globe in each of our major geographies. We also continued to expand our commercial customer base
and we have Cray supercomputers in a growing number of companies including a hospital in Hong Kong, a steel
manufacturer in Poland and a major league baseball team in the U.S. This momentum has continued in 2015 as
we recently announced that Petroleum Geo-Services, a leading global oil-and-gas company based in Norway,
selected a Cray XC40 and Sonexion storage to power its most advanced seismic imaging project ever.

In supercomputing, our high-end XC line of supercomputers and CS line of cluster systems provide the most
scalable, high-performance solutions in the market today. Both product lines leverage components of the unique
Cray software environment and a wide variety of innovative partner solutions and applications. In addition, these
systems also integrate a range of processing technology, including the latest offerings from Intel and Nvidia. We
bring all of this technology together in our supercomputers to enable our customers to deliver breakthroughs
across a broad array of scientific and engineering disciplines. It is exciting to see how our customers are literally
changing the world by leveraging the capabilities of Cray supercomputers.

In big data we continue to focus on storage and analytics, as well as helping our customers take advantage
of the continued convergence of supercomputing and analytics. Our Sonexion storage combines our expertise in
designing and managing end-to-end, high-performance, Lustre-based solutions with a unique architecture that
allows for maximum scalability. We secured a number of large Sonexion customers in 2014, for both our Cray-
attached and (non-Cray) cluster-attached Sonexion solutions, and this growing business is now 15% of our total
revenue. Complementing Sonexion is our Tiered Adaptive Storage data management and archive solution.
Looking to the future, we announced a new storage solution during 2014 called DataWarp, an applications I/O
accelerator that bridges the growing performance gap between compute resources and disk-based storage.

In big data analytics we launched the Urika-XA in late 2014, our second analytics product and an excellent
complement to our Urika-GD appliance for graph discovery. Based on the infrastructure of our CS400, the
Urika-XA combines supercomputing hardware, including solid state storage, a parallel file system and a high-
performance interconnect, with the analytical power of the Hadoop and Spark frameworks. This is an open
platform for high-performance analytics and significantly broadens our big data offerings in this fast growing
market.

As the supercomputing and big data markets continue to converge, we are already planning next-generation
systems that will integrate aspects of both in single, stand-alone solutions. We recently laid out the high-level
roadmap for our next-generation of supercomputers, code named “Shasta” and planned for introduction in 2018.
Shasta will bring together an exciting slate of unique technologies and accommodate multiple processor families,
networks and runtime environments to handle a wide variety of customer workloads. We’ll be integrating early
versions of many of these new technologies into our current solutions over time, providing our customers with a
solid roadmap from today’s solutions into Shasta. Shasta will be the full embodiment of our Adaptive
Supercomputing Vision, which continues to guide our long-term technical direction.

We made a couple of notable additions to our leadership team last year, including Steve Scott, who returned
to Cray to serve as our Chief Technology Officer, and Ryan Waite, who now heads up our products group. Steve
returned to Cray after spending time in leadership roles at Nvidia and Google, and Ryan brings extensive
experience in big data, supercomputing and software, having held leadership roles with Amazon and Microsoft.
In addition, Max Schireson and Martin Homlish recently joined our Board of Directors. Max previously served
as the CEO of MongoDB, a leading big data database company. Marty has held leadership roles with Sony, SAP
and Hewlett-Packard, and is currently the CEO of AMP. We are honored and pleased to welcome each of them to
the Cray team.

Finally, on a sad note, Bill Blake passed away on March 31st. Bill served on our Board of Directors from
2006 to 2012 and as our CTO from 2012 to 2014. His influence on our company has been profound and his
presence in our industry will be missed. Our condolences go out to Bill’s family.

On behalf of our Board of Directors and management, I would like to thank all of our customers, partners,

employees and shareholders for your continued confidence and support of Cray.

Sincerely,

Peter J. Ungaro
President and Chief Executive Officer

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Í

‘

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From

to

.

Commission File Number: 000-26820

CRAY INC.

(Exact Name of Registrant as Specified in Its Charter)

Washington
(State or Other Jurisdiction of
Incorporation or Organization)

901 Fifth Avenue, Suite 1000
Seattle, Washington
(Address of Principal Executive Offices)

93-0962605
(I.R.S. Employer
Identification No.)

98164
(Zip Code)

Registrant’s telephone number, including area code:
(206) 701-2000
Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act: Yes Í

No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act: Yes ‘

No Í

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes Í

No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
such
the preceding 12 months
No ‘
files). Yes Í

required to submit and post

such shorter period that

the registrant was

for

(or

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer Í

Smaller reporting company ‘

Non-accelerated filer ‘

Accelerated filer ‘

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2014, was
approximately $1,041,002,837 based upon the closing price of $26.60 per share reported on June 30, 2014, on the Nasdaq Global
Market.

No Í

As of February 13, 2015, there were 40,826,651 shares of Common Stock issued and outstanding.

Portions of the Proxy Statement to be delivered to shareholders in connection with the registrant’s Annual Meeting of

Shareholders to be held on or around June 10, 2015, are incorporated by reference into Part III.

DOCUMENTS INCORPORATED BY REFERENCE

CRAY INC.

FORM 10-K
For Fiscal Year Ended December 31, 2014

INDEX

PART I

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

Page

1
10
20
21
21
21

22
25
26
40
41
42
42
44

44
44

44
44
44

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

PART IV

CRAY, and the stylized CRAY mark, SONEXION and URIKA are registered trademarks of Cray Inc. in the
United States and other countries, and the CS, XE, XK, and XC families of supercomputers are all trademarks of
Cray Inc. Other trademarks used in this report are the property of their respective owners.

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties,
as well as assumptions that, if they never materialize or if they prove incorrect, could cause our actual results to
differ materially from those expressed or implied by such forward-looking statements. Forward-looking
statements are based on our management’s beliefs and assumptions and on information currently available to
them. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts” and “potential”
and similar expressions, but the absence of these words does not mean that a statement is not forward-looking.
All statements other than statements of historical fact are statements that could be deemed forward-looking
statements, and examples of forward-looking statements include any projections of earnings, revenue or other
results of operations or financial results; any statements of the plans, strategies, objectives and beliefs of
management of the Company; any statements concerning proposed new products, technologies or services; any
statements regarding future research and development or co-funding for such efforts; any statements regarding
future economic conditions; and any statements of assumptions underlying any of the foregoing. These
forward-looking statements are subject to the safe harbor created by Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our actual results could differ
materially from those anticipated in these forward-looking statements for many reasons, including the risks faced
by us and described in Item 1A. Risk Factors in Part I and other sections of this report and our other filings with
the U.S. Securities and Exchange Commission, or SEC, or Commission. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this report. You should read this report
completely and with the understanding that our actual future results may be materially different from what we
expect. We assume no obligation to update these forward-looking statements, whether as a result of new
information, future events, or otherwise.

Item 1. Business

General

PART I

We design, develop, manufacture, market and service the high-end of the high-performance computing, or
HPC, market, primarily categories of systems commonly known as supercomputers and provide storage and
analytics solutions. We also provide software, system maintenance and support services and engineering services
related to supercomputer systems. Our customers include domestic and foreign government and government-
funded entities, academic institutions and commercial entities. Our key target markets are the supercomputing
portion of the HPC market and the expanding storage and analytics market. We provide customer-focused
solutions based on three models: (1) highly integrated supercomputing and storage solutions, complete with
highly tuned software,
that stress capability, scalability, sustained performance and reliability at scale;
(2) flexible commodity-based “cluster” supercomputing and storage solutions based upon utilizing best-of-breed
components and working with our customers to define solutions that meet specific needs; and (3) turn-key
analytic solutions featuring industry standards and innovative graph technologies. All of our solutions also
emphasize total cost of ownership, scalable price-performance and data center flexibility as key features. Our
strategy is to gain market share in the supercomputer market segment, extend our technology leadership,
maintain our focus on execution and profitability and grow by continuing to expand our addressable market in
areas where we can leverage our experience and technology, such as in high performance storage systems and
powerful analytic tools on large volumes of data, popularly referred to as “big data”. We also meet diverse
customer requirements by combining supercomputing, cluster, storage and analytics technology, into unique
solutions offerings that work in a workflow-driven data center environment.

We were incorporated in the State of Washington in December 1987 under the name Tera Computer
Company. We changed our corporate name to Cray Inc. in connection with our acquisition of the Cray Research,
Inc., or Cray Research, operating assets from Silicon Graphics, Inc. in 2000. Our corporate headquarters are
located at 901 Fifth Avenue, Suite 1000, Seattle, Washington 98164. Our telephone number is (206) 701-2000
and our website address is www.cray.com. The contents of our website are not incorporated by reference into this
annual report on Form 10-K or our other SEC reports and filings.

1

Products, Services and Customer Support

We concentrate on building product solutions for our customers in two major markets — the supercomputing
portion of HPC and big data, including storage and data analytics. We also provide a range of service offerings
around these products that leverage our high quality support and intimate understanding of our customers.

Cray Supercomputing Systems

Our supercomputing products span a broad performance spectrum and address the critical computing
resource challenges HPC users face today: achieving massive scaling to tens of thousands of processors; ease of
use for high productivity; and very high levels of sustained performance on real applications. We achieve this by
designing and integrating supercomputers that combine highly capable processors, high speed interconnect
technology for maximum communication efficiency,
innovative packaging to address increased density,
upgradability, energy efficiency and reliability requirements and scalable system software that significantly
enhances performance, productivity and manageability at scale. With our “Adaptive Supercomputing” vision, we
have expanded the concept of heterogeneous computing to a fully integrated view of hardware and software
supporting both multiple processing technologies and diverse workloads.

Our supercomputers are the result of our Adaptive Supercomputing vision that

integrates diverse
technologies into a unified architecture enabling customers to match the computational solution to the need. Our
systems utilize components and technologies designed to support the requirements of the most demanding HPC
users. Our XC40 supercomputers are designed to provide significantly higher sustained performance on many
important applications that require the very highest levels of scaling, with substantial performance improvements
over comparable commodity technologies. Our CS series of supercomputer cluster solutions (including CS400
and CS-Storm) emphasize flexibility, capacity and industry standard designs for compute-intensive customer
needs. All of our supercomputers are designed to allow HPC users to focus on their primary objectives, including
advancing scientific discovery, increasing industrial capabilities and improving national security.

Our supercomputer systems are designed to offer several additional benefits including:

• superior price-performance;

• production quality reliability and resiliency;

• open standards, including Linux-based operating systems, open file systems (e.g., Lustre™) and open

programming models (e.g., MPI, OpenMP and OpenACC);

• upgrade paths that allow customers to leverage their investments over longer periods of time and thereby

reduce total costs of ownership;

• integrated operating system software and Cray programming environment;

• excellent energy efficiency optimized for minimum energy consumed to solution;

• flexibility of processor type, memory, network configuration, storage configuration and system software

tools developed towards our Adaptive Supercomputing vision; and

• the Cray service experience, that brings with it a proven research and development team and a global

sales and service organization dedicated to the needs of HPC users.

We expect the continued advancement of many-core and accelerator processors to be advantageous to us as
the processors complement our technical strengths in networking, scaling, system software and cooling and
power management technologies. The growing number of cores on each processor continues to amplify the
scaling issues that customers face today, and accelerators or coprocessors will further stress the system’s
communications network. We believe our balanced approach to system design and support for innovative parallel
programming methodologies will become increasingly critical in enabling customers to take advantage of the
benefits of many-core processing.

Cray XC40 Supercomputer. The Cray XC40 supercomputer

recent highly integrated
to an Adaptive Supercomputing architecture
supercomputing system, which delivers on our commitment
providing extreme scale and sustained performance in both water- and air-cooled packaging options. The Cray
XC40 system provides the HPC user community the advantage of the computational resources of our

is our

2

supercomputers powered by the Intel Xeon E5 family of processors combined with the Aries interconnect,
providing a flexible and unique Dragonfly network topology, our robust and fully-integrated software
environment and innovative power and cooling technologies. In addition, the Cray XC family of supercomputers
has been expanded to include Intel Xeon Phi coprocessors and NVIDIA Tesla graphics processor units, or GPUs.

The Cray XC40 supercomputer utilizes the Cray Linux Environment, which has been enhanced and
hardened over the past 10 years on Cray Supercomputing systems. Customers may buy a single Cray XC40
supercomputer to run both a highly scalable custom workload as well as an industry-standard, independent
software vendor workload. The Cray XC40 system includes powerful compiler, runtime and related software that
allows users to transparently leverage the underlying hardware components.

Cray CS400-AC Supercomputer. The Cray CS400-AC supercomputer cluster

system offers an
energy-efficient, air-cooled architecture featuring high performance, high availability computing. It includes
flexible configuration options for a wide range of data center cooling architecture requirements through the use
of air or chilled cooling rear door heat exchangers. The Cray CS400-AC system is integrated with the HPC
Software Stack, software tools compatible with most open source and commercial compilers, tools, schedulers
and libraries to run complex applications. This solution is also integrated with the Advanced Cluster Engine. This
management software suite is designed to substantially reduce the complexity of managing HPC clusters by
offering server, cluster, storage, and network management features combined with node provisioning, failover,
load-balancing, job scheduling and revision control capabilities with multi-Linux OS support.

Cray CS400-LC Supercomputer. The new Cray CS400-LC cluster supercomputer system offers the
features and benefits of the Cray CS400-AC system with superior energy savings, lower total cost of operation
and faster return on investment by requiring fewer or no air conditioning units in the data center. Its unique
design uses warm water liquid-cooling heat exchangers with no chillers, reducing typical energy consumption
used to cool the data center by up to 50%. This system offers high performance and energy efficiency three times
more per rack than traditional air-cooled designs. It also provides up to 80% heat capture for heat reuse. The
Cray CS400-LC solution isolates the primary data center loop and uses a low-pressure isolated secondary data
center liquid loop to cool the server’s critical components such as processors and memory improving cooling
system reliability as well as safety.

Cray CS-Storm Supercomputer. The CS-Storm supercomputer is a purpose-built solution employing
GPUs in a very high density architecture to deliver superior performance, density and energy efficiency on highly
data-parallel computations. The Cray CS-Storm combines innovative architecture design, supporting up to 8
GPUs per compute node, with the same production software environment available on the CS400 products.
Market segments such as finance, energy, government and higher education utilize GPU-accelerated applications
that can benefit significantly from the CS-Storm architecture. A CS-Storm supercomputer chassis may also be
incorporated within a CS400 cluster supercomputer when appropriate. The software stack, programming
environment and management infrastructure are shared, making such integration seamless.

Cray Analytics Products

Our analytics products apply supercomputing technologies to solve the most challenging data analytics use-
cases, with performance at scale. The tremendous growth in data volumes and data complexity as well as the
development of advanced analytic techniques and increased time-to-value expectations are driving the need for
supercomputing class architectures. Our experience in high performance data-intensive, memory-centric
architectures are being brought to bear in our Urika line of products.

Cray Urika-GD Graph Discovery Appliance. Our Urika-GD graph discovery appliance addresses one of
the most complex problems in advanced analytics — interactive data discovery with graphs. This
enterprise-ready appliance is designed to discover unknown and hidden relationships in big and diverse data,
perform real-time analytics, and shorten customers’ time to insight. Urika-GD is based on a very large shared
memory and massively multithreaded platform, with a highly scalable RDF/SPARQL based graph database.

Cray Urika-XA Extreme Analytics Platform. Our Urika-XA extreme analytics platform is architected for
production-class data analytics workloads. Urika-XA’s turnkey architecture comes pre-integrated with Apache
Hadoop® and Apache Spark™ frameworks yet is versatile and open to support additional emerging tools in the

3

big data ecosystem. Urika-XA enables users to consolidate multiple computing workloads ranging from data
integration, machine learning, interactive data exploration, visualization, iterative algorithms and more onto a
single analytics platform. This allows customers to optimize their dataflows or analytic pipelines and also reduce
the footprint of their analytics infrastructure. The Urika-XA platform delivers performance and reliability on a
wide range of analytics applications, thereby lowering total cost of ownership on production data analytics.

Cray Storage and Data Management Products

Our storage and data management products include integrated data storage and data management solutions
for HPC and big data by leveraging years of experience delivering high performance parallel storage and file
systems to our customers. We are able to rapidly deploy highly scalable and extremely fast file systems that
integrate effectively with computing solutions ranging from third-party and Cray Linux clusters to highly
integrated Cray supercomputers.

Cray Sonexion Storage Systems. Our flagship storage product line, the Cray Sonexion, embeds the Lustre
parallel file system and other software in an optimal configuration to reduce deployment
increase
reliability, capacity and scale performance. Cray Sonexion offers an optimal combination of modular scaling
capacity from terabytes to petabytes and sustained IO performance from seven gigabytes to over one terabyte per
second in a single file system. High density is achieved through reducing storage componentry and cabling.
Sonexion systems are engineered to be installed and put into production more quickly than other HPC storage
solutions and can be attached to Cray XC30, XC40, CS300 and CS400 systems as well as industry-standard
Linux clusters.

time,

Cray Tiered Adaptive Storage (TAS). Cray Tiered Adaptive Storage, critical for big data and HPC, is a
flexible storage and archiving solution that allows customers to transparently move data among fast, primary and
archival tiers. TAS is a complete and open archiving solution, offering all hardware and software in an
appliance-like form factor. Tiers may be comprised of SSD, disk, or tape libraries from several vendors.

Engineering and Customer Support

Custom Engineering. To address those users whose needs cannot be met through our standard product
offerings, we provide an alternative. Our custom engineering business leverages our amassed intellectual
property and technology portfolio, deep domain expertise and know-how to design and build solutions and
services designed to match a customer’s specific needs. The need for a unique solution often stems from special
processing needs that are often performance, application or capacity related; special environmental needs that
might include special size dimension, weight, power and cooling limitations; or unique interface or system
software and integration requirements.

Customer Support. Our worldwide customer support organization delivers our customers the “Cray
experience” that provides us with a competitive advantage and a predictable flow of revenue and cash. We
believe that the quality of our customer support personnel plays an important role in our ability to maintain
long-term customer relationships. Support services are important to our customers, and in many cases we locate
our support personnel at or near customer sites globally, supported by a central service organization. Our support
services include hardware and software maintenance in support of our systems, applications support, installation
project management, system installation and de-installation, site preparation and technical training for our
systems. In addition, we offer ancillary services in application consulting, third-party software support, site
engineering, on-site analysts for defined projects and specialized training. In 2014, maintenance and support
revenue accounted for roughly fifteen percent of our total revenue. Our support arrangements generally provide
for support services on an annual basis, although some cover multiple years. While most customers pay for
support on an annual basis, others pay on a monthly, quarterly or multi-year basis. Typically, customers may
select levels of support and response times, ranging from delivery of parts only to 24 x 7 coverage with two-hour
response times.

Sales and Marketing

We focus our sales and marketing activities on both horizontal and vertical marketing activities ranging
from government agencies or funded research laboratories, to academic institutions and commercial entities

4

requiring HPC, big data systems and storage. Our primary sales model is direct, and we offer solutions through a
highly-trained direct sales force that operates throughout North America, South America, Asia, Europe, the
Middle East, Australia and Africa. More than half of our sales force is located in the United States and Canada,
with the remainder overseas.

A formal request-for-proposal process for HPC systems or technology drives a majority of our highest-end
systems sales and engineering service engagements in the academic and government markets. We utilize
pre-sales technical experts to develop technical proposals that meet customer requirements and benchmarking
teams to demonstrate the advantages of our particular supercomputing products or service being proposed. For a
majority of our larger government and academic sales opportunities, the proposal process, including establishing
system size, options, pricing and other commitments, involves a number of resources outside of our sales
organization. While we often tailor our supercomputer (including cluster) solutions for each customer, there is
substantial commonality in the underlying components and systems, allowing us to leverage manufacturing and
supply chain operations.

Government agencies and government-funded scientific research institutions around the world comprise a
large portion of our customer base. Our government programs’ efforts are an integral part of our overall strategy
by actively managing our relationship with U.S. government agencies and Congress.

Our marketing staff is primarily responsible for product marketing, business development and marketing
communications. Product marketing bridges our research and development organization and our sales staff to
help ensure that our products meet the demands and requirements of our key customers and a broader market set
of prospects for our HPC and big data business and our new business initiatives. Marketing communications
focus on our overall brand messaging, advertising, public relations, social media, conferences, trade shows and
direct as well as online marketing campaigns to create brand awareness and generate demand. Business
development focuses on providing products and services to specific customer sets, such as earth sciences, energy,
financial services, manufacturing and life sciences.

Our Technology

We are dependent on the successful early identification, development and timely introduction of new
products and capabilities. Our research and development activities include identification of new trends,
technologies and workload needs in the ever changing HPC and big data markets, and then leveraging this
research in the design of system architectures, hardware and software necessary to implement our expanding
product portfolio to address customer needs.

Product Architectures

Our product portfolio covers a breath of architectures including tightly integrated massively parallel
supercomputers, highly flexible and configurable cluster supercomputers, world class storage and data
management solutions and purpose-built big data analytics appliances.

Hardware

We have extensive experience in the definition, design and integration of the hardware components required
of HPC system solutions. This includes processors, board design, memory, storage, network and interconnect
technologies, I/O subsystems, power, cooling and packaging infrastructures. The majority of our hardware
research and development investments are in the following areas:

and

storage

• Compute
and
design.
Integration of a variety of processor, volatile and nonvolatile memory and network devices
using a combination of custom and industry standard printed circuit boards, high-density connectors,
carefully chosen transmission and storage media and optimized topologies.

architectures,

interconnect

integration

high-speed

board

and

• Power, packaging and cooling. We use a variety of dense packaging techniques in order to produce
systems with superior performance, socket densities and energy efficiency. This packaging combines
industry standard and custom-designed technologies in the areas of printed circuit board assemblies,
power distribution and liquid and air cooling.

5

Software

We have extensive experience in designing, developing and adapting system software such as the operating
system, system management, optimized data management, movement and analysis as well as programming
environment software as an integral aspect of our product portfolio and distributing that software as part of
system sales. Our software research and development experience includes operating systems, scalable hardware
control, reliability, availability and serviceability, or RAS, infrastructure systems for managing hardware,
including power control, monitoring of environmental data, hardware diagnostics and programming
environments. The programming environments include our own and commercially available third party
compilers, communication and scientific libraries as well as a rich suite of application development tools and
software for managing and monitoring data storage, tiered data infrastructures and archiving data.

Additionally, we research innovative software for advanced analytics at scale, including industry leading
graph analytics and associated algorithms for discovering previously unknown insight from large, disparate data
sets, as well as optimizations to Hadoop for performance and manageability at scale. Our research includes
techniques and optimizations to scale advanced analytics across distributed scalable systems, and in large, shared
memory architectures.

We purchase or license software technologies from third parties when necessary to meet certain specific

customer requirements, while focusing our own resources where we believe we add the highest value.

For information relating to amounts spent on research and development, see Note 20 — Research and
Development in the Notes to Consolidated Financial Statements in Item 15. Exhibits, Financial Statement
Schedules in Part IV of this annual report.

Manufacturing and Supply Chain

We subcontract the manufacture of a majority of the hardware sub-assemblies and certain components for
our high-end products and custom-engineered systems, including integrated circuits, printed circuit boards,
connectors, cables, power supplies and memory parts, on a sole or limited source basis to third-party suppliers.
We use contract manufacturers to assemble certain components. Our manufacturing strategy currently centers on
build-to-order systems, focusing on obtaining competitive assembly and component costs while concentrating
our resources on the final assembly, test and quality assurance stages to ensure a positive customer experience.
This strategy allows us to avoid the large capital commitment and overhead associated with establishing
full-scale manufacturing facilities, helps us to maintain the flexibility to adopt new technologies as they become
available without the risk of equipment obsolescence, provides near real-time configuration changes to exploit
faster and/or less expensive technologies and provides a higher level of large scale system quality. We perform
final system integration, testing and quality check-out of our systems. Our manufacturing personnel currently are
located primarily in Chippewa Falls, Wisconsin. We work closely with a supplier to provide integrated and tested
Cray Sonexion storage products. In January of 2014, we completed transitioning manufacturing operations for
our cluster related products from Milpitas, California to Chippewa Falls, Wisconsin.

Our systems designed for the supercomputer market segment and our custom-engineered solutions
incorporate components that are available from single or limited sources, often containing our design input or
proprietary designs. Such components include integrated circuits, interconnect systems and certain memory
devices. Prior to development of a particular product, components are typically competitively bid to a short list of
technology partners. The technology partner that provides the highest value solution for the component is often
awarded the contract for the life of the component. Once we have engaged a technology partner, changing our
product designs to utilize another supplier’s integrated circuits can be a costly and time-consuming process. We
also have sole or limited sources for less critical components, such as peripherals, power supplies, cooling and
chassis hardware. We currently obtain key processors from Intel Corporation, or Intel, and NVIDIA for our Cray
XC and cluster systems, AMD and NVIDIA for our Cray XE and XK systems and the Aries interconnect chip
licensed from Intel and purchased through Avago who contracts to have Taiwan Semiconductor Manufacturing
Company, or TSMC, manufacture the integrated circuit. Our procurements from these vendors are primarily
through purchase orders. We have chosen to deal with sole sources in specific cases due to the availability of
specific technologies, economic advantages and other factors. Reliance on single or limited source vendors

6

involves several risks, including the possibility of shortages of key components, long lead times, reduced control
over delivery schedules and changes in direction by vendors. We have been adversely affected by delays in
obtaining qualified competitive components in previous years.

Our Markets

Our key target markets are the supercomputing portion of the HPC market and the big data market,
encompassing both storage and analytics. High performance, real-time analytics on large volumes of data is
developing into an important success driver for business, government and academia, and successfully leveraging
this market is important to us. Big data is a relatively new target market for us, but several of our core strengths
and technologies, such as the abilities to process vast amounts of unique data at very high speeds and to make
“discoveries,” are essential to addressing big data challenges, enabling us to bring highly differentiated analytics
offerings to market. The market segments we are targeting with our supercomputing, storage and analytics
products for HPC and big data are as follows:

Scientific Research. Scientific research includes government

research laboratories and research
universities around the world. In the U.S., the Department of Defense, through its High Performance Computing
Modernization Program, funds a number of research organizations that are our target customers. The Office of
Science in the Department of Energy and its laboratories are key customers, as are the National Science
Foundation and the National Aeronautics and Space Administration and similar agencies around the world. These
research centers also provide supercomputing and big data resources to their affiliated organizations (such as the
Department of Defense contractors) and industrial partners.

National Security/Cybersecurity. Classified work in various worldwide government agencies has
represented an important market for us over many years. Certain U.S. government departments have on occasion
provided funding support for our research and development efforts to meet their objectives. Current and potential
customers include a number of Department of Defense-related classified organizations, the National Nuclear
Security Administration of the Department of Energy and analogous foreign counterparts who have interest in
our full range of products. Commercial entities have had interest in our cybersecurity solutions.

Defense. The defense segment has wide-ranging needs for HPC systems that in some ways are unique and
in other ways are similar to our other market segments. HPC systems can assist in the development of defense
technologies, equipment and secure communications infrastructure, as well as in the identification and analysis of
military intelligence. Intelligence supports real-time development of defense strategy and decision making, while
technology advancements are necessary to maintain military advantages, including deterrents, and to protect the
warfighter.

Earth Sciences. Weather forecasting and climate modeling applications require increasing speed and
larger volumes of data. Forecasting models and climate applications have grown increasingly complex with an
ever-increasing number of interactive variables, making improved supercomputing, storage and analytics
capabilities increasingly critical. We have a number of customers running weather and climate applications,
including customers in Germany,
the United Kingdom, Korea, Brazil, Switzerland, Singapore, Denmark,
Finland, India, Spain and the United States.

Energy. Supercomputing in the energy sector is driven largely by oil and gas exploration and processing,
from seismic analysis to reservoir simulations. The simulation methods used often require high performance
networks and storage subsystems. We currently have commercial customers utilizing both Cray systems and
storage solutions in production and we are targeting this segment for future products.

Financial Services. Big data analytics and supercomputing systems are providing competitive advantage
in areas as disparate as trading, compliance, marketing optimization and risk analysis. Financial services
applications are very time sensitive, so high performance data analytics solutions are highly sought after. Our
customers are using a range of our solutions and systems to derive competitive advantage today in this segment.

Life Sciences. The life sciences industry has demanding data and simulation requirements that test the
limits of HPC and big data systems. In the life sciences, HPC methods cover a vast area ranging across modeling
to the whole cell, next-generation genomic sequencing and healthcare
systems from the molecular level

7

optimization. Big data analytics are key to making sense and creating insight in the enormous volumes of data
being generated. Our big data solutions can help discover new relationships that can allow existing drugs to help
address new medical issues. Our customers are utilizing our products and solutions across this range of use cases
today.

Manufacturing. Supercomputers are used to design lighter, safer and more durable vehicles, study wind
noise and airflow around vehicles, improve airplane flight characteristics and, in many other computer-aided
engineering applications,
to improve time-to-market and product quality. We currently have aerospace,
automotive and manufacturing customers around the globe that are actively using our HPC and big data
solutions.

Other Markets. The rise of attention on big data in industries, including telecommunications, digital
media, retail and professional sports, has resulted in growing interest in supercomputers. Enterprises in these
markets are evaluating where high performance computing should be used as a complement to existing analytics
solutions to solve some of their most challenging big data problems, particularly in the area of analytics.

Sales to the U.S. government and system acquisitions primarily funded by the U.S. government, or U.S.
Government, accounted for approximately 48% of our revenue in 2014, 51% of our revenue in 2013 and 68% of
our revenue in 2012. Significant customers with over 10% of our annual revenue were the U.S. Government in
2014; the U.S. Government and Exxon Mobil in 2013; and the U.S. Government and Exxon Mobil in 2012.
International customers accounted for 42% of our total revenue in 2014, 32% of our total revenue in 2013 and
18% of our total revenue in 2012.

We have four operating segments that are reportable for financial reporting purposes. Segment information
and related disclosures are set forth in Note 19 — Segment Information in the Notes to Consolidated Financial
Statements in Item 15. Exhibits, Financial Statement Schedules in Part IV of this annual report.

Competition

The broad HPC market is very competitive. Many of our competitors in the U.S. and internationally are
established companies well known in the HPC supercomputing market,
including IBM, Hewlett-Packard,
Lenovo, Dell, NEC, Hitachi, Fujitsu, Silicon Graphics International and Atos SE. Most of these competitors have
substantially greater total research, engineering, manufacturing, marketing and financial resources than we do.

We compete with systems builders and resellers of systems that are constructed from commodity
components using processors manufactured by Intel, AMD and others. IBM, NEC and Fujitsu also build systems
leveraging their own processors. These competitors include the previously named companies as well as smaller
companies that assemble systems from commercially available commodity products. These companies have
capitalized on developments in parallel processing and increased computer performance in commodity-based
networking and cluster systems. While these companies’ products are more limited in applicability and
scalability, they have achieved growing market acceptance as they can offer significant price/peak performance
on problems lacking complexity or extreme scalability. Such companies, because they may offer high peak
performance per dollar, can put pricing pressure on us when competing in procurements. The Cray CS400
(including CS-Storm) supercomputing cluster products are designed to help us better address this market by
providing flexible HPC offering alternatives with competitive pricing.

To the extent

that IBM and other processor suppliers develop processors or networks with greater
capabilities than the processors we use from Intel, AMD and NVIDIA, our systems may be at a competitive
disadvantage to systems utilizing such other processors.

For our products designed for the high-end supercomputer market segment, we compete primarily on the
basis of product performance, scalability, breadth of features, price/performance, total cost of ownership, quality,
reliability, upgradability, service and support, corporate reputation, brand image and account relationships. Our
market approach here is more focused than many of our competitors, with high-end supercomputing products
(Cray XC40) designed with high levels of integration to meet the exacting needs of this performance and
scalability driven market. We work to offer systems that provide greater performance on the largest, most
difficult computational problems and superior price/performance on many important applications in the

8

upper-end of the supercomputer market segment. Our highly-integrated systems often offer superior total cost of
ownership advantages as they typically use less electric power and cooling and occupy less space than lower
bandwidth cluster systems.

The market for our Cray CS400 product line is very competitive. The majority of competition is from IBM,
HP, Dell, SGI, Atos and Fujitsu that offer open-standards cluster solutions to address the growth in the mid-range
supercomputing market. We compete primarily on the basis of price/performance, open-standards architecture,
flexible configurations, energy-efficiency, reliability, scalability, comprehensive cluster management, corporate
reputation and account relationships. Our market approach is to offer cluster solutions that provide greater
performance on the large and complex computational problems and superior price/performance on many
important applications in this market segment.

The competitive landscape in the big data market is quite varied, with competition from vendors offering
integrated solutions, such as Oracle, commodity cluster systems with either open source or proprietary data
analytics software, and traditional business intelligence vendors such as Teradata, Oracle, IBM and SAP. The
market for knowledge discovery through graph analytics (Cray Urika-GD) is still nascent and fragmented as no
dominant applications have as yet emerged, with the result that custom and open/source software approaches
such as Hadoop/MapReduce are often used. However, customers with large, mission-critical graph problems
have discovered that commodity approaches do not scale or deliver results in an acceptable timeframe, and have
recognized the advantages of specialized solutions. We recently introduced the Urika-XA offering, which
competes primarily on the basis of performance, scalability and integration, as well as total cost of ownership in
the traditional Hadoop and Spark analytics marketplace.

Our storage products compete with a number of manufacturers and integrators of parallel storage solutions,
including IBM with its GPFS parallel file system, as well as solutions from Data Direct Networks (DDN),
NetApp, Panasas and other storage companies. The parallel storage and file system market
is currently
fragmented with a number of competing providers in the HPC marketplace. We believe that our strong storage
products along with our extensive experience and excellent reputation as an HPC systems vendor, our storage
offerings compete effectively against our competition, especially when the prospective target market overlaps
with our HPC systems target market.

Intellectual Property

We attempt to protect our trade secrets and other proprietary rights through formal agreements with our
employees, customers, suppliers and consultants, and through patent protection. Although we intend to protect
our rights vigorously, there can be no assurance that our contractual and other security arrangements will be
successful.

Our general policy is to seek patent protection for those inventions and improvements that give us a
competitive advantage and are likely to be incorporated into our products and services. We have a number of
patents and pending patent applications relating to our hardware and software technologies. While we believe our
patents and applications have value, no single patent or group of patents is in itself essential to us as a whole or to
any of our key products. Any of our proprietary rights could be challenged, invalidated or circumvented and may
not provide significant competitive advantage.

We have licensed certain patents and other intellectual property from others in our industry. These licenses often
contain restrictions on our use of the underlying technology. We have also entered into cross-license arrangements with
other companies involved in the HPC industry. On May 2, 2012, we sold certain intellectual property and other assets
related to the research and development of hardware network interconnect technologies to Intel.

Backlog

We do not believe backlog is a meaningful indicator of our future business prospects due to the uncertainty
of converting orders into recognized revenue in any given period. Factors impacting the amount of backlog and
our ability to recognize revenue from backlog in any given period include the possibility of significant contract
amendments, the timing of our product development, manufacturing and delivery schedules and changes in
delivery schedules requested by our customers. Therefore, we believe that backlog information is not material to
an understanding of our overall business.

9

Employees

As of December 31, 2014, we had 1,138 employees. We have no collective bargaining agreement with our

employees. We have not experienced a work stoppage and believe that our employee relations are very good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, are available free of charge at our website at www.cray.com, as soon as reasonably
practicable after we file such reports with the SEC electronically. The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov. In addition, we have set forth
our Code of Business Conduct, Corporate Governance Guidelines, the charters of the Audit, Compensation,
Corporate Governance and Strategic Technology Assessment Committees of our Board of Directors and other
governance documents on our website, www.cray.com, under “Company Information — Investors — Corporate
Governance.” The contents of our website are not incorporated by reference into this annual report on Form 10-K
or our other SEC reports and filings.

Item 1A. Risk Factors

In addition to the other information contained in this annual report, you should carefully read and consider
the following risk factors. If any of these risks actually occur, our business, financial condition or operating
results could be materially adversely affected and the trading price of our common stock could decline.

Our operating results fluctuate significantly and we may not achieve profitability in any given
period. Our operating results are subject to significant fluctuations which make predicting revenue and
operating results for any specific period very difficult, particularly because a material portion of product revenue
recognized in any given quarter or year typically depends on a very limited number of system sales expected for
that quarter or year and the product revenue generally depends on the timing of product acceptances by
customers and contractual provisions affecting revenue recognition. Delays in achieving customer acceptances of
installed systems and recognizing revenue from a product transaction or transactions due to development or
product delivery delays, not receiving needed components timely or with anticipated quality and performance,
inability of a system to meet performance requirements or targets or other contractual obligations, or for other
reasons, could have a material adverse effect on our operating results in any specific quarter or year, and could
shift associated revenue, gross profit and cash receipts from one quarter to another, or even from one year to
another in the case of revenue expected to be realized in the fourth quarter of any year. In addition, because our
revenue can be concentrated in particular quarters, often the fourth quarter, rather than evenly spread throughout
a year, we generally do not expect to sustain profitability over successive quarters even if we are profitable for
the year.

Although we have recorded positive annual net income since 2010, we experienced net losses in earlier
periods. Net income may fluctuate significantly as a result of many factors, including as a result of significant
investments we may make to grow our business even though the benefits of those investments often require many
years to come to fruition and may not be realized when expected or at all.

Whether we will be able to increase our revenue and achieve and sustain profitability on a quarterly and

annual basis depends on a number of factors, including:

• our ability to secure sufficient orders for our Cray XC and Cray CS systems as well as upgrades and

successor systems;

• successfully delivering and obtaining sufficient customer acceptances of our Cray XC and Cray CS

systems, including attached Sonexion storage systems;

• our ability to successfully generate revenue and profitability from sales of our analytics and storage and

data management products, as well as upgrades and successor systems;

10

• revenue delays or losses due to customers postponing purchases to wait for future upgraded or new
systems, including those containing new processors, delays in delivery of upgraded or new systems,
longer than expected customer acceptance cycles or penalties resulting from system acceptance issues;

• our ability to efficiently scale our internal processes effectively to enable growth;

• the level of revenue recognized in any given period, which is affected by the very high average sales
prices and limited number of significant system sales and resulting potential acceptances in any quarter,
the timing of product acceptances by customers and contractual provisions affecting the timing and
amount of revenue recognition;

• our ability to continue to broaden our customer base beyond our traditional customers;

• our expense levels, including research and development expense net of government funding;

• our ability to successfully and timely design, integrate and secure competitive processors for our Cray XC

and Cray CS systems and upgrades and successors systems;

• the level of product gross profit contribution in any given period due to volume, competition or product
mix, particularly with the introduction of flexible commodity-based supercomputers, competitive factors,
strategic transactions, product life cycle, currency fluctuations, acceptance penalties and component costs;

• the competitiveness of our products and prices;

• our ability to secure additional government funding for future development projects;

• maintaining and successfully completing our product development projects on schedule and within

budgetary limitations;

• the level and timing of maintenance contract renewals with existing customers; and

• the terms and conditions of sale or lease for our products and services.

The receipt of orders and the timing of shipments and acceptances impact our quarterly and annual results,

including cash flows, and are affected by events outside our control, such as:

• the timely availability of acceptable components, including, but not limited to, processors, in sufficient
quantities to meet customer delivery schedules and other customer commitments at a competitive cost;

• the timing and level of government funding and resources available for product acquisitions and research
and development contracts, which has been, and may continue to be, adversely affected by the current
economic and fiscal uncertainties, increased governmental budgetary limitations and disruptions in the
operations of the U.S. government;

• the introduction or announcement of competitive or key industry supplier products;

• competitor pricing strategies;

• price fluctuations in the processors and other commodity electronics and memory markets;

• the availability of adequate customer facilities to install and operate new Cray systems;

• currency fluctuations,

including the ongoing economic
challenges in the United States, Japan and Europe and fluctuations in oil prices that can affect the
resources available to potential customers to purchase products;

international conflicts or economic crises,

• general economic trends, including changes in levels of customer capital spending; and

• our customers’ ability to make future payments in accordance with contractual terms of their purchase or

sales-type lease agreements.

Because of the numerous factors affecting our revenue and results of operations, we may not achieve
profitability on a quarterly or annual basis in the future. We anticipate that our quarterly results will fluctuate
significantly, and include losses, even in years where we expect or achieve positive annual net income. Delays in

11

third-party component availability, product development, receipt of orders, or product acceptances, the level and
timing of approved government fiscal budgets, issues with third-party component performance, reductions in
outside funding for our research and development efforts and achieving contractual development milestones have
had a substantial adverse effect on our past results and could continue to have such an effect on our results in
2015 and in future years.

If we are unable to successfully develop, sell and deliver our Cray XC systems and successor systems,
and recognize revenue for these systems, our operating results will be adversely affected. We expect that a
substantial portion of our revenue in the foreseeable future will come from acceptances of delivered Cray XC
including systems integrating future processors and accelerators. The
systems and successor systems,
development effort related to these systems are lengthy and technically challenging processes, and require a
significant investment of capital, engineering and other resources often years ahead of the time when we can be
assured that they will result in competitive products. We may invest significant resources in alternatives that
prove ultimately unfruitful. Unanticipated performance and/or development issues may require more engineers,
time or testing resources than are currently available. Given the breadth of our engineering challenges, changes in
the market and technology and our limited engineering and technical personnel resources, we periodically review
the anticipated contributions and expense of our product programs to determine their long-term viability, and we
may substantially modify or terminate one or more development programs. We may not be successful in meeting
our development schedules for technical reasons and/or because of insufficient engineering resources, which
could result in an uncompetitive product or cause a lack of confidence in our capabilities among our key
customers. To the extent that we incur delays in completing the design, development and production of hardware
components, delays in development of requisite system software, cancellation of programs due to technical or
economic infeasibility or investment in unproductive development efforts, our revenue, results of operations and
cash flows, and the reputation of such systems in the market, could be adversely affected.

In addition, many factors affect our ability to successfully sell and recognize revenue for these systems,

including the following:

• the level of product differentiation in our Cray XC systems and successor systems. We need to compete
successfully against HPC systems from both large established companies and smaller companies and
demonstrate the value of our balanced high bandwidth systems;

• whether potential customers delay purchases of our products because they decide to wait for successor

systems or upgrades that we have announced or they believe will be available in the future;

• our ability to meet all customer requirements for acceptance. Even once a system has been delivered, we
sometimes do not meet all of the contract requirements for customer acceptance and ongoing reliability of
our systems within the provided-for acceptance period, which has resulted in contract penalties and delays
in our ability to recognize revenue from system deliveries. Most often these penalties have adversely
affected gross profit at the time of revenue recognition through the provision of additional equipment and
services and/or service credits to satisfy delivery delays and performance shortfalls. The risk of contract
penalties is increased when we bid for new business prior to completing development of new products
when we must estimate future system performance, such as has been required with our Cray XC systems
and will be frequently required for subsequent systems; and

• our ability to source competitive, key components in appropriate quantities (to have enough to sell
without ending up with excess inventory that can lead to obsolescence charges), in a timely fashion and
on acceptable terms and conditions and that meet the performance criteria required.

Failure to successfully develop and sell our Cray XC systems and successor systems into the

supercomputing market and recognize revenue for such systems will adversely affect our operating results.

If our current and future products targeting markets outside of our traditional markets, primarily
our big data analytics and storage and data management products, are not successful, our ability to grow
our revenues and achieve and sustain profitability will be adversely affected. Our ability to materially
grow our revenues and achieve and sustain profitability will be adversely affected if we are unable to generate
sufficient revenue from products targeting markets outside of our traditional markets, particularly if those market

12

segments do not grow significantly. We are currently focusing on big data analytics and storage and data
management opportunities. To grow our revenue from opportunities outside our primary markets, we must
successfully and in a cost-effective manner design and develop products utilizing technologies different from our
traditional supercomputing products, compete successfully with many established companies and new entrants in
these markets, continue to win awards for new contracts, timely perform on existing contracts, develop our
capability for broader market sales and business development and successfully develop and introduce new
solution-oriented offerings, notwithstanding that these are relatively new businesses for us and we do not have
significant experience targeting these markets. Big data analytics and storage and data management opportunities
require significant monetary investments ahead of revenue, including product development efforts, adding
experienced personnel and initiating new marketing and sales efforts and therefore may reduce net income in the
short term even if successful.

The continuing commoditization of HPC hardware and software has resulted in pricing pressure and
may adversely affect our operating results. The continuing commoditization of HPC hardware, such as
processors,
interconnects, storage and other infrastructure, and the growing commoditization of software,
including plentiful building blocks and more capable open source software, as well as the potential for
integration of differentiated technology into already-commoditized components, has resulted in, and may result
in pricing pressure that may cause us to reduce our pricing in order to remain competitive, which can negatively
impact our gross margins and adversely affect our operating results.

If

fewer
the U.S. government and other governments purchase, or fund the purchase of,
supercomputers or delay such purchases, our revenue would be reduced and our operating results would
be adversely affected. Historically, sales to the U.S. Government have represented the largest single market
segment for supercomputer sales worldwide, including our products and services. In 2012, 2013 and 2014,
approximately 68%, 51% and 48%, respectively, of our revenue was derived from such sales. Our plans for the
foreseeable future contemplate significant sales to the U.S. Government. Sales to the U.S. Government, including
further sales pursuant to existing contracts, have been, and may continue to be, adversely affected by factors
outside our control, such as by:

• Congressional decisions in addressing budget concerns and current economic uncertainty;

• disruptions in the operations of the U.S. government;

• “sequestration”;

• the downgrading of U.S. government debt or the possibility of such action;

• the political climate in the U.S. focusing on cutting or limiting budgets and their effect on government

budgets;

• the limits on federal borrowing capacity;

• changes in procurement policies;

• budgetary considerations, including Congressional delays in completing appropriation bills as occurred in

2011, 2012, 2013 and 2014;

• domestic crises;

• political efforts to limit the activities of U.S. intelligence community agencies; including proposed state
legislation that would limit or even criminalize doing business with the NSA for certain companies doing
business with state governments; and

• international political developments, such as the downgrading of European debt.

If agencies and departments of the United States or other governments were to stop, reduce or delay their

use and purchases of supercomputers, our revenue and operating results would be adversely affected.

Our reliance on third-party suppliers poses significant risks to our operating results, business and
prospects. We rely upon third-party vendors to supply processors, including accelerators, for most of the

13

products we sell and use service providers to co-develop key technologies. We subcontract the manufacture of a
majority of the hardware components for our high-end products, including integrated circuits, printed circuit
boards, memory parts, connectors, cables and power supplies, on a sole or limited source basis to third-party
suppliers. We use contract manufacturers to assemble certain important components for all of our systems. We
also rely on third parties to supply key software and hardware capabilities, such as file systems, solution-specific
servers and storage subsystems, and in the case of our Sonexion products, we rely on third-party original
equipment manufacturers to supply complete storage systems. Because specific components must be designed
into our systems well in advance of initial deliveries of those systems, we are particularly reliant on our processor
vendors to deliver on the capabilities and pricing expected at the time we design key elements of the system and
make binding bids to customers. We are subject to substantial risks because of our reliance on these and other
limited or sole source suppliers, including the following risks:

• if a supplier does not provide components or systems that meet our specifications in sufficient quantities
and with acceptable quality on time or deliver when required, or delays future components or systems
beyond anticipated delivery dates, then sales, production, delivery, acceptance and revenue from our
systems could be delayed and/or reduced and we could be subject to costly penalties even once delivered
and accepted, which has happened multiple times in the past and has at times significantly lowered our
revenue for a particular quarter or year;

• if a supplier cannot provide a competitive key component (for example, due to inadequate performance or
a prohibitive price) or eliminates key features from components, such as with the processors we design
into our systems, our systems may be less competitive than systems using components with greater
capabilities;

• if an interruption of supply of our components, services or capabilities occurs because a supplier changes
its technology roadmap, decides to no longer provide those products or services, increases the price of
those products or services significantly or imposes reduced delivery allocations on its customers, it could
take us a considerable period of time to identify and qualify alternative suppliers, to redesign our products
as necessary and to begin to manufacture the redesigned components or otherwise obtain those services or
capabilities. In some cases, such as with key integrated circuits and memory parts or processors, we may
not be able to redesign such components or find alternate sources that we could use in any realistic
timeframe;

• if a supplier plans future processors that are made available in a way that encourages customers to delay
purchases of our products because they decide to wait for successor systems or upgrades they believe will
be available in the future or to purchase products with the future processors from our competitors who are
willing to take greater risk on delivery;

• if a supplier of a component is subject to a claim that the component infringes a third-party’s intellectual
property rights, as has happened with multiple suppliers, our ability to obtain necessary components could
be adversely affected or our cost to obtain such components could increase significantly;

• if a supplier providing us with key research and development and design services or core technology
components with respect to integrated circuit design, network communication capabilities or software is
late, fails to provide us with effective functionality or loses key internal talent, our development programs
may be delayed or prove to be impossible to complete;

• if a supplier provides us with hardware or software that contains bugs or other errors or is different from
what we expected, our development projects and production systems may be adversely affected through
reduced performance or capabilities, additional design testing and verification efforts, re-spins of
integrated circuits and/or development of replacement components, and the production and sales of our
systems could be delayed and systems installed at customer sites could require significant, expensive field
component replacements or result in penalties;

• some of our key component and service suppliers are small companies with limited financial and other
resources, and consequently may be more likely to experience financial and operational difficulties than
larger, well-established companies, which increases the risk that they will be unable to deliver products as
needed; and

14

• if a key supplier is acquired or has a significant business change, such as occurred with the acquisition of
the third-party original equipment manufacturers that supplies complete storage systems for our Sonexion
product, the production and sales of our systems and services may be delayed or adversely affected, or
our development programs may be delayed or may be impossible to complete.

Certain delays in the availability of acceptable components, including processors and memory parts, and
increases in order lead times for certain components, adversely affected our revenue and operating results in
multiple prior periods, in some cases significantly, and could adversely affect future results.

If our cluster systems are not successful, our operating results will be adversely affected. Our cluster
products were first introduced late in 2012. We have had relatively limited experience selling cluster-based
solutions, including into the same markets we sell our core supercomputers, and if we cannot successfully and at
acceptable margins sell these solutions, our operating results will be adversely affected.

We have in the past, and may make acquisitions in the future, which could require significant
management attention, disrupt our business, result in dilution to our shareholders, deplete our cash
reserves and adversely affect our financial results. Acquisitions involve numerous risks, including the
following:

• difficulties in successfully integrating the operations, systems, technologies, products, offerings and

personnel of the acquired company or companies;

• insufficient revenue to offset increased expenses associated with acquisitions;

• diversion of management’s attention from normal daily operations of the business and the challenges of

managing larger and more widespread operations resulting from acquisitions;

• potential difficulties in completing projects associated with in-process research and development

intangibles;

• difficulties in entering markets in which we have no or limited direct prior experience and where

competitors in such markets have stronger market positions;

• initial dependence on unfamiliar supply chains or relatively small supply partners; and

• the potential loss of key employees, customers, distributors, vendors and other business partners of the

companies we acquire following and continuing after announcement of acquisition plans.

Acquisitions may also cause us to:

• use a substantial portion of our cash reserves or incur debt;

• issue equity securities or grant equity incentives to acquired employees that would dilute our current

shareholders’ percentage ownership;

• assume liabilities, including potentially unknown liabilities;

• record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular

basis and potential periodic impairment charges;

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs and restructuring and other related expenses; or

• become subject to intellectual property or other litigation.

Acquisitions of high-technology companies and assets are inherently risky and subject to many factors
outside of our control, and no assurance can be given that our recently completed or future acquisitions will be
successful and will not materially adversely affect our business, operating results, or financial condition. Failure
to manage and successfully integrate acquisitions could materially harm our business and operating results.

If we are unable to compete successfully in the highly competitive HPC market, our business will not
be successful. The market for HPC systems is very competitive. An increase in competitive pressures in our
market or our failure to compete effectively may result in pricing reductions, reduced gross margins and loss of

15

market share and revenue. Many of our competitors are established companies well known in the HPC market,
including IBM, Hewlett-Packard, Lenovo, Dell, NEC, Hitachi, Fujitsu, Silicon Graphics International and Atos
SE. Most of these competitors have substantially greater research, engineering, manufacturing, marketing and
financial resources than we do.

We also compete with systems builders and resellers of systems that are constructed from commodity
components using processors manufactured and/or designed by Intel, ARM, AMD, NVIDIA and others. These
competitors include the companies named above and Dell, with IBM using both third-party processors and its
own proprietary processors, as well as smaller companies that benefit from the low research and development
costs needed to assemble systems from commercially available commodity products. Such companies, because
they can offer high peak performance per dollar, can put pricing pressure on us in certain competitive
procurements. In addition, to the extent that Intel, IBM and other processor suppliers develop processors with
greater capabilities or at a lower cost than the processors we currently use, our Cray XC systems may be at a
competitive disadvantage to systems utilizing such other processors until we can design in, integrate and secure
competitive processors, if at all.

Our growth initiatives in the big data analytics and storage and data management markets must also compete
successfully with many established companies and new entrants, many of whom have significantly greater
resources and brand recognition in these markets than we do.

Periodic announcements by our competitors of new HPC, storage or data analytics systems or plans for
future systems and price adjustments may reduce customer demand for our products. Many of our potential
customers already own or lease high performance computer, storage or data analytics systems. Some of our
competitors may offer substantial discounts to potential customers. We have in the past and may again be
required to provide substantial discounts to make strategic sales, which may reduce or eliminate any gross profit
on such transactions, or require us to provide lease financing for our products, which could result in a multi-year
deferral of our receipt of cash and revenue for these systems. These developments limit our revenue and financial
resources and reduce our ability to be profitable and grow.

If we cannot retain, attract and motivate key personnel, we may be unable to effectively implement
our business plan. Our success depends in large part upon our ability to retain, attract and motivate highly
skilled management, development, marketing, sales and service personnel. The loss of and failure to replace key
engineering management and personnel could adversely affect multiple development efforts. Recruitment and
retention of senior management and skilled technical, sales and other personnel is very competitive, and we may
not be successful in either attracting or retaining such personnel. From time to time, including recently, we have
lost key personnel to other high technology companies, and many larger companies with significantly greater
resources than we do have aggressively recruited, and continue to aggressively recruit, key personnel. As part of
our strategy to attract and retain key personnel, we may offer equity compensation through stock options and
restricted stock grants. Potential employees, however, may not perceive our equity incentives as attractive
enough. In addition, due to the intense competition for qualified employees, we may be required to and have had
to increase the level of compensation paid to existing and new employees, which could materially increases our
operating expenses.

We may not be able to protect our proprietary information and rights adequately. We rely on a
combination of patent, copyright and trade secret protection, nondisclosure agreements and licensing
arrangements to establish, protect and enforce our proprietary information and rights. We have a number of
patents and have additional applications pending. There can be no assurance, however, that patents will be issued
from the pending applications or that any issued patents will adequately protect those aspects of our technology
to which such patents will relate. Despite our efforts to safeguard and maintain our proprietary rights, we cannot
be certain that we will succeed in doing so or that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to our technologies. The laws of some countries do not
protect intellectual property rights to the same extent or in the same manner as do the laws of the United States.
Additionally, under certain conditions, the U.S. government might obtain non-exclusive rights to certain of our
intellectual property. Although we continue to implement protective measures and intend to defend our
proprietary rights vigorously, these efforts may not be successful.

16

We maintain confidential and proprietary information on our computer networks and employ
security measures designed to protect this information from unauthorized access. If our security measures
are breached, we could lose proprietary data and may suffer economic losses. We maintain confidential
information on our computer networks, including information and data that are proprietary to our customers and
third parties, as well as to us. Although we have designed and employed and continue to enhance a multitude of
security measures to protect this information from unauthorized access, security breaches may occur as a result
of third-party action, including computer hackers, employee error, malfeasance or otherwise, that could result in
someone obtaining unauthorized access to our customers’ data or our data, including our intellectual property and
other confidential business information. Because the techniques employed by hackers to obtain unauthorized
access or to sabotage systems change frequently, we may be unable to anticipate these techniques or to
implement adequate preventative measures. Any security breach could result in disclosure of our trade secrets or
disclosure of confidential customer, supplier or employee data. If this should happen, we could be exposed to
potentially significant legal liability, remediation expense, harm to our reputation and other harm to our business.

Customers and other third parties may make statements speculating about or announcing an
intention to complete purchases or acceptances of our products before such purchases or acceptances are
substantially certain, and these proposed purchases or acceptances may not be completed when or as
expected, if at all. From time to time, customers and other third parties may make statements speculating about
or announcing a potential purchase of our products before we have obtained an order for such purchases or
completed negotiations and signed a contract for the purchase of such products. In some instances, government
and government-funded customers may announce possible purchases even before they have obtained the
necessary budget to procure the products. As a result, these statements or announcements do not mean that we
will ultimately be able to secure the sale when or as expected or at all as it is not certain that the contract or order
negotiations will be completed successfully or as expected or that the customer will be able to obtain the budget
they hope for or expect. In addition, from time to time, customers and other third parties may make statements
speculating about or announcing the completion of an acceptance process of a delivery system before such
acceptance is completed or certain. As a result, these statements or announcements do not mean that we will
ultimately be able to obtain the acceptance when or as expected or recognize revenue.

We are subject to increasing government regulations and other requirements due to the nature of our
business, which may adversely affect our business operations.
In 2012, 2013 and 2014, approximately 68%,
51% and 48% respectively, of our revenue was derived from the U.S. Government. In addition to normal
business risks, our contracts with the U.S. government are subject to unique risks, some of which are beyond our
control. Our contracts with the U.S. government are subject to particular risks, including:

The funding of U.S. government programs is subject to congressional appropriations. Many of the U.S.
government programs in which we participate may extend for several years; however, these programs are
normally funded annually. Changes in U.S. strategy and priorities may affect our future procurement
opportunities and existing programs. Long-term government contracts and related orders are subject
to
cancellation, or delay, if appropriations for subsequent performance periods are not made. The termination of
funding for existing or new U.S. government programs could result in a material adverse effect on our results of
operations and financial condition.

The U.S. government may modify, curtail or terminate its contracts with us. The U.S. government may
modify, curtail or terminate its contracts and subcontracts with us, without prior notice at its convenience upon
payment for work done and commitments made at the time of termination. Modification, curtailment or
termination of our major programs or contracts could have a material adverse effect on our results of operations
and financial condition.

Our U.S. government contract costs are subject to audits by U.S. government agencies. U.S. government
representatives may audit the costs we incur on our U.S. government contracts, including allocated indirect costs.
Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a
specific contract will not be reimbursed, and such costs already reimbursed must be refunded. If any audit uncovers
improper or illegal activities or non-compliance with the terms of a specific contract, we may be subject to civil and
criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension
of payments, fines and suspension or prohibition from doing business with the U.S. government.

17

Our business is subject to potential U.S. government inquiries and investigations. We may be subject to
U.S. government inquiries and investigations of our business practices due to our participation in government
contracts. Any such inquiry or investigation could potentially result in a material adverse effect on our results of
operations and financial condition.

is also subject

Our U.S. government business

regulations and other
requirements. These requirements, although customary in U.S. government contracts, increase our performance
and compliance costs. These costs might increase in the future, reducing our margins, which could have a
negative effect on our financial condition. Failure to comply with these regulations and requirements could lead
to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time
and could have a negative effect on our reputation and ability to secure future U.S. government contracts.

to specific procurement

U.S. export controls could hinder our ability to make sales to foreign customers and our future
prospects. The U.S. government regulates the export of HPC systems such as our products. Occasionally we
have experienced delays for up to several months in receiving appropriate approvals necessary for certain sales,
which have delayed the shipment of our products. Delay or denial in the granting of any required licenses could
make it more difficult to make sales to certain foreign customers, eliminating an important source of potential
revenue. Our ability to have certain components manufactured in certain foreign countries for a lower cost has
also been adversely affected by export restrictions covering information necessary to allow such foreign
manufacturers to manufacture components for us.

We may infringe or be subject to claims that we infringe the intellectual property rights of
others. Third parties have asserted, and may in the future assert, intellectual property infringement claims
against us. As a result of such intellectual property infringement claims, we could be required or otherwise
decide that it is appropriate to:

• pay third-party infringement claims;

• discontinue manufacturing, using or selling particular products subject to infringement claims;

• discontinue using the technology or processes subject to infringement claims;

• develop other technology not subject to infringement claims, which could be time-consuming and costly

or may not be possible; or

• license technology from the third party claiming infringement, which license may not be available on

commercially reasonable terms.

Regardless of the merits, any intellectual property infringement claim would require management attention

and could be expensive to defend.

Our stock price is volatile. The trading price of our common stock is subject to significant fluctuations in
response to many factors, including stock market trends and shareholder profile, our quarterly operating results,
changes in analysts’ estimates or our outlook, our capital raising activities, announcements of technological
innovations and customer contracts by us or our competitors, a significant aggressive seller or buyer, general
economic conditions and conditions in our industry.

We incorporate software licensed from third parties into the operating systems for our products as
well as in our tools to design products and any significant interruption in the availability of these third
party software products or defects in these products could reduce the demand for our products or cause
delay in development. The operating system as well as other software we develop for our supercomputers
contains components that are licensed to us under open source software licenses. Our business could be disrupted
if this software, or functional equivalents of this software, were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case we would be required to redesign our operating
system software to function with alternative third-party software, or develop these components ourselves, which
would result in increased costs and could result in delays in product shipments. Our supercomputer systems
utilize software system variants that incorporate Linux technology. The open source licenses under which we
have obtained certain components of our operating system software may not be enforceable. Any ruling by a
court that these licenses are not enforceable, or that Linux-based operating systems, or significant portions of

18

them, may not be copied, modified or distributed as provided in those licenses, would adversely affect our ability
to sell our systems. In addition, as a result of concerns about the risks of litigation and open source software
generally, we may be forced to protect our customers from potential claims of infringement. In any such event,
our financial condition and results of operations may be adversely affected.

We also incorporate proprietary incidental software from third parties, such as for file systems, job
scheduling and storage subsystems. We have experienced some functional issues in the past with implementing
such software with our supercomputer systems. In addition, we may not be able to secure needed software
systems on acceptable terms, which may make our systems less attractive to potential customers. These issues
may result in lost revenue, additional expense by us and/or loss of customer confidence.

We may not realize the anticipated benefits, or minimize the possible risks, of the sale of certain
interconnect hardware assets to Intel Corporation, which could alter the revenue, costs and nature of our
business.
In connection with our sale of certain interconnect hardware assets to Intel, we conducted business,
legal and financial due diligence with the goal of identifying and evaluating material risks involved in the
transaction. Despite our efforts, we may not have been successful in ascertaining or evaluating all such risks and,
as a result, might not ultimately realize all of the intended advantages of the transaction. Additionally, the
transfer of certain of our employees and technologies to Intel may result in unforeseen operating difficulties and
expenditures and could involve a number of potential adverse risks to our business, including the following:

• harm to our ability to compete in relevant markets or in customer perception of our products;

• unanticipated costs or adverse tax consequences;

• exposure to potential liabilities to third parties or Intel, or claims for indemnification by Intel, including

with respect to third-party litigation matters;

• delays and difficulties in receiving key components for our products from suppliers, including Intel;

• loss of customers, vendors or alliances; and

• failure to create long-term shareholder value with the additional cash resources.

If we fail to realize the expected benefits from the transaction, or to minimize the expected risks of the
transaction, whether as a result of unidentified risks or other unforeseen events, our business, results of
operations and financial condition could be adversely affected.

The “conflict minerals” rule of the Securities and Exchange Commission, or SEC, has caused us to
incur additional expenses, could limit the supply and increase the cost of certain metals used in
manufacturing our products, and could make us less competitive in our target markets. On August 22,
2012, the SEC adopted a rule requiring disclosure by public companies of the origin, source and chain of custody
of specified minerals, known as conflict minerals, that are necessary to the functionality or production of
products manufactured or contracted to be manufactured by us. The rule requires companies to obtain sourcing
data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure
report on Form SD covering the prior calendar year. Implementation of our conflict minerals policy could limit
our ability to source at competitive prices and to secure sufficient quantities of certain minerals used in the
manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide
conflict-free minerals may be limited. In addition, we have incurred, and may continue to incur, material costs
associated with complying with the conflict minerals rule, such as costs related to the determination of the origin,
source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related
governance policies, processes and controls, and possible changes to products or sources of supply as a result of
such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant
minerals used in our products through the data collection and due diligence procedures that we implement, which
may harm our reputation. Furthermore, we may encounter challenges in satisfying those customers that require
that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers,
they may choose a competitor’s products. We continue to investigate the presence of conflict materials within
our supply chain.

19

We are required to evaluate our internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002 at the end of each fiscal year, and any adverse results from such future
evaluations could result in a loss of investor confidence in our financial reports and have an adverse effect
on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a
report by our management and a report by our independent registered public accounting firm on our internal
control over financial reporting in our annual reports on Form 10-K as to whether we have any material
weaknesses in our internal controls over financial reporting. Depending on their nature and severity, any future
material weaknesses could result in our having to restate financial statements, could make it difficult or
impossible for us to obtain an audit of our annual financial statements or could result in a qualification of any
such audit. In such events, we could experience a number of adverse consequences, including our inability to
comply with applicable reporting and listing requirements, a loss of market confidence in our publicly available
information, delisting from the NASDAQ Global Market, an inability to complete a financing, loss of other
financing sources such as our line of credit, and litigation based on the events themselves or their consequences.

Provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws could make a
proposed acquisition of our business
is not approved by our Board of Directors more
difficult. Provisions of our Restated Articles of Incorporation and Amended and Restated Bylaws could make
it more difficult for a third party to acquire us. These provisions could limit the price that investors might be
willing to pay in the future for our common stock. For example, our Restated Articles of Incorporation and
Amended and Restated Bylaws provide for:

that

• removal of a director only in limited circumstances and only upon the affirmative vote of not less than

two-thirds of the shares entitled to vote to elect directors;

• the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock, without

shareholder approval, with rights senior to those of the common stock;

• no cumulative voting of shares;

• the right of shareholders to call a special meeting of the shareholders only upon demand by the holders of

not less than 30% of the shares entitled to vote at such a meeting;

• the affirmative vote of not

less than two-thirds of the outstanding shares entitled to vote on an
amendment, unless the amendment was approved by a majority of our continuing directors, who are
defined as directors who have either served as a director since August 31, 1995, or were nominated to be
a director by the continuing directors;

• special voting requirements for mergers and other business combinations, unless the proposed transaction

was approved by a majority of continuing directors;

• special procedures to bring matters before our shareholders at our annual shareholders’ meeting; and

• special procedures to nominate members for election to our Board of Directors.

These provisions could delay, defer or prevent a merger, consolidation,
transaction between us and a third party that is not approved by our Board of Directors.

takeover or other business

Item 1B. Unresolved Staff Comments

None.

20

Item 2. Properties

Our principal properties are as follows:

Location of Property

Uses of Facility

Approximate
Square Footage

Chippewa Falls, WI . . . . . . . . . . . . . . . . . . . . . . . Manufacturing, hardware development,

213,600

central service and warehouse

Seattle, WA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive offices, hardware and software

development, sales and marketing

St. Paul, MN . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software development, sales and marketing
San Jose, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hardware and software development

54,000

65,688
21,733

We own 205,478 square feet of manufacturing, development, service and warehouse space in Chippewa

Falls, Wisconsin, and lease the remaining space described above.

We lease a total of 8,600 square feet of office space, primarily for hardware development, in Austin, Texas.
We lease a total of 5,200 square feet of office space, primarily for hardware and software engineering, in The
Woodlands, Texas. We lease a total of 5,600 square feet of office space, primarily for software development, in
Pleasanton, California. We also lease a total of approximately 6,200 square feet, primarily for sales and service
offices, in other domestic locations. In addition, various foreign sales and service subsidiaries have leased an
aggregate of approximately 25,000 square feet of office space. We believe our facilities are adequate to meet our
needs at least through 2015.

Item 3. Legal Proceedings

We are currently not a party to any material legal proceedings.

Item 4. Mine Safety Disclosures

Not applicable.

21

PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of

Equity Securities

Price Range of Common Stock and Dividend Policy

Our common stock is traded on the Nasdaq Global Market under the symbol CRAY. As of February 13,

2015, we had 40,826,651 shares of common stock outstanding that were held by 484 holders of record.

The quarterly high and low sales prices of our common stock for the periods indicated are as follows:

Year Ended December 31, 2014:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2013:

First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$42.09
$38.69
$31.85
$35.81

$23.23
$23.59
$28.59
$28.20

$26.64
$24.63
$24.94
$24.23

$15.41
$16.20
$19.51
$21.30

We have not paid cash dividends on our common stock and we do not anticipate paying any cash dividends

on our common stock in the foreseeable future.

Equity Compensation Plan Information

The following table provides information as of December 31, 2014, with respect to compensation plans
under which shares of our common stock are authorized for issuance, including plans previously approved by our
shareholders and plans not previously approved by our shareholders.

Plan Category

Number of Shares of
Common Stock to be
Issued Upon Exercise of
Outstanding Options

Weighted-Average
Exercise Price of
Outstanding Options

Number of Shares of
Common Stock Available
for Future Issuance Under
Equity Compensation
Plans (excluding shares
reflected in 1st column)

Equity compensation plans approved by

shareholders(1)

. . . . . . . . . . . . . . . . . . . . .

1,863,295

Equity compensation plans not approved by

shareholders(2)

. . . . . . . . . . . . . . . . . . . . .

67,695

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,930,990

$12.61

$ 5.03

3,079,888

—

3,079,888

(1) The shareholders approved our 1995, 1999 and 2003 stock option plans, our 2004, 2006 and 2009 long-term
equity compensation plans, our 2013 equity incentive plan and our 2001 employee stock purchase plan, as
amended; our 1995, 1999 and 2003 stock option plans and our 2004, 2006 and 2009 long-term equity
compensation plans have terminated and no more options, restricted shares, restricted units or stock bonus
awards may be granted under those plans. Pursuant to the 2013 equity incentive plan, incentive options may
be granted to employees (including officers) and nonqualified options may be granted to employees, officers,
directors, agents and consultants with exercise prices at least equal to the fair market value of the underlying
common stock at the time of grant. While our Board of Directors may grant options with varying vesting
periods under these plans, most options granted to employees vest over four years, with 25% of the options
vesting after one year and the remaining options vesting monthly over the next three years, and most option
grants to non-employee directors vesting immediately. Also pursuant to the 2013 equity incentive plan, our
Board of Directors may grant restricted stock awards, stock bonus awards, stock appreciation rights,

22

restricted stock units, performance shares and performance units to employees, directors, consultants,
independent contractors and advisors. As of December 31, 2014, under the 2013 equity incentive plan, an
aggregate of 3,079,888 shares remained available for grant as stock options or stock appreciation rights and
an aggregate of 1,987,025 shares were available for restricted stock awards, stock bonus awards, restricted
stock units, performance shares or performance units to employees, directors, consultants, independent
contractors and advisors.

(2) The shareholders did not approve the 2000 non-executive employee stock option plan. Under the 2000 non-
executive employee stock option plan approved by our Board of Directors on March 30, 2000, an aggregate
of 1,500,000 shares pursuant to non-qualified options could be issued to employees, agents and consultants
but not to officers or directors. Otherwise, the 2000 non-executive employee stock option plan is similar to
the stock option plans described in footnote (1) above. On March 30, 2010, the 2000 non-executive
employee stock option plan was terminated, which ended future grants but did not affect then outstanding
options. As of December 31, 2014, under the 2000 non-executive employee stock plan, we had options for
67,695 shares outstanding.

Unregistered Sales of Securities

We had no unregistered sales of our securities in 2014 not previously reported.

Issuer Repurchases

We did not repurchase any of our common stock in 2014, other than in connection with the forfeiture of
common stock by holders of restricted stock awards in exchange for payments by the Company of statutory tax
withholding amounts on behalf of the holders arising as a result of the vesting of restricted stock awards.

23

STOCK PERFORMANCE GRAPHS

The graph below compares the cumulative total return to shareholders for our common stock with the
comparable return of the NASDAQ OMX Global Indexes Nasdaq US Benchmark TR Index and the NASDAQ
OMX Global Indexes ICB: 9572 Computer Hardware Index.

The graph assumes that a shareholder invested $100 in our common stock on December 31, 2009, and that
all dividends were reinvested. We have never paid cash dividends on our common stock. All return information
is historical and is not necessarily indicative of future performance.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG OUR COMMON STOCK,
THE NASDAQ US BENCHMARK TR INDEX AND THE ICB: 9572
COMPUTER HARDWARE INDEX THROUGH DECEMBER 31, 2014

S
R
A
L
L
O
D

600

500

400

300

200

100

0

12/31/09

12/31/10

12/31/11

12/31/12

12/31/13

12/31/14

Cray Inc.

Nasdaq US Benchmark TR Index

ICB: 9572 Computer Hardware

12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014

Cray Inc.

Nasdaq US Benchmark TR Index

ICB: 9572 Computer Hardware Index

100.0

100.0

100.0

111.7

117.5

123.5

100.8

117.9

129.5

248.4

137.3

155.3

427.7

183.3

182.7

537.1

206.1

247.6

24

Item 6.

Selected Consolidated Financial Data

The following table presents selected historical consolidated financial data for Cray Inc. and its subsidiaries,

which is derived from our audited consolidated financial statements:

2014

Years Ended December 31,
2012
(In thousands, except for per share data)

2011

2013

2010

Operating Data:

Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$460,748
100,858

$436,330
89,419

$ 353,767
67,291

$155,561
80,485

$239,085
80,303

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

561,606

525,749

421,058

236,046

319,388

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . .

321,554
55,638

298,244
43,179

231,237
38,643

101,000
40,680

155,027
54,404

Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . .

377,192

341,423

269,880

141,680

209,431

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

184,414

184,326

151,178

94,366

109,957

. . . . . . . . . . . . . . . . . . . .
Research and development, net
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,048
57,785
23,381
—

87,728
51,345
23,603
—

64,303
37,180
20,707
—

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

175,214

162,676

122,190

Net gain on sale of interconnect hardware development
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net
. . . . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . .

—

9,200
(9)
506

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Benefit (provision) for income taxes . . . . . . . . . . . . . . . .

9,697
52,626

— 139,068

21,650
(1,378)
757

21,029
11,194

168,056
472
204

168,732
(7,491)

49,452
26,134
15,840
1,783

93,209

—

1,157
(989)
(33)

135
14,194

43,618
31,085
17,767
—

92,470

—

17,487
(766)
219

16,940
(1,878)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,323

$ 32,223

$ 161,241

$ 14,329

$ 15,062

Net income per common share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average outstanding shares:

$

$

1.61

1.54

$

$

0.85

0.81

$

$

4.42

4.27

$

$

0.41

0.40

$

$

0.44

0.43

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,634

37,832

36,509

35,122

34,313

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40,435

39,776

37,789

36,072

35,278

Cash Flow Data:

Cash provided by (used in):

Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Purchases of property and equipment

$ (58,109) $ (87,350) $ 156,892
37,694
27,211
7,827
(93)
8,652
14,242
10,843
13,136

(22,755)
(70)
16,324
17,193

$ (3,823) $ (49,164)
500
933
9,431
3,736

(4,779)
1,462
8,601
4,916

Balance Sheet Data:
Cash, cash equivalents, restricted cash and investments . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$145,796
361,614
651,434
453,854

$220,449
334,928
603,366
375,587

$ 323,205
283,352
510,314
340,546

$ 54,187
137,733
283,099
166,814

$ 61,295
125,377
260,628
145,821

25

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below includes “forward-looking statements” as described in the section “Forward-Looking
Statements” preceding Part I of this annual report on Form 10-K, and is subject to the safe harbor created by
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Our actual results could differ materially from those anticipated in these forward-looking statements
for many reasons, including the risks faced by us and described in Item 1A. Risk Factors in Part I and other
sections of this report and our other filings with the Securities and Exchange Commission. The following
discussion should also be read in conjunction with the Consolidated Financial Statements and accompanying
Notes thereto.

Overview and Executive Summary

We design, develop, manufacture, market and service the high-end of the high-performance computing, or
HPC, market, primarily categories of systems commonly known as supercomputers and provide storage and
analytics solutions. We also provide software, system maintenance and support services and engineering services
related to supercomputer systems and our storage and data analytics solutions. Our customers include domestic
and foreign government and government-funded entities, academic institutions and commercial entities. Our key
target markets are the supercomputing portion of the HPC market and the expanding storage and analytics
market. We provide customer-focused solutions based on three models: (1) highly integrated supercomputing and
storage solutions, complete with highly tuned software, that stress capability, scalability, sustained performance
and reliability at scale; (2) flexible commodity-based “cluster” supercomputing and storage solutions based upon
utilizing best-of-breed components and working with our customers to define solutions that meet specific needs;
and (3) turn-key analytic solutions featuring industry standards and innovative graph technologies. All of our
solutions also emphasize total cost of ownership, scalable price-performance and data center flexibility as key
features. Our continuing strategy is to gain market share in the supercomputer market segment, extend our
technology leadership, maintain our focus on execution and profitability and grow by continuing to expand our
addressable market in areas where we can leverage our experience and technology, such as in high performance
storage systems and powerful analytic tools for large volumes of data, popularly referred to as “big data”. We
requirements by combining supercomputing, cluster, storage and analytics
also meet diverse customer
technologies described above,
into unique solutions offerings that work in a workflow-driven datacenter
environment.

Summary of 2014 Results

Total revenue increased by $35.9 million in 2014 compared to 2013, from $525.7 million to $561.6 million.
Product revenue increased by $24.4 million and service revenue increased by $11.4 million over the same period.
The increase in product revenue was principally the result of a higher volume of Supercomputing acceptances,
partially due to the release of our new Cray XC40 and CS400 systems, as well as increased revenues from our
Storage and Data Management business. Service revenue increased due to higher maintenance revenue generated
from our larger installed base of systems.

Product gross profit margin decreased from 32% in 2013 to 30% in 2014. Product gross profit margin
decreased principally due to a higher portion of our revenue being generated by our Cray CS products, which
typically carry lower margins. Gross profit margin from services decreased from 52% in 2013 to 45% in 2014
primarily due to increases in compensation cost due to a higher number of support personnel to support growth in
systems installations, higher third party costs for our engineering services contracts, and severance costs due to a
workforce rebalancing.

We recorded income from operations of $9.2 million in 2014 compared to income from operations of $21.7
million in 2013. The decrease in income from operations was primarily attributable to lower gross profit margin
percentages and an increase in operating expenses of $12.5 million. Operating expenses increased principally due
to additional investments in research and development activities and increased sales and marketing costs.

26

Net income increased from $32.2 million in 2013 to $62.3 million in 2014, primarily driven by the $55.7
million reduction of substantially all of the valuation allowance held against our U.S. deferred tax assets in 2014,
partially offset by the decrease in operating income discussed above.

Net cash used in operations during 2014 was $58.1 million, as compared to net cash used in operations of
$87.4 million in 2013. Net cash used in operations during 2014 was primarily driven by an increase in inventory
of $54.1 million, due to several system builds that we expect to accept early in 2015. Working capital increased
by $26.7 million from $334.9 million at December 31, 2013 to $361.6 million at December 31, 2014.

Market Overview and Challenges

Significant trends in the HPC industry include:

• Supercomputing with many-core commodity processors driving increasing scalability requirements;

• Increased micro-architectural diversity,

including increased usage of many-core processors and

accelerators, as the rate of per-core performance increases slows;

• Data needs growing much faster than computational needs;

• Technology innovations in memory and storage allowing for faster data access such as NVRAM, SSDs

and flash devices;

• The commoditization of HPC hardware, particularly processors and system interconnects;

• The growing commoditization of software, including plentiful building blocks and more capable open

source software;

• Electrical power requirements becoming a design constraint and driver in total cost of ownership

determinations;

• Increasing use of analytics technologies (Hadoop, Spark, NoSQL and Graph) in both the HPC and big

data markets; and

• Cloud computing for cost-effective computing on loosely-coupled HPC applications.

Several of these trends have resulted in the expansion and acceptance of loosely-coupled cluster systems
using processors manufactured by Intel, AMD and others combined with commercially available, commodity
networking and other components, particularly in the middle and lower segments of the HPC market. These
systems may offer higher theoretical peak performance for equivalent cost, and “price/peak performance” is
sometimes the dominant factor in HPC procurements. Vendors of such systems often put pricing pressure on us
in competitive procurements.

In the market for the largest, and most scalable systems, those often costing in excess of $3 million, the use
of generally available network components can result in increasing data transfer bottlenecks as these components
do not balance processor power with network communication capability. With the arrival of increasing processor
core counts due to new many-core processors,
these unbalanced systems will typically have even lower
productivity, especially in larger systems running more complex applications. We augment standard
microprocessors with other processor types, such as graphics processing units and many-core attached
processors, in order to increase computational power, further complicating programming models. In addition,
with increasing scale, bandwidth and processor core counts, large computer systems use progressively higher
amounts of power to operate and require special cooling capabilities.

To position ourselves to meet the market’s demanding needs, we concentrate our research and development
efforts on technologies that enable our supercomputers to perform at scale — that is, to continue to increase
actual performance as systems grow ever larger in size — and in areas where we can leverage our core expertise
in other markets whose applications demand these tightly-coupled architectures. We also have demonstrated
expertise in several processor technologies. We expect to be in a comparatively advantageous position as larger
many-core processors become available and as multiple processing technologies become integrated into single
systems in heterogeneous environments. In addition, we have continued to expand our addressable market by

27

leveraging our technologies, customer base, the Cray brand and industry trends by introducing complementary
products and services to new and existing customers, as demonstrated by our emphasis on strategic initiatives,
such as storage and data management and “big data” analytics.

In storage, we are developing and delivering high value products for the high performance storage and data
archiving markets. Cray storage products are primarily positioned to enable tight integration of storage to
computing solutions and/or utilize parallel file processing technologies and facilitate storage across multiple data
tiers. We support open source parallel file systems and protocol such as Lustre and are a founding member of the
OpenSFS (Open Scalable File System) consortia for Lustre.

In analytics, we are developing and delivering high performance data discovery and advanced analytics
solutions. These solutions compete with open source software, running on commodity cluster systems. Although
these competitive systems have low acquisition costs, the total cost of ownership, or TCO, is driven up by
management, power and efficiency challenges. We concentrate our efforts on developing solutions that minimize
the TCO, delivering faster time-to-solution and advanced capabilities that are key drivers for many of our data
analytics customers.

We have also expanded our addressable market by providing cluster systems and solutions to the
supercomputing market that allow us to offer flexible platforms to incorporate best of breed components to allow
customers to optimize the system to fit their unique requirements.

Key Performance Indicators

Our management monitors and analyzes several key performance indicators in order to manage our business

and evaluate our financial and operating performance, including:

Revenue. Product revenue generally constitutes the major portion of our revenue in any reporting period
and, for the reasons discussed in this annual report on Form 10-K, is subject to significant variability from period
to period. In the short term, we closely review the status of product shipments, installations and acceptances in
order to forecast revenue and cash receipts; longer-term, we monitor the status of the pipeline of product sales
opportunities and product development cycles. We believe product revenue growth measured over several
quarters is a better indicator of whether we are achieving our objective of increased market share in the
supercomputing market. The introduction of the Cray XC and Cray CS products, along with our longer-term
product roadmap are efforts to increase product revenue. We are also increasing our business and product
development efforts in storage and data management along with big data analytics. Maintenance service revenue
is more constant in the short term and assists, in part, to offset the impact that the variability in product revenue
has on total revenue.

Gross profit margin. Product gross profit margin decreased from 32% in 2013 to 30% in 2014. Product gross
profit margin decreased principally due to a higher portion of our revenue being generated by our Cray CS products
which typically carry lower margins. Gross profit margin from services decreased from 52% in 2013 to 45% in
2014 primarily due to increases in compensation cost due to a higher number of support personnel to support
growth in systems installations, higher third party costs for our engineering services contracts, and severance costs
due to a workforce rebalancing. Total gross profit margin decreased from 35% in 2013 to 33% in 2014.

Operating expenses. Our operating expenses are driven largely by headcount, the level of recognized co-
funding for research and development, contracted third-party research and development services, and incentive
compensation expense. As part of our ongoing efforts to control operating expenses, we monitor headcount levels
in specific geographic and operational areas. Operating costs increased as we made significant investments in
research and development and sales and marketing to support the growth in 2014 and position us for growth in
the future.

Liquidity and cash flows. Due to the variability in product revenue, new contracts, and payment terms, our
cash position also varies significantly from quarter-to-quarter and within a quarter. We monitor our expected
cash levels, particularly in light of increased inventory purchases for large system installations and the risk of
delays in product shipments and acceptances and, longer-term, in product development. Cash receipts generally
lag customer acceptances and, because we had a number of large customer acceptances in the fourth quarter of
2014, we anticipate significant cash receipts in the first quarter of 2015.

28

Results of Operations

Revenue and Gross Profit

Our product and service revenue for the indicated years ended December 31 were (in thousands, except for

percentages):

Year Ended December 31,
2013

2012

2014

Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .

$460,748
321,554

$436,330
298,244

$353,767
231,237

Product gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$139,194

$138,086

$122,530

Product gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30%

32%

35%

$100,858
55,638

$ 89,419
43,179

$ 67,291
38,643

Service gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 45,220

$ 46,240

$ 28,648

Service gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45%

52%

43%

$561,606
377,192

$525,749
341,423

$421,058
269,880

Total gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$184,414

$184,326

$151,178

Total gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33%

35%

36%

Product Revenue

Product revenue in 2014 increased by $24.4 million, or 6%, over 2013 in part due to the release of our new
Cray XC40 and CS400 systems. CS based revenue increased substantially in 2014 and revenues from our Storage
and Data Management business also increased year over year.

Product revenue in 2013 increased by $82.6 million, or 23%, over 2012 principally as the result of the
strong acceptance in the market of our Cray XC30 and CS300 products as well as increased revenues from our
Storage and Data Management business.

Service Revenue

Service revenue for 2014 increased by $11.4 million from 2013, or 13%. Approximately 75% of the $11.4
million increase in service revenue for 2014 resulted from growth in our maintenance and support services due to
our larger installed system base. Engineering service revenue also increased in 2014.

Service revenue for 2013 increased by $22.1 million from 2012, or 33%. Approximately 70% of the $22.1
million increase in service revenue for 2013 resulted from growth in our maintenance and support services due to
our larger installed system base. Engineering service revenue also increased in 2013.

Cost of Product Revenue and Product Gross Profit

Cost of product revenue for 2014 increased by $23.3 million compared to 2013 driven primarily by higher
product revenue. Product gross profit percentage was 30% in 2014 and 32% in 2013. The 2014 product gross
profit margin was impacted by a higher portion of our revenue being generated by our Cray CS products which
typically carry lower margins.

Cost of product revenue for 2013 increased by $67.0 million compared to 2012 driven by significantly
higher product revenue. Product gross profit percentage was 32% in 2013 and 35% in 2012. The 2013 product
gross profit margin was impacted by higher than anticipated costs on the second phase of the upgrade at Oak
Ridge National Laboratory, aggressive pricing, fluctuations in foreign currency rates and lower margins on our
Cray CS products that were also impacted by $3 million in amortization and other acquisition adjustments.

29

Cost of Service Revenue and Service Gross Profit

Cost of service revenue increased by $12.5 million in 2014 driven primarily by higher service revenue.
Service gross profit margin decreased by seven percentage points to 45% in 2014 compared to 2013. The service
gross profit margin decreased primarily due to increases in compensation cost due to a higher number of support
personnel to support growth in systems installations, higher third party costs for our engineering services
contracts and third party products, and severance costs due to a workforce rebalancing.

Cost of service revenue increased by $4.5 million and service gross profit margin increased by nine
percentage points to 52% in 2013 compared to 2012. The service gross profit margin increased due to higher
maintenance revenue from our larger installed system base where expense growth was slower and benefited from
economies in cost structure.

Operating Expenses

Research and Development

Research and development expenses for the indicated years ended December 31 were as follows (in

thousands, except for percentages):

Year Ended December 31,
2013

2014

2012

Gross research and development expenses . . . . . . . . . . . . . . . . . . .
Less: Amounts included in cost of revenue . . . . . . . . . . . . . . . . . .
Less: Reimbursed research and development (excludes amounts

$104,797
(7,713)

$92,469
(3,741)

$ 86,305
(1,080)

in revenue)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,036)

(1,000)

(20,922)

Net research and development expenses . . . . . . . . . . . . . . . . . . . .

$ 94,048

$87,728

$ 64,303

Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17%

17%

15%

Gross research and development expenses in the table above reflect all research and development
expenditures. Research and development expenses include personnel expenses, depreciation, allocations for
overhead expenses, software, prototype materials and outside contracted expenses.

In 2014, gross research and development expenses increased by $12.3 million from 2013 levels primarily
due to increased investments in the development of new products. We increased our average headcount which
resulted in higher compensation costs of $4.6 million. The increase in total compensation costs also included the
impact of increased share based compensation costs, offset by a decrease in incentive compensation costs. We
also incurred an additional $4.1 million in software and materials purchases, depreciation and benchmarking
costs when compared to 2013 and an additional $2.8 million in outside services.

In 2013, gross research and development expenses increased by $6.2 million from 2012 levels primarily due
to increased investments in the development of new products for our new initiatives, principally big data
analytics. Reimbursed research and development decreased $19.9 million in 2013 compared to 2012 primarily
due to the completion of the DARPA HPCS Phase III project in 2012.

Other Operating Expenses

Our sales and marketing and general and administrative expenses for

the indicated years ended

December 31 were (in thousands, except for percentages):

Year Ended December 31,
2012
2013
2014

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,785 $51,345 $37,180
9%
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,381 $23,603 $20,707

Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10%

10%

Percentage of total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4%

4%

5%

30

Sales and Marketing. The $6.4 million increase in sales and marketing expenses in 2014 compared to
2013 was primarily due to an increase in salaries and employee-related expenses in connection with the
expansion of our sales force. Compensation costs increased by $3.3 million and included the impact of increased
share based compensation costs, offset by a decrease in incentive compensation costs. We also incurred an
additional $0.6 million in marketing program costs, $0.5 million in outside services and $1.3 million in
benchmarking costs when compared to 2013.

The $14.2 million increase in sales and marketing expenses in 2013 compared to 2012 was primarily due to
an increase in salaries and employee-related expenses in connection with the expansion of our sales force and as
a result of our acquisition of Appro International, Inc., or Appro.

General and Administrative. The $0.2 million decrease in general and administrative expenses in 2014
compared to 2013 was primarily due to a $1.7 million decrease in outside services, partially offset by increased
compensation expense of $1.2 million, when compared to 2013, due to a year over year increase in headcount to
support the growth in the business. The increase in total compensation costs also included the impact of increased
share based compensation costs, offset by a decrease in incentive compensation costs.

The $2.9 million increase in general and administrative expenses in 2013 compared to 2012 was partly due
to increased employee-related expenses, including the addition of employees related to our acquisition of Appro.
This was partially offset by lower incentive-based compensation.

Sale of Interconnect Hardware Development Program

On May 2, 2012, we sold our interconnect hardware development program to Intel for cash consideration of
$140 million. As part of the transaction, 73 of our employees joined Intel, and certain intellectual property and
fixed assets were transferred to Intel. We retained certain rights to use the transferred assets and intellectual
property. As a result of the sale, we recorded a gain of $139.1 million for the year ended December 31, 2012.

Other Income (Expense), Net

We recorded $9,000 and $1.4 million of net other expense and $0.5 million of net other income for the years
ended December 31, 2014, 2013 and 2012, respectively. Net other income and expense includes gains and losses
from foreign currency transactions, investments and disposals of assets.

Interest Income, Net

Our interest income and interest expense for the years ended December 31 were (in thousands):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 643
(137)

$ 894
(137)

$ 397
(193)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 506

$ 757

$ 204

Year Ended December 31,
2012
2013
2014

Interest income in 2014 decreased as compared to 2013 due to lower average investment balances and a
higher proportion of investments held in short-term money market funds which typically carry a lower interest
rate. Interest income in 2013 increased as compared to 2012 due to higher average invested balances. Interest
expense decreased in 2013 as a result of changes in our credit arrangements. Interest expense in 2014 was in line
with the prior year comparative period.

31

Taxes

We recorded income tax benefit (expense) for the years ended December 31 as follows (in thousands):

Year Ended December 31,
2013

2012

2014

Net income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,697
52,626

$21,029
11,194

$168,732
(7,491)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$62,323

$32,223

$161,241

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

543%

53%

(4)%

The difference between the income tax provision at the federal statutory rate of 35% and our income tax
benefit at the effective income tax rate of 543% for the year ended December 31, 2014 was attributable to our
decision to reduce substantially all of the remaining valuation allowance that was held against our U.S. deferred
tax assets. The difference between the income tax provision at the federal statutory rate of 35% and our income
tax benefit at the effective rate of 53% for the year ended December 31, 2013 was primarily attributable to a
partial reduction, in the amount of $13.5 million, of the valuation allowance held against our U.S. deferred tax
assets. The primary reason for the difference between the federal statutory rate and our effective income tax rate
for the year ended December 31, 2012 was that the gain from the sale of our interconnect hardware development
program did not result in significant income tax expense. We had existing deferred tax assets that were subject to
valuation allowances and deductible temporary differences that were previously unrecognized. The sale of the
interconnect hardware development program was never anticipated in previous evaluations of the realizability of
our deferred tax assets and consequently the sale, together with a tax benefit that was recognized as a result of
restructuring a subsidiary, resulted in our ability to experience a relatively small tax consequence from the sale.

Our decision to reduce substantially all of the remaining valuation allowance held against our U.S. deferred
tax assets during the year ended December 31, 2014 was based upon an evaluation of all available positive and
negative evidence, known business risks and industry trends. During the year ended December 31, 2014, we
reduced the valuation allowance held against our U.S. deferred tax assets by $55.7 million based upon an
assessment of all positive and negative evidence relating to future years. We consider our actual results over
several years to have stronger weight
including forecasts, when
considering whether or not to establish or reduce a valuation allowance on deferred tax assets and believe that
our ability to forecast results significantly into the future is severely limited due to the rapid rate of technological
and competitive change in the industry in which we operate. As of December 31, 2014 we had generated U.S.
pre-tax income in each of the last three years and cumulative U.S. pre-tax income of $184.8 million ($51.1
million excluding the impact of the sale of our interconnect hardware development program) over the last three
years. In addition to our cumulative income position, the assessment of our ability to utilize our U.S. deferred tax
assets included an assessment of forecasted domestic and international earnings over a number of years, which
included the impact of several major contracts that were finalized during the fourth quarter of 2014.

than other more subjective indicators,

During the year ended December 31, 2013, we reduced the valuation allowance held against our deferred
tax assets by $13.5 million due to actual income from operations during the year ended December 31, 2013
exceeding amounts previously used in the evaluation of the realizability of our deferred tax assets at the
beginning of the year and based upon an assessment of all positive and negative evidence relating to future years.

During the year ended December 31, 2012 we reduced the valuation allowance held against our deferred tax
assets by $18.4 million as a result of the sale of our interconnect hardware development program. We further
reduced the valuation allowance held against our U.S. deferred tax assets by $10.7 million during the year ended
December 31, 2012 due to actual income from operations during the year ended December 31, 2012 exceeding
amounts previously used in the evaluation of the realizability of our deferred tax assets at the beginning of the
year and based upon an assessment of all positive and negative evidence relating to future years.

Our conclusion about the realizability of our deferred tax assets, and therefore the appropriateness of the
is reviewed quarterly and could change in future periods depending on our future

valuation allowance,

32

assessment of all available evidence in support of the likelihood of realization of our deferred tax assets. If our
conclusion about the realizability of our deferred tax assets and therefore the appropriateness of our valuation
allowance changes in a future period we could record a substantial tax provision or benefit in our Consolidated
Statement of Operations when that occurs.

As of December 31, 2014, we had U.S. federal net operating loss carryforwards of approximately $115.4
million, of which approximately $37.9 million was related to stock-based income tax deductions in excess of
amounts that have been recognized for financial reporting purposes, and federal research and development tax
credit carryforwards of approximately $21.3 million. The federal net operating loss carryforwards will expire
between 2019 through 2031, and the research and development tax credits will expire from 2021 through 2034 if
not utilized.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all
existing revenue recognition guidance under generally accepted accounting principles in the United States of
America, or GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration that is expected to be received
for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing
so, it is possible more judgment and estimates may be required within the revenue recognition process than
required under existing GAAP including identifying performance obligations in the contract, estimating the
amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 is effective for the fiscal and interim reporting periods beginning
after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented
with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the
cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing
certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our
pending adoption of ASU 2014-09 on our consolidated financial statements.

Liquidity and Capital Resources

We generate cash from operations predominantly from the sale of supercomputing systems and related
services. We typically have a small number of significant contracts that make up the majority of total revenue.
We also recently entered into a sales-type lease agreement with a customer, under which we will receive
quarterly payments over the next four years. The material changes in certain of our balance sheet accounts were
due to the timing of product deliveries, customer acceptances, contractually determined billings and cash
collections. Working capital requirements, including inventory purchases and normal capital expenditures, are
generally funded with cash from operations.

Total cash and investments decreased from $220.4 million at December 31, 2013 to $145.8 million at
December 31, 2014, principally due to increased inventory at December 31, 2014 related to several systems that
we expect customer acceptance to occur early in 2015. At the end of both 2014 and 2013 we had significant
accounts receivable balances of $165.1 million and $182.5 million due to the large amount of revenue we
recorded in the fourth quarter of each respective year. We anticipate that cash will increase in the first half of
2015 as we collect on outstanding accounts receivable for systems accepted at the end of the fourth quarter of
2014.

As of December 31, 2014, we had $16.9 million in restricted cash associated with certain letters of credit

outstanding to secure customer prepayments.

As of December 31, 2014, we had working capital of $361.6 million compared to $334.9 million as of

December 31, 2013.

33

Cash flow information for the years ended December 31 included the following (in thousands):

Cash (used in) provided by:

Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(58,109)
(22,755)
(70)

$(87,350)
27,211
(93)

$156,892
37,694
7,827

2014

2013

2012

Operating Activities. For the year ended December 31, 2014, cash used in operating activities was
primarily driven by an increase in inventory of $54.1 million, due to several system builds that we expect to
accept early in 2015. For the year ended December 31, 2013, cash used in operating activities was principally the
result of significant increases in accounts receivables. For the year ended December 31, 2012, cash provided by
operating activities was principally the result of significant decreases in accounts receivable and increases in
deferred revenue.

Investing Activities. For the year ended December 31, 2014, cash used in investing activities was
principally due to purchases of investments and property and equipment of $56.1 million and $17.2 million,
respectively, partially offset by sales and maturities of investments of $53.6 million. For the year ended
December 31, 2013, net cash provided by investing activities was due principally to sales and maturities of
investments of $139.3 million, partially offset by purchases of investments of $85.2 million. For the year ended
December 31, 2012, net cash provided by investing activities was due principally to the sale of our interconnect
hardware development program to Intel for $139.2 million, net of direct transaction costs, partially offset by
purchases of investments of $70.2 million and the acquisition of Appro of $24.2 million, net of cash acquired.

Financing Activities. Net cash used in or provided by financing activities in 2014, 2013 and 2012 resulted
primarily from cash received from the issuance of common stock from exercises of options and from the issuance
of stock through our employee stock purchase plan, offset by payments of statutory tax withholding amounts
made in exchange for the forfeiture of common stock by holders of vesting restricted stock awards.

Over the next twelve months, we expect our significant cash requirements will relate to operational expenses,
consisting primarily of personnel costs, costs of inventory associated with certain large-scale product deliveries,
spare parts, outside engineering expenses, and the acquisition of property and equipment. In addition, we lease
certain equipment and facilities used in our operations under operating leases in the normal course of business.

The following table summarizes our contractual cash obligations as of December 31, 2014 (in thousands):

Contractual Obligations

Total

1 Year

Years 2-3 Years 4-5 Thereafter

Development agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,956
37,624

$ 6,856
5,097

$

50
9,325

$

50
8,639

$ —
14,563

Total contractual cash obligations . . . . . . . . . . . . . . . . . . . .

$44,580

$11,953

$9,375

$8,689

$14,563

Amounts Committed by Year

As of December 31, 2014, we had a $10.0 million unsecured line of credit with Wells Fargo Bank, National
Association and an $11.0 million letter of credit facility with Silicon Valley Bank. Both facilities are designed to
support the issuance of letters of credit and foreign exchange hedging transactions. The Wells Fargo Bank,
National Association credit facility matures in October 2015 and the Silicon Valley Bank credit facility matures
in December 2015. We made no draws and had no outstanding cash borrowings on any lines of credit as of
December 31, 2014.

As of December 31, 2014, we had $13.5 million in outstanding letters of credit and $16.9 million in
restricted cash associated with certain letters of credit to secure customer prepayments and other customer related
obligations.

In our normal course of operations, we have development arrangements under which we engage outside
engineering resources to work on our research and development projects. For the year ended December 31, 2014,
we incurred $12.2 million for such arrangements.

34

At any particular time, our cash position is affected by the timing of cash receipts for product sales,
maintenance contracts, other service contracts, and our payments for inventory, resulting in significant
fluctuations in our cash balance from quarter-to-quarter and within a quarter. Our principal sources of liquidity
are our cash and cash equivalents, short-term investments and cash from operations. We expect our cash
resources to be adequate for at least the next twelve months.

Beyond the next twelve months, the adequacy of our cash resources will largely depend on our success in

achieving profitable operations and positive operating cash flows on a sustained basis.

Critical Accounting Policies and Estimates

This discussion as well as disclosures included elsewhere in this annual report on Form 10-K are based upon
our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingencies. In preparing our financial statements in
accordance with GAAP, there are certain accounting policies that are particularly important. These include
revenue recognition, inventory valuation, income taxes, research and development expenses and share-based
compensation. We believe these accounting policies and others set forth in Note 2 — Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements in Item 15. Exhibits and Financial
Statement Schedules in Part IV of this annual report should be reviewed as they are integral to understanding our
results of operations and financial condition. In some cases, these policies represent required accounting. In other
cases, they may represent a choice between acceptable accounting methods or may require substantial judgment
or estimation.

Additionally, we consider certain judgments and estimates to be significant, including those relating to the
estimated selling price determination used in revenue recognition, percentage of completion accounting,
estimates of proportional performance on co-funded engineering contracts, collectibility of receivables and
prepaid engineering services, determination of inventory at the lower of cost or market, useful lives for
depreciation and amortization, determination of future cash flows associated with impairment testing of long-
lived assets, including goodwill and other intangibles, determination of the implicit interest rate used in the sales-
type lease calculation, estimated warranty liability, determination of the fair value of stock options and other
assessments of fair value, calculation of deferred income tax assets, including estimates of future financial
performance in the determination of the likely recovery of deferred income tax assets, our ability to utilize such
assets, potential income tax assessments and other contingencies. We base our estimates on historical experience,
current conditions and on other assumptions that we believe to be reasonable under the circumstances. Actual
results may differ materially from these estimates and assumptions.

Our management has discussed the selection of significant accounting policies and the effect of judgments

and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue, including transactions under sales-type leases, when it is realized or realizable and
earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an
arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably
assured. Delivery does not occur until the products have been shipped or services provided to the customer, risk
of loss has transferred to the customer, and, where applicable, a customer acceptance has been obtained. The
sales price is not considered to be fixed or determinable until all material contingencies related to the sales have
been resolved. We record revenue in the Consolidated Statements of Operations net of any sales, use, value
added or certain excise taxes imposed by governmental authorities on specific sales transactions. In addition to
the aforementioned general policy, the following are our statements of policy with regard to multiple-element
arrangements and specific revenue recognition policies for each major category of revenue.

Multiple-Element Arrangements. We commonly enter into revenue arrangements that include multiple
deliverables of our product and service offerings due to the needs of our customers. Product may be delivered in
phases over time periods which can be as long as five years. Maintenance services generally begin upon

35

acceptance of the first equipment delivery and future deliveries of equipment generally have an associated
maintenance period. We consider the maintenance period to commence upon acceptance of the product or
installation in situations where a formal acceptance is not required, which may include a warranty period and
accordingly allocate a portion of the arrangement consideration as a separate deliverable which is recognized as
service revenue over the entire service period. Other services such as training and engineering services can be
delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement is separated into
more than one unit of accounting if the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis; and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or

performance of the undelivered item(s) is considered probable and substantially in our control.

If these criteria are met for each element, the arrangement consideration is allocated to the separate units of
accounting based on each unit’s relative selling price. If these criteria are not met, the arrangement is accounted
for as one unit of accounting which would result in revenue being recognized ratably over the contract term or
being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.

We follow a selling price hierarchy in determining the best estimate of the selling price of each deliverable.
Certain products and services are sold separately in standalone arrangements for which we are sometimes able to
determine vendor specific objective evidence, or VSOE. We determine VSOE based on normal pricing and
discounting practices for the product or service when sold separately.

When we are not able to establish VSOE for all deliverables in an arrangement with multiple elements, we
attempt to establish the selling price of each remaining element based on third-party evidence, or TPE. Our
inability to establish VSOE is often due to a relatively small sample of customer contracts that differ in system
size and contract terms which can be due to infrequently selling each element separately, not pricing products
within a narrow range, or only having a limited sales history, such as in the case of certain advanced and
emerging technologies. TPE is determined based on our prices or competitor prices for similar deliverables when
sold separately. However, we are often unable to determine TPE, as our offerings usually contain a significant
level of customization and differentiation from those of competitors and we are often unable to reliably
determine what similar competitor products’ selling prices are on a standalone basis.

When we are unable to establish selling price using VSOE or TPE, we use estimated selling price, or ESP,
in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would
transact a sale if the product or service were sold on a standalone basis. In determining ESP, we use the cost to
provide the product or service plus a margin, or consider other factors. When using cost plus a margin, we
consider the total cost of the product or service, including customer-specific and geographic factors. We also
consider the historical margins of the product or service on previous contracts and several factors including any
changes to pricing methodologies, competitiveness of products and services and cost drivers that would cause
future margins to differ from historical margins.

Products. We most often recognize revenue from sales of products upon delivery or customer acceptance
of the system. Where formal acceptance is not required, we recognize revenue upon delivery or installation.
When the product
is part of a multiple element arrangement, we allocate a portion of the arrangement
consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These
contracts generally provide for maintenance services for one year, although some are for multi-year periods,
often with prepayments for the term of the contract. We consider the maintenance period to commence upon
acceptance of the product or installation in situations where a formal acceptance is not required, which may
include a warranty period. When service is part of a multiple element arrangement, we allocate a portion of the
arrangement consideration to maintenance service revenue based on estimates of selling price. Maintenance
contracts that are billed in advance of revenue recognition are recorded as deferred revenue. Maintenance
revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

36

Project Revenue. Revenue from design and build contracts is recognized under the percentage-of-
completion (or POC method). Under the POC method, revenue is recognized based on the costs incurred to date
as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original
estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These
revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in
income in the period in which the circumstances that gave rise to the revision become known by management.
We perform ongoing profitability analyses of our contracts accounted for under the POC method in order to
determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any time
these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the
contract is recorded immediately.

We record revenue from certain research and development contracts which include milestones using the
milestone method if the milestones are determined to be substantive. A milestone is considered to be substantive
if management believes there is substantive uncertainty that it will be achieved and the milestone consideration
meets all of the following criteria:

• It is commensurate with either of the following:

• Our performance to achieve the milestone; or

• The enhancement of value of the delivered item or items as a result of a specific outcome resulting

from our performance to achieve the milestone.

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms (including other potential milestone

consideration) within the arrangement.

The individual milestones are determined to be substantive or non-substantive in their entirety and milestone

consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work

performed.

Nonmonetary Transactions. We value and record nonmonetary transactions at the fair value of the asset
surrendered unless the fair value of the asset received is more clearly evident, in which case the fair value of the
asset received is used.

Sales-type leases

When we lease a system to a customer, the accounting involves specific determinations, which often involve
complex provisions and significant judgments. The four criteria of the accounting standard that we use in the
determination of whether a lease is a sales-type lease or an operating lease are: (a) a review of the lease term to
determine if it is equal to or greater than 75% of the economic life of the system; (b) a review of the minimum
lease payments to determine if they are equal to or greater than 90% of the fair value of the system; (c) a
determination of whether or not the lease transfers ownership to the lessee at the end of the lease term; and (d) a
determination of whether or not the lease contains a bargain purchase option. If the lease transaction meets one of
the four criteria, then it is recorded as a sales-type lease; otherwise it is an operating lease. Additionally, we
assess whether collectibility of the lease payments is reasonably assured and whether there are any significant
uncertainties related to costs that it has yet to incur with respect to the lease.

We consider the economic lives of most of our products to range from three to four years. There is no
significant after-market for our used products and we believe that the economic lives are representative of the
periods during which our products are expected to be economically usable, with normal service, for the purposes
for which they were intended. Residual values are not significant.

The discount rate implicit in the sales-type lease is used to calculate the present value of minimum lease
payments, which we record as a lease receivable. The minimum lease payment consists of the gross lease
payments net of executory costs and contingencies, if any. While revenue is recognized at the inception of the

37

lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income.
Unearned interest income is recorded at the inception of the lease and amortized over the lease term using the
effective interest method.

Inventory Valuation

We record our inventory at the lower of cost or market. We regularly evaluate the technological usefulness
and anticipated future demand for our inventory components. Due to rapid changes in technology and the
increasing demands of our customers, we are continually developing new products. Additionally, during periods
of product or inventory component upgrades or transitions, we may acquire significant quantities of inventory to
support estimated current and future production and service requirements. As a result, it is possible that older
inventory items we have purchased may become obsolete, be sold below cost or be deemed in excess of
quantities required for production or service requirements. When we determine it is not likely we will recover the
cost of inventory items through future sales, we write-down the related inventory to our estimate of its market
value.

Because the products we sell have high average sales prices and because a high number of our prospective
customers receive funding from U.S. or foreign governments, it is difficult to estimate future sales of our
products and the timing of such sales. It also is difficult to determine whether the cost of our inventories will
ultimately be recovered through future sales. While we believe our inventory is stated at the lower of cost or
market and that our estimates and assumptions to determine any adjustments to the cost of our inventories are
reasonable, our estimates may prove to be inaccurate. We have sold inventory previously reduced in part or in
whole to zero, and we may have future sales of previously written-down inventory. We also may have additional
expense to write-down inventory to its estimated market value. Adjustments to these estimates in the future may
materially impact our operating results.

Accounting for Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or
settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not
that all or a portion of the deferred tax assets will not be realized through future operations. This assessment is
based upon consideration of available positive and negative evidence, which includes, among other things, our
recent results of operations and expected future profitability. We consider our actual historical results over
including forecasts, when
several years to have stronger weight
considering whether to establish or reduce a valuation allowance on deferred tax assets. We have significant
difficulty projecting future results due to the nature of the business and the industry in which we operate.

than other more subjective indicators,

We recognize the income tax benefit from a tax position only if it is more likely than not that the tax
position will be sustained on examination by the applicable taxing authorities, based on the technical merits of
our position. The tax benefit recognized in the financial statements from such a position is measured based on the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively.

As of December 31, 2014, we had approximately $87.6 million of net deferred tax assets, against which we
provided a $10.1 million valuation allowance, resulting in a net deferred tax asset of $77.5 million. During the
year ended December 31, 2014 we reduced substantially all of the remaining valuation allowance held against
our U.S. deferred tax assets. The assessment of our ability to utilize our deferred tax assets included an
assessment of all known business risks and industry trends as well as forecasted domestic and international
earnings over a number of years. Our ability to forecast results significantly into the future is severely limited due
to the rapid rate of technological and competitive change in the industry in which we operate.

We continue to provide a valuation allowance against specific U.S. deferred tax assets and a full valuation
allowance against deferred tax assets arising in a limited number of foreign jurisdictions as the realization of such
assets is not considered to be more likely than not at this time. In a future period our assessment of the

38

realizability of our deferred tax assets and therefore the appropriateness of the valuation allowance could change
based on an assessment of all available evidence, both positive and negative in that future period. If our
conclusion about the realizability of our deferred tax assets and therefore the appropriateness of the valuation
allowance changes in a future period we could record a substantial tax provision or benefit in our Consolidated
Statement of Operations when that occurs.

Research and Development Expenses

Research and development expenses include costs incurred in the development and production of our
hardware and software, costs incurred to enhance and support existing product features, costs incurred to support
and improve our development processes, and costs related to future product development. Research and
development costs are expensed as incurred, and may be offset by co-funding from third parties. We may also
enter into arrangements whereby we make advance, non-refundable payments to a vendor to perform certain
research and development services. These payments are deferred and recognized over the vendor’s estimated
performance period.

Amounts to be received under co-funding arrangements with the U.S. government or other customers are
based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in
operations as performance is estimated to be completed and are measured as milestone achievements occur or as
costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the
near term. If an estimate is changed, net research and development expense could be impacted significantly.

We do not record a receivable from the U.S. government prior to completing the requirements necessary to
bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain budget
restrictions and milestones may be subject to completion risk, and as a result, there may be periods in which
research and development costs are expensed as incurred for which no reimbursement is recorded, as milestones
have not been completed or the U.S. government has not funded an agreement. Accordingly, there can be
substantial variability in the amount of net research and development expenses from quarter to quarter and year
to year.

We classify amounts to be received from funded research and development projects as either revenue or a
reduction to research and development expense based on the specific facts and circumstances of the contractual
arrangement, considering total costs expected to be incurred compared to total expected funding and the nature of
the research and development contractual arrangement. In the event that a particular arrangement is determined
to represent revenue, the corresponding costs are classified as cost of revenue.

Share-based Compensation

We measure compensation cost for share-based payment awards at fair value and recognize it as
compensation expense over the service period for awards expected to vest. We recognize share-based
compensation expense for all share-based payment awards, net of an estimated forfeiture rate. We recognize
compensation cost for only those shares expected to vest on a straight-line basis over the requisite service period
of the award.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards
requires subjective assumptions, including the expected life of the share-based payment awards and stock price
volatility. We utilize the Black-Scholes options pricing model to value the stock options granted under our
options plans. In this model, we utilize assumptions related to stock price volatility, stock option term and
forfeiture rates that are based upon both historical factors as well as management’s judgment.

The fair value of restricted stock is determined based on the number of shares granted and the quoted price

of our common stock at the date of grant.

We grant performance vesting restricted shares to executives as one of the ways to align compensation with
shareholder interests. Vesting of these awards is contingent upon achievement of certain performance conditions.
Compensation expense for these awards is only recognized when vesting is deemed to be probable.

39

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and equity price fluctuations.

Interest Rate Risk: We invest our available cash in money market mutual funds whose underlying
investments include investment-grade debt instruments of corporate issuers and in debt instruments of the
U.S. government and its agencies. We do not have any derivative instruments or auction rate securities in our
investment portfolio. We protect and preserve invested funds by limiting default, market and reinvestment risk.
Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk.
Fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while
floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors,
our future investment income may fall short of expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.
Although we have the above noted risks, a 0.5% change in interest rates would not be material.

Foreign Currency Risk: We sell our products primarily in North America, Asia and Europe. As a result,
our financial results could be affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Our products are generally priced based on U.S. dollars, and a
strengthening of the dollar could make our products less competitive in foreign markets. While we often sell
products with payments in U.S. dollars, our product sales contracts may call for payment in foreign currencies
and to the extent we do so, or engage with our foreign subsidiaries in transactions deemed to be either short-term
or long-term in nature, we are subject to foreign currency exchange risks.

As of December 31, 2014, we had entered into forward exchange contracts that were designated as cash
flow hedges that hedge approximately $192.5 million of anticipated cash receipts on specific foreign currency
denominated sales contracts. These forward contracts hedge the risk of foreign exchange rate changes between
the time that the related contracts were signed and when the cash receipts are expected to be received. As of
December 31, 2014, we had also entered into forward exchange contracts that were not designated as cash flow
hedges totaling $43.4 million in order to minimize the impact of foreign exchange rate changes on a $45.8
million intercompany balance that resulted from a sales-type lease agreement that was entered into by one of our
subsidiaries and a customer. Our foreign maintenance contracts are typically paid in local currencies and provide
a partial natural hedge against foreign exchange exposure. To the extent that we wish to repatriate any of these
funds to the United States, however, we are subject to foreign exchange risks. We do not hold or purchase any
currency forward exchange contracts for trading purposes. As of December 31, 2014, a hypothetical 10%
unfavorable change in foreign currency exchange rates would impact our annual operating results and cash flows
by approximately $1.1 million.

40

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS*

Consolidated Balance Sheets at December 31, 2014 and December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and

F-1
F-2

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-3

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and

F-4
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37

* The Financial Statements are located following page F-1.

The selected quarterly financial data required by this item is set forth in Note 22 of the Notes to

Consolidated Financial Statements.

41

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
management, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the
participation and under the supervision of our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer/Corporate Controller, evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report, and based on that evaluation, our Chief Executive Officer and
Chief Financial Officer determined that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the fourth quarter of
2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined by Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of
assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America,
and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Our management,

including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in
“Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2014.

Peterson Sullivan LLP, an independent registered public accounting firm, has expressed an unqualified

opinion on the effectiveness of our internal control over financial reporting as of December 31, 2014.

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Cray Inc.

We have audited Cray Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company’s
management
is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America,
and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of December 31, 2014 and 2013, and the
related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2014, and our report dated February 19, 2015,
expressed an unqualified opinion.

/S/ PETERSON SULLIVAN LLP

Seattle, Washington
February 19, 2015

43

Item 9B. Other Information

None.

Item 10. Directors, Executive Officers and Corporate Governance

PART III

The information required by this Item is contained in the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 10, 2015, and such information is incorporated herein by
reference.

Item 11. Executive Compensation

The information required by this Item is contained in the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 10, 2015, and such information is incorporated herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder

Matters

The information required by this Item is contained in the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 10, 2015, and such information is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is contained in the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 10, 2015, and such information is incorporated herein by
reference.

Item 14. Principal Accounting Fees and Services

The information required by this Item is contained in the proxy statement for our annual meeting of
shareholders scheduled to be held on or around June 10, 2015, and such information is incorporated herein by
reference.

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

PART IV

Consolidated Balance Sheets at December 31, 2014 and December 31, 2013

Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012

Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and

2012

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

(a)(2) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts — The financial statement schedule for the years ended
December 31, 2014, 2013 and 2012 should be read in conjunction with the consolidated financial statements of
Cray Inc. filed as part of this annual report on Form 10-K.

44

Schedules other than that listed above have been omitted since they are either not required, not applicable,

or because the information required is included in the consolidated financial statements or the notes thereto.

(a)(3) Exhibits

The Exhibits listed in the Exhibit Index, which appear immediately following the signature page and are
incorporated herein by reference, are filed as part of this annual report on Form 10-K. Each management contract
or compensatory plan or agreement listed on the Exhibit Index is identified by an asterisk.

45

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on February 19, 2015.

SIGNATURES

CRAY INC.

By

/s/ PETER J. UNGARO
Peter J. Ungaro
Chief Executive Officer and President

Each of the undersigned hereby constitutes and appoints Peter J. Ungaro, Brian C. Henry and Michael C.
Piraino and each of them, the undersigned’s true and lawful attorney-in-fact and agent, with full power of
substitution, for the undersigned and in his or her name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-K and any other instruments or documents that said attorneys-
in-fact and agents may deem necessary or advisable, to enable Cray Inc. to comply with the Securities Exchange
Act of 1934 and any requirements of the Securities and Exchange Commission in respect thereof, and to file the
same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents and each of them full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the Company and in the capacities indicated on February 19, 2015.

Signature

Title

By /s/ PETER J. UNGARO
Peter J. Ungaro

By /s/ BRIAN C. HENRY
Brian C. Henry

By /s/ CHARLES D. FAIRCHILD

Charles D. Fairchild

By /s/ PRITHVIRAJ BANJEREE

Prithviraj Banjeree

By /s/ STEPHEN C. KIELY
Stephen C. Kiely

By /s/ FRANK L. LEDERMAN

Frank L. Lederman

By /s/ SALLY G. NARODICK

Sally G. Narodick

By /s/ DANIEL C. REGIS
Daniel C. Regis

By /s/ STEPHEN C. RICHARDS

Stephen C. Richards

By /s/ MAX SCHIRESON
Max Schireson

46

Chief Executive Officer, President and Director
(Principal Executive Officer)

Chief Financial Officer and Executive Vice President
(Principal Financial Officer)

Chief Accounting Officer, Controller and Vice
President (Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

Director

EXHIBIT INDEX

Exhibit Description

Incorporated by Reference

Purchase Agreement

Asset
Intel
Corporation and the Company, dated April 24,
2012

between

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K 000-26820

04/25/12

2.1

Agreement and Plan of Merger by and among
Astro Acquisition Corp., Appro International, Inc.,
the Shareholders’ Agent and the Company, dated
November 8, 2012

8-K 000-26820

11/09/12

2.1

Exhibit
Number

2.1

2.2

3.1

3.2

3.3

3.3

3.1

3.1

4.1

4.2

Restated Articles of Incorporation

Amended and Restated Bylaws

8-K 000-26820

06/08/06

8-K 000-26820

02/12/07

First Amendment
Bylaws

to Amended and Restated

8-K 000-26820

04/19/12

10.0*

1999 Stock Option Plan

10.1*

2000 Non-Executive Employee Stock Option Plan

S-8

S-8

333-57970

03/30/01

333-57970

03/30/01

10.2* Amended and Restated 2001 Employee Stock

10-K 000-26820

03/04/11

10.28

Purchase Plan

10.3*

2003 Stock Option Plan

10.4*

2004 Long-Term Equity Compensation Plan

10.5*

2006 Long-Term Equity Compensation Plan

10.6*

2009 Long-Term Equity Compensation Plan

10.7*

2013 Equity Incentive Plan

000-26820

03/31/03

000-26820

03/24/04

000-26820

04/28/06

000-26820

03/31/09

000-26820

04/24/13

DEF
14A

DEF
14A

DEF
14A

DEF
14A

DEF
14A

A

B

B

A

A

10.8*

10.9*

Form of Officer Non-Qualified Stock Option
Agreement

10-K 000-26820

04/01/05

10.32

Form of Officer
Agreement

Incentive

Stock Option

10-K 000-26820

04/01/05

10.33

10.10* Form of Employee Restricted Stock Agreement

10-K 000-26820

03/09/07

10.11

10.11* Form of Director Restricted Stock Agreement

8-K 000-26820

06/08/06

8-K 000-26820

07/03/13

10.1

99.1

10.12* Form of 2013 Equity Incentive Plan Notice of
Stock Option Grant and Stock Option Award
Agreement

10.13* Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Award and Restricted Stock
Purchase Agreement

10.14* Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Award and Restricted Stock
Purchase Agreement

47

8-K 000-26820

07/03/13

99.2

8-K 000-26820

12/17/14

10.1

Exhibit
Number

Exhibit Description

Incorporated by Reference

10.15* Form of 2013 Equity Incentive Plan Notice of
Stock Option Grant and Stock Option Award
Agreement

10.16* Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Unit Award and Restricted Stock
Unit Award Agreement

10.17* Form of 2013 Equity Incentive Plan Notice of
Stock Appreciation Right Award Grant and Stock
Appreciation Right Award Agreement

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K 000-26820

12/17/14

10.2

8-K 000-26820

12/17/14

10.3

8-K 000-26820

12/17/14

10.4

10.18* Letter Agreement between the Company and Peter

8-K 000-26820

03/08/05

10.1

J. Ungaro, dated March 4, 2005

10.19* Offer Letter between the Company and Brian C.

10-Q 000-26820

11/09/05

10.1

Henry, dated May 16, 2005

10.20* Offer Letter between the Company and Steve

10-Q 000-26820

10/28/14

10.1

Scott, dated August 30, 2014

10.21* Form of Management Retention Agreement
entered into with executive officers prior
to
September 27, 2011 (including Annex A-1 and
Annex A-2 applicable only to Peter J. Ungaro and
Brian C. Henry)

10.22* Form of Management Retention Agreement
from

executive

officers

entered
September 27, 2011 forward

into with

8-K 000-26820

12/22/08

10.1

10-K 000-26820

02/13/14

10.20

10.23* Executive Severance Policy,

as

adopted on

8-K 000-26820

12/17/10

10.1

December 13, 2010

10.24* Amended and Restated Non-Employee Director

10-Q 000-26820

04/29/14

10.3

Compensation Policy

10.25* 2014 Executive Bonus Plan

10-Q 000-26820

04/29/14

10.26* Form of Indemnification Agreement

8-K 000-26820

02/08/11

8-K 000-26820

07/16/09

10.27

10.28

10.29

10.30

10.31

Lease Agreement between NEA Galtier, LLC and
the Company, dated as of July 2, 2009

First Amendment to Lease between NEA Galtier,
LLC and the Company, dated as of October 1,
2009

Second Amendment
to Lease between NEA
Galtier, LLC and the Company, dated as of
April 21, 2011

Third Amendment to Lease between NEA Galtier,
LLC and the Company, dated as of August 31,
2011

to Lease between NEA
Fourth Amendment
Galtier, LLC and the Company, dated as of
April 1, 2012

48

10.1

10.1

10.1

X

X

X

X

Exhibit
Number

10.32

10.33

21.1

23.1

24.1

31.1

31.2

32.1

Exhibit Description

Incorporated by Reference

Form

File No.

Filing
Date

Exhibit/
Annex

Filed
Herewith

8-K 000-26820

05/03/12

10.1

to Lease between NEA
Fifth Amendment
Galtier, LLC and the Company, dated as of
March 31, 2014

Intellectual Property Agreement between Intel
Corporation and the Company, dated May 2,
2012

Subsidiaries of the Company

Consent of Peterson Sullivan LLP, Independent
Registered Public Accounting Firm

Power of Attorney for directors and officers
(included on the signature page of this report)

13a-14(a)/15d-14(a) Certification

Rule
Mr. Ungaro, Chief Executive Officer

13a-14(a)/15d-14(a) Certification

Rule
Mr. Henry, Chief Financial Officer

of

of

Certification pursuant to 18 U.S.C. Section 1350
by the Chief Executive Officer and the Chief
Financial Officer

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL

Taxonomy
Linkbase Document

Extension

Calculation

101.LAB XBRL Taxonomy Extension Label Linkbase

Document

101.PRE XBRL

Taxonomy
Linkbase Document

Extension

Presentation

*

Management contract or compensatory plan or arrangement.

X

X

X

X

X

X

X

X

X

X

X

X

Excluded from this list of exhibits, pursuant to Paragraph (b)(4)(iii)(a) of Item 601 of Regulation S-K, may
be one or more instruments defining the rights of holders of long-term debt of the Company. The Company
hereby agrees that it will, upon request of the Securities and Exchange Commission, furnish to the Commission a
copy of any such instrument.

49

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

December 31,
2014

December 31,
2013

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and other receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investment in sales-type lease, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service spares, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets other than goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 112,633
16,874
16,289
165,113
143,632
36,073
17,948

508,562
—
31,089
34,793
1,868
14,182
3,895
41,414
15,631

$ 192,633
—
14,048
182,527
95,129
9,195
11,804

505,336
13,768
—
30,278
1,828
14,182
6,362
19,206
12,406

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 651,434

$ 603,366

Current liabilities:

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 48,699
16,054
16,285
65,910

146,948
47,588
3,044

TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

197,580

$ 34,225
22,470
22,225
91,488

170,408
50,477
6,894

227,779

Commitments and contingencies (Note 14)
Shareholders’ equity:

Preferred stock — Authorized and undesignated, 5,000,000 shares; no shares issued or

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

Common stock and additional paid-in capital, par value $.01 per share — Authorized,

75,000,000 shares; issued and outstanding 40,822,377 and 40,469,854 shares,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit

598,390
6,503
(151,039)

586,243
853
(211,509)

TOTAL SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

453,854

375,587

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . .

$ 651,434

$ 603,366

See accompanying notes

F-1

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Years Ended December 31,
2013

2012

2014

Revenue:

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$460,748
100,858

$436,330
89,419

$353,767
67,291

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

561,606

525,749

421,058

Cost of revenue:

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

321,554
55,638

298,244
43,179

231,237
38,643

Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

377,192

341,423

269,880

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

184,414

184,326

151,178

Operating expenses:

Research and development, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,048
57,785
23,381

87,728
51,345
23,603

64,303
37,180
20,707

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

175,214

162,676

122,190

Net gain on sale of interconnect hardware development program . . . . . . . . . . .

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net

—

9,200
(9)
506

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,697
52,626

— 139,068

21,650
(1,378)
757

21,029
11,194

168,056
472
204

168,732
(7,491)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,323

$ 32,223

$161,241

Basic net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

1.61

1.54

$

$

0.85

0.81

$

$

4.42

4.27

Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,634

37,832

36,509

Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .

40,435

39,776

37,789

See accompanying notes

F-2

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Years Ended December 31,
2013

2012

2014

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:

$62,323

$32,223

$161,241

Unrealized gain (loss) on available-for-sale investments . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (loss) on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments on cash flow hedges included in net income . . . .

12
(1,188)
8,475
(1,649)

46
(1,044)
(4,292)
962

(46)
(43)
(824)
(386)

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,650

(4,328)

(1,299)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$67,973

$27,895

$159,942

See accompanying notes

F-3

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)

BALANCE, December 31, 2011 . . . . . . . . . . . . . . . . .
Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares issued for compensation, net of

forfeitures and taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common Stock
and Additional Paid
In Capital

Number
of Shares Amount

Accumulated
Other
Comprehensive
Income

Accumulated
Deficit

Total

36,763 $564,148

$ 6,480

$(403,814) $166,814

38
1,346

1,288
—

397
7,430

—
5,963

397
7,430

—
5,963
(1,299)
161,241

(1,299)

161,241

BALANCE, December 31, 2012 . . . . . . . . . . . . . . . . .

39,435 $577,938

$ 5,181

$(242,573) $340,546

Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares issued for compensation, net of

forfeitures and taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25
495

515
—

517
3,161

(2,612)
7,239

(4,328)

517
3,161

(3,771)
7,239
(4,328)
32,223

(1,159)

32,223

BALANCE, December 31, 2013 . . . . . . . . . . . . . . . . .

40,470 $586,243

$

853

$(211,509) $375,587

Issuance of shares under employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares issued for compensation, net of

forfeitures and taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21
411

611
3,086

(80)
(1,914)
— 10,364

5,650

611
3,086

(3,767)
10,364
5,650
62,323

(1,853)

62,323

BALANCE, December 31, 2014 . . . . . . . . . . . . . . . . .

40,822 $598,390

$ 6,503

$(151,039) $453,854

See accompanying notes

F-4

CRAY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Years Ended December 31,
2013

2012

2014

Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash (used in) provided by operating

activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion and amortization on available for sale investments . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of interconnect hardware development program . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash (used in) provided by operations due to changes in operating assets and liabilities:
Accounts and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investment in sales-type lease, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses and other accrued liabilities . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,323

$ 32,223

$ 161,241

16,324
235
1,594
—
10,364
2,330
(53,204)

17,450
(32,889)
(54,147)
(9,349)
14,504
(1,395)
(3,842)
(28,407)

8,652
14,242
—
1,977
42
128
— (139,068)
5,963
2,329
3,020

7,239
917
(13,175)

(169,753)
—
(10,780)
(2,670)
(509)
4,721
3,701
44,475

60,744
—
7,004
1,763
(6,489)
15,202
492
35,911

Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:

(58,109)

(87,350)

156,892

Sales and maturities of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of interconnect hardware development program, net
. . . . . .
Cash used in acquisition, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53,608
(56,064)
(3,106)
—
—
(17,193)

139,277
(85,162)
(13,768)

—
(70,218)
3,776
— 139,225
(24,246)
—
(10,843)
(13,136)

Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(22,755)

27,211

37,694

Financing activities:

Proceeds from issuance of common stock through employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of employee restricted shares to fund related statutory withholding . . . . .
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . .

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents:

611
(3,767)
3,086

(70)
934

517
(3,771)
3,161

(93)
(200)

397
—
7,430

7,827
241

(80,000)

(60,432)

202,654

Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

192,633

253,065

50,411

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$112,633

$ 192,633

$ 253,065

Supplemental disclosure of cash flow information:

Cash paid for interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5
2,935

$

3
2,611

$

90
2,804

Non-cash investing and financing activities:

Inventory transfers to property and equipment and service spares . . . . . . . . . . . . . .

$

3,313

$

4,530

$

6,278

See accompanying notes

F-5

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 DESCRIPTION OF BUSINESS

Cray Inc., or Cray, or the Company, designs, develops, manufactures, markets and services the high-end of
the high-performance computing, or HPC, market, primarily categories of systems commonly known as
supercomputers, and provides storage and analytics solutions. The Company also provides software, system
maintenance and support services and engineering services related to supercomputer systems. Cray’s
supercomputer systems address challenging scientific, engineering, commercial and national security computing
problems. The Company’s customers include foreign and domestic government agencies, government-funded
entities, academic institutions and commercial entities.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Principles

The consolidated financial statements and accompanying notes are prepared in accordance with accounting

principles generally accepted in the United States of America, or GAAP.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned

subsidiaries. Intercompany balances and transactions have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation. There has

been no impact on previously reported net income or shareholders’ equity from such reclassifications.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates
and assumptions that affect the amounts reported in the Company’s consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of highly liquid financial instruments that are readily convertible to cash
and have maturities of three months or less at the time of acquisition. The Company maintains cash and cash
equivalent balances with financial institutions that exceed federally insured limits. As of December 31, 2014, the
Company had $16.9 million in short-term restricted cash and as of December 31, 2013, $13.8 million in long-
term restricted cash, associated with certain letters of credit outstanding to secure customer prepayments.

Investments

The Company’s investments consist primarily of commercial paper, corporate debt, and other debt
securities. Debt securities are classified as available-for-sale and are reported at fair value with unrealized gains
and losses, net of applicable taxes, recorded in accumulated other comprehensive income, a component of
shareholders’ equity. The realized gains and losses for available-for-sale securities are included in other income
and expense in the Consolidated Statements of Operations. Realized gains and losses are calculated based on the
specific identification method.

The Company monitors its investment portfolio for impairment on a periodic basis. When the carrying value
of an investment in debt securities exceeds its fair value and the decline in value is determined to be an other-
than-temporary decline, and when the Company does not intend to sell the debt security and it is not more likely
than not that the Company will be required to sell the debt securities prior to recovery of its amortized cost basis,
the Company records an impairment charge in the amount of the credit loss and the balance, if any, to other
comprehensive income (loss).

F-6

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investments that mature between three months and one year from the purchase date are initially classified as
short-term investments in the Consolidated Balance Sheet. Investments that mature beyond one year from the
purchase date are initially classified as long-term investments in the Consolidated Balance Sheet.

Foreign Currency Derivatives

The Company uses forward foreign currency exchange contracts to hedge certain foreign currency
exposures. Forward contracts are cash flow hedges of the Company’s foreign currency exposures on certain
revenue contracts and are recorded at the contract’s fair value. Any gains or losses on the effective portion of the
forward contract
is initially reported in “Accumulated other comprehensive income,” a component of
shareholders’ equity, with a corresponding asset or liability recorded based on the fair value of the forward
contract. When the hedged transaction is recognized, any unrecognized gains or losses on the hedged transaction
are reclassified into results of operations in the same period. Any hedge ineffectiveness is recorded to operations
in the current period. The Company measures hedge effectiveness by comparing changes in fair values of the
forward contract and expected cash flows based on changes in the spot prices of the underlying currencies. Cash
flows from forward contracts accounted for as cash flow hedges are classified in the same category as the cash
flows from the items being hedged. The Company does not use derivative financial instruments for speculative
purposes.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk
consist primarily of cash and cash equivalents, available-for-sale investments, accounts receivable, short-term
and long-term restricted cash and forward foreign currency exchange contracts.

The Company maintains cash and cash equivalents, available-for-sale securities and forward contracts with
various financial institutions. As part of its risk management process, the Company performs periodic evaluations
of the relative credit standing of the financial institutions. The Company has not sustained any credit losses from
instruments held at financial institutions. The Company utilizes forward contracts to protect against the effects of
foreign currency fluctuations. Such contracts involve the risk of non-performance by the counterparty, which
could result in a material loss.

The Company currently derives a significant portion of its revenue from sales of products and services to
different agencies of the U.S. government or commercial customers primarily serving various agencies of the
U.S. government. See Note 19 — Segment Information for additional information. Given the type of customers,
the Company does not believe its accounts receivable represent significant credit risk.

The Company currently has a long-term investment in a sales-type lease it entered into with one of its
customers. See Note 9 — Sales-type Lease for additional information. Given the credit standing of the customer,
the Company does not believe that this investment represents a significant credit risk.

Other Concentration

The Company obtains certain components from single source suppliers due to technology, availability,
price, quality or other considerations. The loss of a single source supplier, the single source supplier’s inability to
deliver the required components or intellectual property due to natural disaster or other reasons, the deterioration
of the relationship with a single source supplier, or any unilateral modification of contract terms under which the
Company is supplied components by a single source supplier could have a significant adverse effect on the
Company’s revenue and gross margins.

Accounts Receivable

Accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually
due from customers for products and services and amounts due from government research and development

F-7

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contracts. The Company provides an allowance for doubtful accounts based on an evaluation of customer past
due account balances. In determining whether to record an allowance for a specific customer, the Company
considers a number of factors, including prior payment history and financial information for the customer.

Fair Values of Financial Instruments

The Company measures certain financial assets and liabilities at fair value based on 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. The Company’s financial
instruments primarily consist of debt securities, time deposits, money market funds, and foreign currency
derivatives. See Note 5 — Fair Value Measurement for a further discussion on fair value of financial instruments.

Inventories

Inventories are valued at the lower of cost or market, with cost computed on a first-in, first-out basis. The
Company regularly evaluates the technological usefulness and anticipated future demand for various inventory
components and the expected use of the inventory. When the Company determines it is not likely the cost of
inventory items will be recovered through future sales, the Company writes-down the related inventory to its
estimated market value.

In connection with certain of its sales agreements, the Company may receive used equipment from a
customer. This inventory generally will be recorded at no value based on the expectation that the Company will
not be able to resell or otherwise use the equipment. In the event that the Company has a specific contractual plan
for resale at the date the inventory is acquired, the inventory is recorded at its estimated fair value.

Property and Equipment and Intangible Assets, net

Property and equipment are recorded at cost less accumulated depreciation and amortization. Additions and
improvements are capitalized and maintenance and repairs are expensed as incurred. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the related assets, ranging from eighteen months to
seven years for furniture and fixtures, three years for computer equipment, and eight to twenty-five years for
buildings and land improvements. Leasehold improvements are depreciated over the life of the lease or asset,
whichever is shorter.

The Company amortizes purchased intangible assets with finite lives using the straight-line method over the

estimated economic lives of the assets, ranging from two to ten years.

Service Spares

Service spares are valued at the lower of cost or market and represent inventory used to support service and
maintenance agreements with customers. As inventory is utilized, replaced items are returned to the Company
and are either repaired or scrapped. Costs incurred to repair inventory to a usable state are charged to expense as
incurred. Service spares are recorded at cost and amortized over the estimated service life of the related product
platform (generally four years).

Impairment of Long-Lived Assets and Intangibles

The Company evaluates property, plant and equipment and intangible assets with finite lives for impairment
whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The
Company assesses the recoverability of the assets based on the undiscounted future cash flow the assets are
expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected
to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than
the carrying value of the asset. When the Company identifies an impairment, the carrying value of the asset is
reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate,
to comparable market values.

F-8

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill

Goodwill is not amortized but is tested for impairment at least annually. The Company reviews goodwill for
impairment annually at
the beginning of its fourth fiscal quarter and whenever events or changes in
circumstances indicate the carrying value of the asset may not be recoverable. The goodwill impairment test
consists of a two-step process, if necessary. However, the Company first assesses qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic
350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after
assessing the totality of events or circumstances, the Company determines that it is not more likely than not that
the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is
unnecessary and goodwill is considered to be unimpaired. However, if based on the qualitative assessment the
Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, the Company will proceed with performing the two-step process.

In step one, the Company determines the fair value of each reporting unit and compares it to its carrying
value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit,
goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the
impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value
of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to
the difference.

The Company performed its qualitative assessment during the fourth fiscal quarter of 2014 and concluded
that it was more likely than not that the fair values of its reporting units were greater than their carrying amounts.
After reaching this conclusion, the two-step impairment test was unnecessary and no further testing was
performed. The qualitative factors that were considered included, but were not limited to, general economic
conditions, outlook for the HPC and big data markets, recent and forecasted financial performance and the price
of the Company’s common stock.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting and allocates
the purchase price to the tangible and intangible assets acquired and the liabilities assumed based upon their
estimated fair values at the acquisition date. The difference between the purchase price and the fair value of the
net assets acquired is recorded as goodwill. The Company uses estimates and assumptions to accurately value
assets acquired and liabilities assumed at the acquisition date. During the measurement period, which may be up
to one year from the acquisition date, any refinements made to the fair value of the assets and liabilities assumed
are recorded with retrospective effect.

The fair values of intangible assets acquired are estimated using a discounted cash flow approach with Level
3 inputs. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-
tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To
calculate fair value, the Company uses risk-adjusted cash flows discounted at rates considered appropriate given
the inherent risks associated with each type of asset. The Company believes the level and timing of cash flows
appropriately reflects market participant assumptions.

Revenue Recognition

The Company recognizes revenue, including transactions under sales-type leases, when it is realized or
realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive
evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is
reasonably assured. Delivery does not occur until the products have been shipped or services provided to the
customer, risk of loss has transferred to the customer, and, where applicable, a customer acceptance has been

F-9

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

obtained. The sales price is not considered to be fixed or determinable until all material contingencies related to
the sales have been resolved. The Company records revenue in the Consolidated Statements of Operations net of
any sales, use, value added or certain excise taxes imposed by governmental authorities on specific sales
transactions. In addition to the aforementioned general policy, the following are the Company’s statements of
policy with regard to multiple-element arrangements and specific revenue recognition policies for each major
category of revenue.

Multiple-Element Arrangements. The Company commonly enters into revenue arrangements that include
multiple deliverables of its product and service offerings due to the needs of its customers. Products may be
delivered in phases over time periods which can be as long as five years. Maintenance services generally begin
upon acceptance of the first equipment delivery and future deliveries of equipment generally have an associated
maintenance period. The Company considers the maintenance period to commence upon acceptance of the
product or installation in situations where a formal acceptance is not required, which may include a warranty
period and accordingly allocates a portion of the arrangement consideration as a separate deliverable which is
recognized as service revenue over the entire service period. Other services such as training and engineering
services can be delivered as a discrete delivery or over the term of the contract. A multiple-element arrangement
is separated into more than one unit of accounting if the following criteria are met:

• The delivered item(s) has value to the customer on a standalone basis; and

• If the arrangement includes a general right of return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered probable and substantially in the control of the
Company.

If these criteria are met for each element, the arrangement consideration is allocated to the separate units of
accounting based on each unit’s relative selling price. If these criteria are not met, the arrangement is accounted
for as one unit of accounting which would result in revenue being recognized ratably over the contract term or
being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered.

The Company follows a selling price hierarchy in determining the best estimate of the selling price of each
deliverable. Certain products and services are sold separately in standalone arrangements for which the Company
is sometimes able to determine vendor specific objective evidence, or VSOE. The Company determines VSOE
based on normal pricing and discounting practices for the product or service when sold separately.

When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple
elements, the Company attempts to establish the selling price of each remaining element based on third-party
evidence, or TPE. The Company’s inability to establish VSOE is often due to a relatively small sample of
customer contracts that differ in system size and contract terms which can be due to infrequently selling each
element separately, not pricing products within a narrow range, or only having a limited sales history, such as in
the case of certain advanced and emerging technologies. TPE is determined based on the Company’s prices or
competitor prices for similar deliverables when sold separately. However, the Company is often unable to
determine TPE, as the Company’s offerings usually contain a significant
level of customization and
differentiation from those of competitors and the Company is often unable to reliably determine what similar
competitor products’ selling prices are on a standalone basis.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses estimated
selling price, or ESP, in its allocation of arrangement consideration. The objective of ESP is to determine the
price at which the Company would transact a sale if the product or service were sold on a standalone basis. In
determining ESP, the Company uses the cost to provide the product or service plus a margin, or considers other
factors. When using cost plus a margin, the Company considers the total cost of the product or service, including
customer-specific and geographic factors. The Company also considers the historical margins of the product or
to pricing methodologies,
service on previous contracts and several
competitiveness of products and services and cost drivers that would cause future margins to differ from
historical margins.

including any changes

factors

F-10

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Products. The Company most often recognizes revenue from sales of products upon customer acceptance
of the system. Where formal acceptance is not required, the Company recognizes revenue upon delivery or
installation. When the product is part of a multiple element arrangement, the Company allocates a portion of the
arrangement consideration to product revenue based on estimates of selling price.

Services. Maintenance services are provided under separate maintenance contracts with customers. These
contracts generally provide for maintenance services for one year, although some are for multi-year periods,
often with prepayments for the term of the contract. The Company considers the maintenance period to
commence upon acceptance of the product or installation in situations where a formal acceptance is not required,
which may include a warranty period. When service is part of a multiple element arrangement, the Company
allocates a portion of the arrangement consideration to maintenance service revenue based on estimates of selling
price. Maintenance contracts that are billed in advance of revenue recognition are recorded as deferred revenue.
Maintenance revenue is recognized ratably over the term of the maintenance contract.

Revenue from engineering services is recognized as services are performed.

Project Revenue. Revenue from design and build contracts is recognized under the percentage-of-
completion (or POC method). Under the POC method, revenue is recognized based on the costs incurred to date
as a percentage of the total estimated costs to fulfill the contract. If circumstances arise that change the original
estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These
revisions may result in increases or decreases in estimated revenues or costs, and such revisions are recorded in
income in the period in which the circumstances that gave rise to the revision become known by management.
The Company performs ongoing profitability analyses of its contracts accounted for under the POC method in
order to determine whether the latest estimates of revenue, costs and extent of progress require updating. If at any
time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of
the contract is recorded immediately.

The Company records revenue from certain research and development contracts which include milestones
using the milestone method if the milestones are determined to be substantive. A milestone is considered to be
substantive if management believes there is substantive uncertainty that it will be achieved and the milestone
consideration meets all of the following criteria:

• It is commensurate with either of the following:

• The Company’s performance to achieve the milestone; or

• The enhancement of value of the delivered item or items as a result of a specific outcome resulting

from the Company’s performance to achieve the milestone.

• It relates solely to past performance.

• It is reasonable relative to all of the deliverables and payment terms (including other potential milestone

consideration) within the arrangement.

The individual milestones are determined to be substantive or non-substantive in their entirety and milestone

consideration is not bifurcated.

Revenue from projects is classified as Product Revenue or Service Revenue, based on the nature of the work

performed.

Nonmonetary Transactions. The Company values and records nonmonetary transactions at the fair value
of the asset surrendered unless the fair value of the asset received is more clearly evident, in which case the fair
value of the asset received is used.

Sales-type leases

When the Company leases a system to a customer, the accounting involves specific determinations, which
often involve complex provisions and significant judgments. The four criteria of the accounting standard that the

F-11

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company uses in the determination of whether a lease is a sales-type lease or an operating lease are: (a) a review
of the lease term to determine if it is equal to or greater than 75% of the economic life of the system; (b) a review
of the minimum lease payments to determine if they are equal to or greater than 90% of the fair value of the
system; (c) a determination of whether or not the lease transfers ownership to the lessee at the end of the lease
term; and (d) a determination of whether or not the lease contains a bargain purchase option. If the lease
transaction meets one of the four criteria, then it is recorded as a sales-type lease; otherwise it is an operating
lease. Additionally, the Company assesses whether collectibility of the lease payments is reasonably assured and
whether there are any significant uncertainties related to costs that it has yet to incur with respect to the lease.

The Company considers the economic lives of most of its products to range from three to four years. There
is no significant after-market for the Company’s used products and the Company believes that the economic lives
are representative of the periods during which its products are expected to be economically usable, with normal
service, for the purposes for which they were intended. Residual values are not significant.

The discount rate implicit in the sales-type lease is used to calculate the present value of minimum lease
payments, which the Company records as a lease receivable. The minimum lease payment consists of the gross
lease payments net of executory costs and contingencies, if any. While revenue is recognized at the inception of
the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest
income. Unearned interest income is recorded at the inception of the lease and amortized over the lease term
using the effective interest method.

Foreign Currency Translation

The Company uses the U.S. dollar predominantly as its functional currency. Assets and liabilities of foreign
subsidiaries that have a functional currency denominated in non-U.S. dollars are translated into U.S. dollars at
year-end exchange rates, and revenue and expenses of these foreign subsidiaries are translated at average rates
prevailing during the year. Translation adjustments are included in “Accumulated other comprehensive income,”
a separate component of shareholders’ equity. Transaction gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity involved are included in “Other
(income) expense, net” in the accompanying Consolidated Statements of Operations. Net transaction gains were
$2.1 million for 2014 and net transactions losses were $1.3 million, and $0.1 million for 2013, and 2012,
respectively.

Research and Development

Research and development expenses include costs incurred in the development and production of hardware
and software, costs incurred to enhance and support existing product features, costs incurred to support and
improve development processes, and costs related to future product development. Research and development
costs are expensed as incurred, and may be offset by co-funding from third parties. The Company may also enter
into arrangements whereby it makes advance, non-refundable payments to a vendor to perform certain research
and development services. These payments are deferred and recognized over the vendor’s estimated performance
period. During the third quarter of 2009, the Company amended a vendor agreement to settle outstanding
performance issues. The Company had made advance payments of $16.2 million to the vendor. Due to the
amendment, the Company received a refund of $10.0 million of amounts previously paid to the vendor and the
right to receive rebates on future purchases. The Company estimated the fair value of this rebate right to be $6.2
million. The Company believes the rebate right is recoverable and it has been classified in “Other non-current
assets” in the Consolidated Balance Sheets. No gain or loss was recorded as a result of this amendment. As of
December 31, 2014, $0.1 million in rebates remain available for use.

Amounts to be received under co-funding arrangements with the U.S. government or other customers are
based on either contractual milestones or costs incurred. These co-funding milestone payments are recognized in
operations as performance is estimated to be completed and are measured as milestone achievements occur or as

F-12

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

costs are incurred. These estimates are reviewed on a periodic basis and are subject to change, including in the
near term. If an estimate is changed, net research and development expense could be impacted significantly.

The Company does not record a receivable from the U.S. government prior to completing the requirements
necessary to bill for a milestone or cost reimbursement. Funding from the U.S. government is subject to certain
budget restrictions and milestones may be subject to completion risk, and as a result, there may be periods in
which research and development costs are expensed as incurred for which no reimbursement is recorded, as
milestones have not been completed or the U.S. government has not funded an agreement. Accordingly, there can
be substantial variability in the amount of net research and development expenses from quarter to quarter and
year to year.

The Company classifies amounts to be received from funded research and development projects as either
revenue or a reduction to research and development expense based on the specific facts and circumstances of the
contractual arrangement, considering total costs expected to be incurred compared to total expected funding and
the nature of the research and development contractual arrangement. In the event that a particular arrangement is
determined to represent revenue, the corresponding research and development costs are classified as cost of
revenue.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or
settled. A valuation allowance for deferred tax assets is provided when the Company estimates that it is more
likely than not that all or a portion of the deferred tax assets may not be realized through future operations. This
assessment is based upon consideration of available positive and negative evidence, which includes, among other
things, recent results of operations and expected future profitability. The Company considers its actual historical
results over several years to have stronger weight than other more subjective indicators, including forecasts,
when considering whether to establish or reduce a valuation allowance on deferred tax assets.

The Company recognizes the income tax benefit from a tax position only if it is more likely than not that the
tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits
of the Company’s position. The tax benefit recognized in the financial statements from such a position is
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively.

As of December 31, 2014, the Company had approximately $87.6 million of net deferred tax assets, against
which the Company provided a $10.1 million valuation allowance, resulting in a net deferred tax asset of $77.5
million. During the year ended December 31, 2014 the Company reduced substantially all of the remaining
valuation allowance held against the Company’s U.S. deferred tax assets. The Company continues to provide a
valuation allowance against specific U.S. deferred tax assets and a full valuation allowance against deferred tax
assets arising in a limited number of foreign jurisdictions as the realization of such assets is not considered to be
more likely than not at this time. In a future period the Company’s assessment of the realizability of its deferred
tax assets and therefore the appropriateness of the valuation allowance could change based on an assessment of
all available evidence, both positive and negative in that future period. If the Company’s conclusion about the
realizability of its deferred tax assets and therefore the appropriateness of the valuation allowance changes in a
future period, the Company could record a substantial tax provision or benefit in its Consolidated Statement of
Operations when that occurs.

F-13

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Share-Based Compensation

The Company measures compensation cost for share-based payment awards at fair value and recognizes it
as compensation expense over the service period for awards expected to vest. Share-based compensation expense
is recognized for all share-based payment awards, net of an estimated forfeiture rate. Compensation cost is only
recognized for those shares expected to vest on a straight-line basis over the requisite service period of the award.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards
requires subjective assumptions, including the expected life of the share-based payment awards and stock price
volatility. The Company utilizes the Black-Scholes options pricing model to value the stock options granted
under its options plans. In this model, the assumptions utilized relate to stock price volatility, stock option term
and forfeiture rates that are based upon both historical factors as well as management’s judgment.

The fair value of restricted stock and restricted stock units is determined based on the number of shares or

units granted and the quoted price of the Company’s common stock at the date of grant.

The Company grants performance vesting restricted shares to executives as one of the ways to align
compensation with shareholder interests. Vesting of these awards is contingent upon achievement of certain
performance conditions. Compensation expense for these awards is only recorded when vesting is deemed to be
probable.

Shipping and Handling Costs

Costs related to shipping and handling are included in “Cost of product revenue” and “Cost of service

revenue” in the accompanying Consolidated Statements of Operations.

Advertising Costs

Sales and marketing expenses in the accompanying Consolidated Statements of Operations include
advertising expenses of $2.9 million, $2.2 million, and $1.2 million in 2014, 2013, and 2012, respectively. The
Company incurs advertising costs for representation at certain trade shows, promotional events and sales lead
generation, as well as design and printing costs for promotional materials. The Company expenses all advertising
costs as incurred.

Earnings Per Share, or EPS

Basic EPS is computed by dividing net income available to common shareholders by the weighted average
number of common shares, excluding unvested restricted stock outstanding during the period. Diluted EPS is
computed by dividing net income available to common shareholders by the weighted average number of common
and potential common shares outstanding during the period, which includes the additional dilution related to
conversion of stock options, unvested restricted stock and restricted stock units as computed under the treasury
stock method. For the years ended December 31, 2014, 2013 and 2012, the added shares from these items
included in the calculation of diluted shares and EPS totaled approximately 1.8 million, 1.9 million, and
1.3 million, respectively. Potentially dilutive shares of 0.6 million, 0.5 million, and 0.4 million, respectively,
have been excluded from the denominator in the computation of diluted EPS for the years ended December 31,
2014, 2013 and 2012, respectively, because they are antidilutive. Performance vesting restricted stock totaling
0.8 million, 1.1 million and 0.7 million were excluded from the computation of diluted EPS for the years ended
December 31, 2014, 2013 and 2012, respectively, because the conditions for vesting had not been met as of the
balance sheet date.

F-14

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated Other Comprehensive Income

Accumulated other comprehensive income, a component of Shareholders’ equity, consisted of the following

at December 31 (in thousands):

2014

2013

2012

Accumulated unrealized net gain (loss) on available-for-sale

investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated currency translation adjustments . . . . . . . . . . . . . . . . . . .
Accumulated unrealized net gain (loss) on cash flow hedges . . . . . . . .

$

12
2,069
4,422

$ — $ (46)
4,301
926

3,257
(2,404)

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . .

$6,503

$

853

$5,181

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all
existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues
when promised goods or services are transferred to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core
principle and, in doing so, it is possible more judgment and estimates may be required within the revenue
recognition process than required under existing U.S. GAAP including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. ASU 2014-09 is effective for the fiscal and interim
reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior
reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09;
or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application and providing certain additional disclosures as defined per ASU 2014-09. The Company is currently
evaluating the potential impact of the pending adoption of ASU 2014-09 on its consolidated financial statements.

NOTE 3 ACQUISITION

On November 21, 2012, the Closing Date, the Company acquired all the outstanding shares of Appro
International, Inc., or Appro, for cash consideration of $24.9 million. Appro is a provider of cluster solutions in
the high performance computing market. The acquisition of Appro allowed the Company to expand its product
offering in the high performance computing market. The Company reports the financial results of the Appro
business in the supercomputing segment.

The Company utilized a third-party appraisal in its determination of the fair value of the various assets
acquired and liabilities assumed. The fair value of the acquired assets, net of assumed liabilities, equals the $24.9
million cash consideration paid by the Company. No measurement period adjustments were required.

F-15

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following are the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

635
7,526
5,702
(2,400)
(2,918)
(3,685)
(2,061)

Net tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,799

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

300
5,400
1,800
400
14,182

Total net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,881

The fair values of the major components of the intangible assets acquired and their estimated useful lives are

as follows (in thousands):

Intangible Asset Class

Fair Value

Useful Life
(in Years)

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 300
$5,400
$1,800
$ 400

5
3
10
2

The revenue and net

loss of Appro from the Closing Date to December 31, 2012 included in the

accompanying consolidated statements of operations were $0.6 million and $1.3 million, respectively.

The Company incurred acquisition-related costs (i.e., legal, accounting, valuation, and other costs) of $0.9
million during the year ended December 31, 2012. The acquisition-related costs were expensed in the
accompanying Consolidated Statements of Operations for the year ended December 31, 2012.

The following unaudited pro forma condensed financial information presents the combined results of
operations of the Company and Appro for the year ended December 31, 2012 as if the acquisition had occurred
on January 1, 2012 (in thousands):

Year Ended
December 31, 2012

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$494,369

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$161,985

The unaudited pro forma condensed financial information is not intended to represent or be indicative of the
results of operations of the Company that would have been reported had the acquisition been completed as of the
beginning of the period presented, and should not be taken as representative of the future consolidated results of
operations of the Company.

The goodwill recorded in connection with the acquisition of Appro is primarily related to the synergies expected

to be achieved and the value of the assembled workforce. The goodwill balance is not deductible for tax purposes.

F-16

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The carrying amount of purchased intangibles at December 31, 2014 was as follows (in thousands):

Gross Carrying
Amount

December 31, 2014
Accumulated
Amortization

Net Carrying
Amount

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 300
5,400
1,800
400

$7,900

$ 127
3,800
380
400

$4,707

$ 173
1,600
1,420
—

$3,193

The carrying amount of purchased intangibles at December 31, 2013 was as follows (in thousands):

Gross Carrying
Amount

December 31, 2013
Accumulated
Amortization

Net Carrying
Amount

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 300
5,400
1,800
400

$7,900

$

67
2,000
200
222

$2,489

$ 233
3,400
1,600
178

$5,411

Aggregate estimated amortization expense for the years ending December 31 are as follows (in thousands):

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,840
240
233
180
180

$2,673

For the years ended December 31, 2014, 2013 and 2012, amortization expense related to purchased

intangibles was $2.2 million, $2.2 million and $0.2 million, respectively.

NOTE 4 — SALE OF INTERCONNECT HARDWARE DEVELOPMENT PROGRAM

On May 2, 2012, the Company sold its interconnect hardware development program to Intel Corporation
(“Intel”) for cash consideration of $140 million. As part of the transaction, 73 of the Company’s employees
joined Intel, and certain intellectual property and fixed assets were transferred to Intel. The Company retained
certain rights to use the transferred assets and intellectual property. As a result of the sale, the Company recorded
a gain of $139.1 million in “Net gain on sale of interconnect hardware development program” on the
Consolidated Statements of Operations for the year ended December 31, 2012.

NOTE 5 FAIR VALUE MEASUREMENTS

Under FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures,
based on the observability of the inputs used in the valuation techniques used to determine the fair value of
certain financial assets and liabilities, the Company is required to provide the following information according to
the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to
determine fair values.

F-17

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active
or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for
the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
The following table presents information about the Company’s financial assets and liabilities that have been
measured at fair value on a recurring basis as of December 31, 2014 and 2013, and indicates the fair value
hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

Description

Fair Value
as of December 31,
2014

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Assets:
Cash and cash equivalents and restricted cash . . . . . . . . . . . . . . .
Available-for-sale investments(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts(2) . . . . . . . . . . . . . . . . . . . .

$129,507
16,289
11,079

$129,507 $ —
—
— 11,079

16,289

Assets measured at fair value at December 31, 2014 . . . . . . . .

$156,875

$145,796 $11,079

Liabilities:
Foreign exchange forward contracts(3) . . . . . . . . . . . . . . . . . . . .

2,139

— 2,139

Liabilities measured at fair value at December 31, 2014 . . . . .

$

2,139

$

— $ 2,139

Description

Fair Value
as of December 31,
2013

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Assets:
Cash and cash equivalents and restricted cash . . . . . . . . . . . . . . .
Available-for-sale investments(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts(2) . . . . . . . . . . . . . . . . . . . .

$206,401
14,048
1,730

$206,401
14,048

$ —
—
— 1,730

Assets measured at fair value at December 31, 2013 . . . . . . . .

$222,179

$220,449

$1,730

Liabilities:
Foreign exchange forward contracts(3) . . . . . . . . . . . . . . . . . . . .

7,237

— 7,237

Liabilities measured at fair value at December 31, 2013 . . . . .

$

7,237

$

— $7,237

(1) Included in “Short-term investments” on the Company’s Consolidated Balance Sheets.
(2) Included in “Prepaid expenses and other current assets” and “Other non-current assets” on the Company’s

Consolidated Balance Sheets.

(3) Included in “Other accrued liabilities” and “Other non-current liabilities” on the Company’s Consolidated

Balance Sheets.

Foreign Currency Derivatives

The Company may enter into foreign currency derivatives to hedge future cash receipts on certain sales

transactions that are payable in foreign currencies.

F-18

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2014 and 2013, the Company had outstanding forward contracts which were designated
as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The
outstanding notional amounts were approximately (in millions):

December 31,
2014

December 31,
2013

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
British Pounds (GBP)
Euros (EUR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swiss Francs (CHF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canadian Dollars (CAD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese Yen (JPY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore Dollars (SGD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swedish Krona (SEK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77.9
40.7
0.9
—
—
0.1
84.8

36.4
53.0
5.6
3.9
1,239.8
3.2
—

The Company had hedged foreign currency exposure of approximately $192.5 million and $151.4 million as
of December 31, 2014 and December 31, 2013, respectively. Cash receipts associated with the hedged contracts
are expected to be received from 2015 through 2018, during which time the revenue on the associated sales
contracts is expected to be recognized, or in the case of receivables denominated in a foreign currency, the
receivables balances will be collected. Any gain or loss on hedged foreign currency will be recognized at the time
of customer acceptance or over the period during which hedged receivables denominated in a foreign currency
are outstanding.

As of December 31, 2014, the Company had outstanding forward contracts which were not designated as
cash flow hedges with notional amounts of 28.3 million British Pounds. The foreign currency exposure related to
these contracts was approximately $43.4 million. The Company had no outstanding forward contracts which
were not designated as cash flow hedges as of December 31, 2013.

As of December 31, 2014 and 2013, the fair value of outstanding forward contracts totaled a net gain of $8.9
million and a net loss of $5.5 million, respectively. As of December 31, 2014 and 2013, unrecognized gains, net
of tax, of $4.4 million and unrecognized losses, net of tax, of $2.4 million, respectively, were included in
“Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets.

Fair values of derivative instruments (in thousands):

Hedge Classification

Balance Sheet Location

Fair Value
as of
December 31,
2014

Fair Value
as of
December 31,
2013

Foreign currency contracts . . . . . . . . . . . Prepaid expenses and other current assets
Foreign currency contracts . . . . . . . . . . . Other non-current assets
Foreign currency contracts . . . . . . . . . . . Other accrued liabilities
Foreign currency contracts . . . . . . . . . . . Other non-current liabilities

$ 5,362
5,717
(1,454)
(685)

$ 1,654
76
(2,942)
(4,295)

Total fair value of derivatives classified

as hedging instruments . . . . . . . . . . . .

$ 8,940

$(5,507)

F-19

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table shows the gross and net of tax reclassification adjustments from accumulated other
comprehensive income resulting from hedged foreign currency transactions recorded by the Company for the
years ended December 31, 2014, 2013 and 2012 (in thousands). The gross reclassification adjustments increased
product revenue for the years ended December 31, 2014 and 2012 and decreased product revenue for the year
ended December 31, 2013.

Year Ended December 31,
2013
2014

2012

Gross of Tax Reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of Tax Reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,748
$1,649

$(1,604)
$ (962)

$643
$386

The following tables show the changes in Accumulated Other Comprehensive Income by component for the

years ended December 31, 2014 and 2013 (in thousands):

Year Ended December 31, 2014

Unrealized
Gain on
Investments

Foreign Currency
Translation
Adjustments

Unrealized
Gain/(Loss) on Cash
Flow Hedges

Accumulated Other
Comprehensive
Income

Beginning balance . . . . . . . . . . . . . . . . . . . .
Current-period change, net of tax . . . . . . . .

Ending balance . . . . . . . . . . . . . . . . . . . . . .

$—
$12

$12

$ 3,257
$(1,188)

$ 2,069

$(2,404)
$ 6,826

$ 4,422

$ 853
$5,650

$6,503

Income tax expense (benefit) associated

with current-period change . . . . . . . . . . .

$ 8

$ (229)

$ 4,593

$4,372

Year Ended December 31, 2013

Unrealized
Gain/(Loss) on
Investments

Foreign Currency
Translation
Adjustments

Unrealized
Gain/(Loss) on Cash
Flow Hedges

Accumulated Other
Comprehensive
Income

Beginning balance . . . . . . . . . . . . . . . . . .
Current-period change, net of tax . . . . . .

Ending balance . . . . . . . . . . . . . . . . . . . .

$(46)
$ 46

$ —

$ 4,301
$(1,044)

$ 3,257

$
926
$(3,330)

$(2,404)

$ 5,181
$(4,328)

$

853

Income tax expense (benefit) associated

with current-period change . . . . . . . . .

$ 31

$

27

$(2,390)

$(2,332)

NOTE 7 — INVESTMENTS

The Company’s investments in debt securities with maturities at purchase greater than three months are
classified as “available-for-sale.” Changes in fair value are reflected in other comprehensive income. The
carrying amount of the Company’s investments in available-for-sale securities as of December 31, 2014 and
December 31, 2013 are shown in the table below (in thousands):

December 31,
2014

December 31,
2013

Short-term available-for-sale securities cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term available-for-sale securities unrealized gains . . . . . . . . . . . . . . . . . . . . . . .

$16,269
20

$14,048
—

Short-term available-for-sale securities fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,289

$14,048

As of December 31, 2014, the Company’s debt securities were investment grade and carried a long-term

rating of A2/A or higher.

F-20

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 ACCOUNTS AND OTHER RECEIVABLES, NET

A summary of net accounts and other receivables follows (in thousands):

December 31,

2014

2013

Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investment in sales-type lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$126,874
20,788
4,960
10,187
2,401

$169,417
9,075
2,141
—
2,051

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

165,210
(97)

182,684
(157)

Accounts and other receivables, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$165,113

$182,527

Unbilled receivables represent amounts where the Company has recognized revenue in advance of the
contractual billing terms. Advance billings represent billings made based on contractual terms for which no
revenue has yet been recognized.

As of December 31, 2014 and 2013, accounts receivable included $87.0 million and $111.9 million,
respectively, due from the U.S. Government. Of these amounts, $2.1 million and $0.3 million, respectively, were
unbilled, based upon contractual billing arrangements with these customers. As of December 31, 2014 and 2013,
no non-U.S. Government customers accounted for more than 10% of total accounts and other receivables.

NOTE 9 SALES-TYPE LEASE

As of December 31, 2014, the Company has a sales-type lease with one of its customers. Under the terms of
the arrangement, the Company has agreed to provide a high performance computing solution to the customer for
a term of four years, beginning at the customer’s acceptance of the system.

The following table shows the components of the net investment in the sales-type lease as of December 31,

2014 (in thousands):

Total minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: executory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 53,134
(10,717)

Net minimum lease payments receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated residual value of leased property (unguaranteed) . . . . . . . . . . . . . . . . . . . . . . . . .
Less: unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net investment in sales-type lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: long-term investment in sales-type lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42,417
1,253
(2,394)

41,276
(31,089)

Investment in sales-type lease included in accounts and other receivables . . . . . . . . . . . .

$ 10,187

As of December 31, 2014, minimum lease payments for each of the succeeding four fiscal years are as

follows (in thousands):

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,169
14,169
14,169
10,627

Total minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$53,134

F-21

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10

INVENTORY

A summary of inventory follows (in thousands):

December 31

2014

2013

Components and subassemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 60,851
46,954
35,827

$46,339
23,618
25,172

$143,632

$95,129

As of December 31, 2014 and 2013, $35.3 million and $24.8 million, respectively, of finished goods
inventory was located at customer sites pending acceptance. At December 31, 2014, two customers accounted for
$31.2 million of finished goods inventory. At December 31, 2013, one customer accounted for $18.0 million of
finished goods inventory.

During 2014, 2013 and 2012, the Company wrote-off $2.3 million, $0.9 million and $2.3 million related to

various product lines.

NOTE 11 PROPERTY AND EQUIPMENT, NET

A summary of property and equipment follows (in thousands):

December 31,

2014

2013

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

275
20,409
13,198
59,785
446

$

203
17,022
14,443
91,475
1,276

Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .

94,113
(59,320)

124,419
(94,141)

Property and equipment, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 34,793

$ 30,278

Depreciation expense on property and equipment for 2014, 2013 and 2012 was $12.8 million, $10.9 million

and $7.4 million, respectively.

NOTE 12 SERVICE SPARES, NET

A summary of service spares follows (in thousands):

Service spares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,114
(11,246)

$ 16,613
(14,785)

Service spares, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,868

$ 1,828

Depreciation expense on service spares for 2014, 2013 and 2012 was $1.0 million, $0.9 million and $0.9

million, respectively.

December 31,

2014

2013

F-22

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 DEFERRED REVENUE

Deferred revenue consisted of the following (in thousands):

December 31

2014

2013

Deferred product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 21,152
92,346

$ 54,065
87,900

Total deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

113,498
(47,588)

141,965
(50,477)

Deferred revenue in current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 65,910

$ 91,488

As of December 31, 2014 and 2013 the U.S. Government accounted for $63.8 million and $49.2 million of
total deferred revenue. As of December 31, 2013, two non-U.S. Government customers accounted for $52.0
million of total deferred revenue. As of December 31, 2014, no non-U.S. Government customers accounted for
more than 10% of total deferred revenue.

NOTE 14 COMMITMENTS AND CONTINGENCIES

The Company has recorded rent expense under leases for buildings or office space, which are accounted for

as operating leases, in 2014, 2013 and 2012 of $5.2 million, $5.3 million, and $4.6 million, respectively.

Minimum contractual commitments as of December 31, 2014, were as follows (in thousands):

Operating
Leases

Development
Agreements

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

$ 5,097
4,762
4,563
4,373
4,266
14,563

Minimum contractual commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$37,624

$6,856
25
25
25
25
—

$6,956

In its normal course of operations, the Company engages in development arrangements under which it hires
its existing internal staff in order to complete research and
outside engineering resources to augment
development projects, or parts thereof. For the years ended December 31, 2014, 2013 and 2012, the Company
incurred $12.2 million, $9.3 million and $4.9 million for such arrangements, respectively.

Litigation

From time to time, the Company is subject to various legal proceedings that arise in the ordinary course of

business, none of which are currently material to the Company’s business.

NOTE 15

INCOME TAXES

Income taxes are recognized for the amount of taxes payable for the current year and for the impact of
deferred tax assets and liabilities, which represent consequences of events that have been recognized differently
in the financial statements under GAAP than for tax purposes.

Most of the Company’s deferred tax assets result from net operating loss carryforwards and research and
development
the Company had U.S. federal net operating loss
carryforwards of approximately $115.4 million, of which approximately $37.9 million was related to stock-based

tax credits. As of December 31, 2014,

F-23

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

income tax deductions in excess of amounts that have been recognized for financial reporting purposes. Any
reduction of taxes payable for stock-based income tax deductions in excess of amounts that have been recognized
for financial reporting purposes will be directly credited to shareholders’ equity. As of December 31, 2014, the
Company had federal research and development tax credit carryforwards of approximately $21.3 million. The
federal net operating loss carryforwards will expire from 2019 through 2031, and the research and development
tax credits will expire from 2021 through 2034 if not utilized. Utilization of the Company’s federal net operating
loss and research and development tax credit carryforwards generated prior to May 10, 2001 are limited under
Section 382 of the Internal Revenue Code. As of December 31, 2014, the Company had approximately $7.0
million of foreign net operating loss carryforwards in various jurisdictions. Most of the Company’s foreign net
operating losses can be carried forward indefinitely, with certain amounts expiring from 2016 to 2022.

Income before income taxes consisted of the following (in thousands):

Year Ended December 31,

2014

2013

2012

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,710
3,987

$17,467
3,562

$161,592
7,140

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,697

$21,029

$168,732

The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):

Year Ended December 31,

2014

2013

2012

Current provision (benefit):

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

230
(392)
740

578

$

484
696
801

$1,162
2,768
541

1,981

4,471

Deferred (benefit) provision:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(53,242)
(885)
923

(13,160)
(327)
312

1,362
1,415
243

Total deferred (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . .

(53,204)

(13,175)

3,020

Total (benefit) provision for income taxes . . . . . . . . . . . . . . . . . . . .

$(52,626)

$(11,194)

$7,491

F-24

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax

rate as follows (in thousands):

Year Ended December 31,
2013

2012

2014

Income tax provision at statutory rate . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividends for U.S. income tax purposes . . . . . . . . . . . . .
Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidation of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disallowed compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit . . . . . . . . . . . . . . . . . . . . . . .
Effect of change in valuation allowance on deferred tax assets . . .

$ 3,394
(217)
284
—
492
337
—
(116)
(1,140)
(55,660)

$ 7,360
369
(749)
(8,419)
477
208
—
19
(5,736)
(4,723)

$ 59,056
4,183
(518)
—
2,352
549
(30,704)
492
—
(27,919)

Effective income tax provision (benefit) . . . . . . . . . . . . . . . . . . . .

$(52,626)

$(11,194)

$ 7,491

F-25

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant components of the Company’s deferred income tax assets and liabilities follow (in thousands):

December 31,

2014

2013

Current:
Deferred Income Tax Assets

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,840
681
18,186
12,981
1,261

$ 3,388
460
12,100
5,922
8,120

Gross current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,949
(2,039)

29,990
(20,107)

Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,910

9,883

Deferred Income Tax Liabilities

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(837)

(837)

(688)

(688)

Net current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,073

$ 9,195

Long-Term:
Deferred Income Tax Assets
Property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and experimentation credit carryforwards . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 11,555
24,596
21,511
203
9,967

$

328
23,941
47,154
628
10,161

Gross long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67,832
(8,099)

82,212
(57,687)

Long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,733

24,525

Deferred Income Tax Liabilities

Property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in sales-type lease, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
(14,321)
(1,215)
(2,783)

(1,905)
—
(2,059)
(1,355)

Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(18,319)

(5,319)

Net long-term deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 41,414

$ 19,206

The Company recorded an income tax benefit of $52.6 million and $11.2 million for the years ended
December 31, 2014 and 2013, respectively, and income tax expense of $7.5 million during the year ended
December 31, 2012. The tax benefit recorded by the Company during the year ended December 31, 2014 was
primarily attributable to a partial reduction, in the amount of $55.7 million, of the remaining valuation allowance
that was held against the Company’s U.S. deferred tax assets. The tax benefit recorded by the Company during

F-26

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the year ended December 31, 2013 was primarily attributable to a partial reduction, in the amount of $13.5
million, of the valuation allowance held against the Company’s U.S. deferred tax assets. The primary reason for
the difference between the income tax provision at the statutory rate and the Company’s effective income tax
provision for the year ended December 31, 2012 is that the gain from the sale of the Company’s interconnect
hardware development program did not result in significant income tax expense. The Company had existing
deferred tax assets that were subject to valuation allowances and deductible temporary differences that were
previously unrecognized. The sale of the interconnect hardware development program was never anticipated in
previous evaluations of the realizability of the Company’s deferred tax assets and consequently the sale, together
with a tax benefit that was recognized as a result of a restructuring of a subsidiary, resulted in the Company’s
ability to experience a relatively small tax consequence from the sale.

The Company’s decision to partially reduce, in the amount of $55.7 million, the valuation allowance held
against the Company’s U.S. deferred tax assets during the year ended December 31, 2014 was based upon an
evaluation of all available positive and negative evidence, known business risks and industry trends. The
Company considers its actual results over several years to have stronger weight than other more subjective
indicators, including forecasts, when considering whether or not to establish or reduce a valuation allowance on
deferred tax assets and believes that its ability to forecast results significantly into the future is severely limited
due to the rapid rate of technological and competitive change in the industry in which it operates. As of
December 31, 2014 the Company had generated U.S. pre-tax income in each of the last three years and
cumulative U.S. pre-tax income of $184.8 million ($51.1 million excluding the impact of the sale of the
Company’s interconnect hardware development program) over the last three years. In addition to the Company’s
cumulative income position, the assessment of the Company’s ability to utilize its U.S. deferred tax assets
included an assessment of forecasted domestic and international earnings over a number of years, which included
the impact of several major contracts that were finalized during the fourth quarter of 2014.

The partial reduction,

in the amount of $13.5 million, of the valuation allowance held against

the
Company’s U.S. deferred tax assets during the year ended December 31, 2013 was due to actual income from
operations during the year ended December 31, 2013 exceeding amounts previously used in the evaluation of the
realizability of the Company’s deferred tax assets at the beginning of the year and based upon an assessment of
all positive and negative evidence relating to future years.

During the year ended December 31, 2012 the Company reduced the valuation allowance held against its
deferred tax assets by $18.4 million as a result of the sale of the Company’s interconnect hardware development
program. The Company further reduced the valuation allowance held against its U.S. deferred tax assets by $10.7
million during the year ended December 31, 2012 due to actual income from operations during the year ended
December 31, 2012 exceeding amounts previously used in the evaluation of the realizability of the Company’s
deferred tax assets at the beginning of the year and based upon an assessment of all positive and negative
evidence relating to future years.

the realizability of

The Company’s conclusion about

its deferred tax assets, and therefore the
appropriateness of the valuation allowance, is reviewed quarterly and could change in future periods depending
on the Company’s future assessment of all available evidence in support of the likelihood of realization of its
deferred tax assets. If the Company’s conclusion about the realizability of its deferred tax assets and therefore the
appropriateness of its valuation allowance changes in a future period it could record a substantial tax provision or
benefit in the Consolidated Statement of Operations when that occurs.

The valuation allowance on deferred tax assets decreased by $67.7 million, $4.7 million and $27.9 million
in 2014, 2013 and 2012, respectively. The decrease in the valuation allowance for the year ended December 31,
2014 included a reduction,
in the amount of $55.7 million, of the valuation allowance held against the
Company’s U.S. deferred tax assets based upon an assessment of all positive and negative evidence relating to
future years. The decrease in the valuation allowance for the year ended December 31, 2013 was comprised of
the partial reduction of the valuation allowance of $13.5 million which was principally offset by a stock
compensation related adjustment of $8.4 million.

F-27

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Undistributed earnings relating to the Company’s foreign subsidiaries are considered to be permanently
reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon
repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both
U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various
foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not
practicable due to the complexities associated with this hypothetical calculation. As of December 31, 2014, the
Company’s foreign subsidiaries held cash in the amount of $42.2 million.

The following table summarizes changes in the amount of the Company’s unrecognized tax benefits for

uncertain tax positions for the three years ended December 31, 2014, 2013 and 2012 (in thousands):

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to current year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease related to prior year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to prior year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to current year income tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —
470

$ 470
(268)

$ 202
5,059
369

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,630

The balance of unrecognized tax benefits as of December 31, 2014 was $5.6 million of tax benefits that, if
recognized, would affect the effective tax rate. It is not anticipated that the balance of unrecognized tax benefits
will significantly change over the next twelve months.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company defines its major tax jurisdictions to include Australia, Germany, the United
Kingdom and the United States. The Company is no longer subject to income tax examinations with respect to
Australia for periods before 2009 and for periods before 2013 in Germany and the United Kingdom, respectively.
With respect to the U.S. federal and various state jurisdictions the Company is no longer subject to income tax
examinations with respect to periods before 2011, although in such jurisdictions net operating loss and tax credit
carryforwards generated in a year are subject to examination and adjustment for at least three years following the
year in which such losses or credits are actually used to offset taxable income.

Estimated interest and penalties are recorded as a component of interest expense and other expense,

respectively. Such amounts were not material for 2014, 2013 and 2012.

NOTE 16 CREDIT FACILITIES

As of December 31, 2014, the Company had a $10.0 million unsecured line of credit with Wells Fargo
Bank, National Association and an $11.0 million letter of credit facility with Silicon Valley Bank. Both facilities
are designed to support the issuance of letters of credit and foreign exchange hedging transactions. The Wells
Fargo Bank, National Association credit facility matures in October 2015 and the Silicon Valley Bank credit
facility matures in December 2015. The Company made no draws and had no outstanding cash borrowings on
any credit facilities as of December 31, 2014.

As of December 31, 2014, the Company had $13.5 million in outstanding letters of credit and $16.9 million
in restricted cash associated with certain letters of credit to secure customer prepayments and other customer
related obligations.

F-28

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 17 SHAREHOLDERS’ EQUITY

Preferred Stock: The Company has 5,000,000 shares of undesignated preferred stock authorized, and no

shares of preferred stock outstanding.

Common Stock: The Company has 75,000,000 authorized shares of common stock with a par value of

$0.01 per share.

Restricted Stock and Restricted Stock Units: During 2014, 2013 and 2012, respectively, the Company
issued an aggregate of 463,734, 755,979, and 1,316,447 shares of restricted stock, respectively, to certain
directors, executives and other employees. The grant date fair value of these grants was approximately $13.3
million, $15.8 million, and $15.8 million for 2014, 2013 and 2012, respectively. Stock compensation expense is
recorded over the vesting period, which has generally been two years for non-employee directors and four years
for officers and employees of the Company. As of December 31, 2014, $24.0 million remains to be expensed
over the remaining vesting periods of these grants. This includes $12.4 million for performance vesting restricted
stock subject to performance measures which are currently not considered probable to vest and $0.2 million for
performance vesting restricted stock subject to performance measures which currently are considered probable to
vest. No compensation expense is recognized for performance vesting restricted stock subject to performance
measures that are not yet considered probable of attainment.

As of December 31, 2012, the Company had issued and outstanding 12,500 restricted stock units. There
were no restricted stock units issued and outstanding as of December 31, 2014 and 2013. Restricted stock units
have similar vesting characteristics as restricted stock but are not outstanding shares and do not have any voting
or dividend rights. The Company records stock-based compensation expense over the vesting period. Once a
restricted stock unit vests, a share of common stock of the Company will be issued.

Stock Option Plans: As of December 31, 2014, the Company had one active equity incentive plan that
provides shares available for option grants to employees, directors, executives and others. Options granted to
employees under the Company’s equity incentive plan typically vest over four years or as otherwise determined
by the plan administrator. Options to purchase shares expire no later than ten years after the date of grant.

In determining the fair value of stock options, the Company used the Black-Scholes option pricing model

that employed the following key weighted average assumptions:

2014

2013

2012

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average Black-Scholes value of options granted . . . . . . . . . . .

1.22%
—%

0.98%
—%

0.56%
—%
52.43% 50.45% 74.84%
4.0
$ 8.22

4.0
$ 6.56

4.0
$11.16

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The
Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data.
The expected life of an option was based on the assumption that options will be exercised, on average, about two
years after vesting occurs. The Company recognizes compensation expense for only the portion of options or
stock units that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived
from historical employee termination data and adjusted for expected future employee turnover rates. The
estimated forfeiture rates applied for the years ended December 31, 2014, 2013 and 2012 were 8.3%, 10.0%, and
6.6%, respectively. If the actual number of forfeitures differs from those estimated by management, additional
adjustments to compensation expense may be required in future periods. The Company’s stock price volatility,
option lives and expected forfeiture rates involve management’s best estimates at the time of such determination,
all of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately,
the expense that will be recognized over the life of the option.

F-29

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the Company’s stock option activity and related information follows:

Outstanding at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options

3,417,920
359,500
(1,346,326)
(137,589)

Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .

2,293,505

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

346,360
(495,221)
(66,575)

2,078,069
323,900
(411,352)
(59,627)

Outstanding at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .

1,930,990

Exercisable at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . .

1,251,080

Available for grant at December 31, 2014 . . . . . . . . . . . . . . . . .

3,079,888

Weighted
Average
Remaining
Contractual
Term
(Years)

6.6

5.6

Weighted
Average
Exercise
Price

$ 6.28
11.90
5.52
11.35

7.31

20.65
6.38
21.97

9.29
26.92
7.50
18.45

12.34

8.18

As of December 31, 2014, there was $42.8 million of aggregate intrinsic value of outstanding stock options,
including $32.9 million of aggregate intrinsic value of exercisable stock options. Intrinsic value is the total pretax
intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on
the last trading day of 2014 and the exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options as of December 31, 2014. This
amount changes, based on the fair market value of the Company’s stock. Total intrinsic value of options
exercised was $10.2 million, $7.9 million, and $7.6 million for the years ended December 31, 2014, 2013 and
2012, respectively.

F-30

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the Company’s unvested restricted stock and restricted stock unit grants and changes during

the years ended December 31 was as follows:

Service Vesting
Restricted Shares

Performance Vesting
Restricted Shares

Total Restricted Shares

Weighted
Average
Grant Date
Fair Value

$ 5.47
10.84
7.64
5.86

Shares

1,302,414
579,447
(31,771)
(384,352)

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average Grant
Date Fair Value

Shares

— $ — 1,302,414
1,316,447
12.90
—
(31,771)
— (384,352)

737,000
—
—

$ 5.47
11.99
7.64
5.86

Outstanding at January 1, 2012 . . .
Granted . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31,

2012 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . .

1,465,738
326,979
(3,437)
(661,580)

Outstanding at December 31,

2013 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . .

1,127,700
463,734
(134,653)
(423,179)

7.44
20.83
5.92
6.22

12.05
28.74
15.39
11.14

Outstanding at December 31,

737,000
429,000
(72,000)
—

12.90
21.00
14.88

2,202,738
755,979
(75,437)
— (661,580)

1,094,000
—
(277,000)
—

15.94
—
17.49

2,221,700
463,734
(411,653)
— (423,179)

9.27
20.93
14.48
6.22

13.97
28.74
16.80
11.14

2014 . . . . . . . . . . . . . . . . . . . . . .

1,033,602

19.48

817,000

15.41

1,850,602

17.68

The estimated forfeiture rate applied to the Company’s restricted stock grants during the year ended
December 31, 2014 was 6.3%. The total number of restricted shares outstanding as of December 31, 2014, 2013
and 2012 included 804,500, 1,081,500 and 737,000 performance vesting restricted shares subject to performance
conditions that are currently not considered probable of vesting, respectively.

The aggregate fair value of restricted shares vested during 2014, 2013 and 2012 was $11.9 million, $14.0

million, and $4.2 million, respectively.

As of December 31, 2014, the Company had $29.4 million of total unrecognized compensation cost related
to unvested stock options and unvested restricted stock grants. Excluding the $12.4 million for performance
vesting restricted stock subject to performance measures which are currently not considered probable to vest,
unrecognized compensation cost was $17.0 million. No compensation expense is recorded for performance
vesting restricted stock subject to performance measures which are not yet considered probable of attainment.
Unrecognized compensation cost related to unvested stock options and unvested restricted stock grants
considered probable of vesting is expected to be recognized over a weighted average period of 2.9 years.

F-31

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Outstanding and exercisable options by price range as of December 31, 2014, were as follows:

Outstanding Options

Exercisable Options

Range of Exercise
Prices per Share

$0.00 – $ 4.00 . . . . . . . . . . . . . . . . . .
$4.01 – $ 6.00 . . . . . . . . . . . . . . . . . .
$6.01 – $ 8.00 . . . . . . . . . . . . . . . . . .
$8.01 – $34.15 . . . . . . . . . . . . . . . . . .

Number
Outstanding

265,142
240,647
438,159
987,042

$0.00 – $34.15 . . . . . . . . . . . . . . . . . .

1,930,990

4.3
5.1
5.7
8.1

6.6

Weighted
Average
Remaining
Life (Years)

Weighted
Average
Exercise
Price

Number
Exercisable

265,142
240,647
360,553
384,738

Weighted
Average
Exercise
Price

$ 3.71
$ 5.49
$ 6.33
$14.68

$ 3.71
$ 5.49
$ 6.29
$19.01

$12.34

1,251,080

$ 8.18

The following table (in thousands) sets forth the share-based compensation cost resulting from stock options
and stock grants recorded in the Company’s Consolidated Statements of Operations for the years ended
December 31, 2014, 2013 and 2012.

2014

2013

2012

Cost of product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

229
255
2,721
3,152
4,007

$ 135
229
1,480
2,230
3,165

$

57
258
1,327
1,717
2,604

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .

$10,364

$7,239

$5,963

Employee Stock Purchase Plan (ESPP): Under the Company’s non-compensatory employee stock
purchase plan, the maximum number of shares of the Company’s common stock that employees could acquire
under the ESPP is 1,750,000 shares. Eligible employees are permitted to acquire shares of the Company’s
common stock through payroll deductions not exceeding 15% of base wages. The purchase price per share under
the ESPP is 95% of the closing market price on the fourth business day after the end of each offering period. As
of December 31, 2014, 2013 and 2012, 1,043,228, 1,022,610 and 998,118 shares, respectively, had been issued
under the ESPP.

NOTE 18 BENEFIT PLANS

401(k) Plan

For the three years ended December 31, 2014, the Company’s retirement plan covered substantially all
U.S. employees and provided for voluntary salary deferral contributions on a pre-tax basis in accordance with
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company matches a portion of employee
contributions. The 2014, 2013 and 2012 Company match expense was $1.6 million, $1.2 million and $1.0
million, respectively.

Pension Plan

The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2014, the
excess of plan assets over the projected benefit obligation of $2.3 million was $0.2 million. At December 31,
2013, the excess of plan assets over the projected benefit obligation of $2.6 million was $0.2 million. Plan assets
are invested in insurance policies payable to employees. Net pension expense was not material for any period.
Contributions to the plan are not expected to be significant to the financial position of the Company.

F-32

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 19 SEGMENT INFORMATION

The Company has the following reportable segments: Supercomputing (formerly HPC Systems), Storage
and Data Management, Maintenance and Support and Engineering Services and Other. The Company’s segment
presentation changed beginning January 1, 2014 to be consistent with information now provided to its Chief
Executive Officer, who is the Company’s Chief Operating Decision Maker. This information has been modified
to include inter-segment revenue and gross profit from Maintenance and Support services in Supercomputing and
Storage and Data Management resulting from the sales of products in these segments. The prior period financial
information has been reclassified to conform to the current period’s presentation.

The Company’s reportable segments represent components of the Company for which separate financial
information is available that is utilized on a regular basis by the Chief Executive Officer, who is the Chief
Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance.
The segments are determined based on several factors, including the Company’s internal operating structure, the
manner in which the Company’s operations are managed, client base, similar economic characteristics and the
availability of separate financial information.

Supercomputing

Supercomputing includes a suite of highly advanced supercomputers and cluster systems which are used by
single users all
the way up through large research and engineering centers in universities, government
laboratories, and commercial institutions. Supercomputing also includes the ongoing maintenance of these
systems as well as system analysts.

Storage and Data Management

Storage and Data Management offers the Cray Sonexion and Tiered Adaptive Storage solution as well as

other third-party storage products and their ongoing maintenance as well as system analysts.

Maintenance and Support

Maintenance and Support provides ongoing maintenance of Cray supercomputers, big data storage and

analytics systems, as well as system analysts.

Engineering Services and Other

Included within Engineering Services and Other is the Company’s analytics business and Custom

Engineering.

F-33

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents revenues and gross margin for the Company’s operating segments for the years

ended December 31 (in thousands):

Revenue:

2014

2013

2012

Supercomputing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage and Data Management
. . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering Services and Other . . . . . . . . . . . . . . . . . . . . . . . .
Elimination of inter-segment revenue . . . . . . . . . . . . . . . . . . .

$459,729
84,412
86,573
17,465
(86,573)

$434,133
76,955
77,817
14,661
(77,817)

$355,736
55,009
62,245
10,313
(62,245)

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$561,606

$525,749

$421,058

Gross Profit:
Supercomputing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Storage and Data Management
. . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering Services and Other . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Elimination of inter-segment gross profit

$146,565
31,572
38,819
6,277
(38,819)

$143,440
31,403
38,476
9,483
(38,476)

$128,723
16,574
25,735
5,881
(25,735)

Total gross profit

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$184,414

$184,326

$151,178

Revenue and cost of revenue is the only discrete financial information the Company prepares for its

segments. Other financial results or assets are not separated by segment.

The Company’s geographic operations outside the United States include sales and service offices in Canada,
Brazil, Europe, Japan, Australia, India, South Korea, the United Arab Emirates, China, Singapore and Taiwan.
Product and service revenue and long-lived assets classified by significant country were as follows
(in thousands):

United
States

All
Other
Countries

Total

For the year ended December 31, 2014:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$253,930

$206,818

$460,748

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 72,434

$ 28,424

$100,858

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 58,868

$ 36,792

$ 95,660

For the year ended December 31, 2013:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$297,583

$138,747

$436,330

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,072

$ 27,347

$ 89,419

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 58,910

$

6,146

$ 65,056

For the year ended December 31, 2012:
Product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$301,162

$ 52,605

$353,767

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 42,359

$ 24,932

$ 67,291

Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 57,549

$

4,460

$ 62,009

F-34

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-lived assets as of December 31, 2014 included the $31.1 million long-term investment in sales-type

lease which was held by the Company’s UK subsidiary.

Revenue attributed to foreign countries is derived from sales to customers located outside the United States.
Revenue derived from the U.S. Government totaled approximately $272.0 million, $266.1 million and $286.9
million in 2014, 2013 and 2012, respectively. In 2014, no non-U.S. Government customers accounted for more
than 10% of total revenue. In 2013, one non-U.S. Government customer accounted for an aggregate of
approximately 11% of total revenue. In 2012, one non-U.S. Government customer accounted for an aggregate of
approximately 13% of total revenue. In general, concentrations of revenue by customer encompass all segments.
In 2014, the UK and Germany accounted for a combined 23% of total revenue. In 2013 and 2012 no foreign
country accounted for more than 10% of total revenue.

NOTE 20 RESEARCH AND DEVELOPMENT

The detail for the Company’s net research and development costs for the years ended December 31 follows

(in thousands):

Gross research and development expenses . . . . . . . . . . . . . . . . . . .
Less: Amounts included in cost of revenue . . . . . . . . . . . . . . . . . .
Less: Reimbursed research and development (excludes amounts

2014

2013

2012

$104,797
(7,713)

$92,469
(3,741)

$ 86,305
(1,080)

in revenue)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,036)

(1,000)

(20,922)

Net research and development expenses . . . . . . . . . . . . . . . . . . . .

$ 94,048

$87,728

$ 64,303

NOTE 21

INTEREST INCOME (EXPENSE)

The detail of interest income (expense) for the years ended December 31 follows (in thousands):

2014

2013

2012

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 643
(137)

$ 894
(137)

$ 397
(193)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 506

$ 757

$ 204

Interest income is earned by the Company on cash and cash equivalent, investment balances and the

investment in sales-type lease.

F-35

CRAY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 22 QUARTERLY DATA (UNAUDITED)

The following table presents unaudited quarterly financial

the two years ended
December 31, 2014. In the opinion of management, this information contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation thereof.

information for

The operating results are not necessarily indicative of results for any future periods. Quarter-to-quarter
comparisons should not be relied upon as indicators of future performance. The Company’s business is driven by
a few significant contracts and, as a result, the Company’s operating results are subject to very large quarterly
fluctuations. The Company’s earnings per share for the full year may not equal the sum of the four quarterly
earnings per share amounts because of common share activity during the year.

(In thousands, except per share data)

For the Quarter Ended

3/31

6/30

9/30

12/31

3/31

6/30

9/30

12/31

2014

2013

Revenue . . . . . . . . . . . . . . . . . . $ 55,110 $85,147 $159,406 $261,943 $79,547 $84,467 $ 54,366 $307,369
194,420
Cost of revenue . . . . . . . . . . . .

173,000

110,876

55,397

37,173

33,940

57,666

56,143

Gross profit
Research and development,

. . . . . . . . . . . . . . .

net

. . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . .
General and administrative . . .
Net income (loss)(1) . . . . . . . .
Net income (loss) per common

17,937

29,004

48,530

88,943

24,150

26,801

20,426

112,949

22,621
11,776
5,413
(12,938)

24,189
13,259
5,316
(6,748)

22,503
14,808
5,813
7,371

24,735
17,942
6,839
74,638

20,226
11,143
5,485
(7,609)

19,968
11,550
5,085
(150)

21,555
11,480
4,970
(11,025)

25,979
17,172
8,063
51,007

share, basic . . . . . . . . . . . . . $

(0.34) $ (0.18) $

0.19 $

1.92 $ (0.20) $ — $

(0.29) $

1.33

Net income (loss) per common

share, diluted . . . . . . . . . . . . $

(0.34) $ (0.18) $

0.18 $

1.84 $ (0.20) $ — $

(0.29) $

1.27

(1) The fourth quarter of 2014 includes the impact of the reduction of substantially all of the valuation

allowance held against the Company’s U.S. deferred tax assets.

F-36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Cray Inc.

We have audited the accompanying consolidated balance sheets of Cray Inc. and Subsidiaries
(the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations,
comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2014. Our audits also included the financial statement schedule listed in the index at item 15(a)(2).
The Company’s management is responsible for these consolidated financial statements and schedule. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Cray Inc. and Subsidiaries as of December 31, 2014 and 2013, and the
consolidated results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 19, 2015, expressed an
unqualified opinion.

/S/ PETERSON SULLIVAN LLP

Seattle, Washington
February 19, 2015

F-37

Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2014
(In Thousands)

Description

Year ended December 31, 2012:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .

Year ended December 31, 2013:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .

Year ended December 31, 2014:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .

Balance at
Beginning
of Period

Charge/(Benefit)
to Expense

Deductions(2)

Balance at
End of
Period

$110

$ (62)

$(43)

$

5

$

5

$179

$ (27)

$157

$157

$ 22

$ (82)

$ 97

(1) The Company does not have any warranty liabilities.
(2) Deductions represent uncollectible accounts written off, net of recoveries.

F-38

INVESTOR INFORMATION

BOARD OF DIRECTORS

Stephen C. Kiely, Chairman
Retired Chief Executive Officer

Prithviraj Banerjee
Managing Director of Global Technology
Research and Development
Accenture

Martin J. Homlish
Chief Executive Officer
AMP

Frank L. Lederman
Retired Chief Technical Officer

Sally G. Narodick
Retired Chief Executive Officer

Daniel C. Regis
General Partner
Regis Investments, LP

Stephen C. Richards
Retired Chief Operating Officer
and Chief Financial Officer

Max L. Schireson
Retired Chief Executive Officer

Peter J. Ungaro
President and Chief Executive Officer
Cray Inc.

EXECUTIVE OFFICERS

Peter J. Ungaro
President and Chief Executive Officer

Brian C. Henry
Executive Vice President
and Chief Financial Officer

Barry C. Bolding
Vice President, Marketing
and Business Development

Charles D. Fairchild
Vice President, Corporate Controller
and Chief Accounting Officer

Charles A. Morreale
Vice President, Field Operations

Michael C. Piraino
Vice President Administration,
General Counsel and Corporate Secretary

Steven L. Scott
Senior Vice President and Chief Technology Officer

Ryan W. J. Waite
Senior Vice President of Products

Margaret A. Williams
Senior Vice President of Research and Development

SHAREHOLDER SERVICES
Computershare Inc., our transfer agent and
registrar, can be contacted as indicated below to help
you with a variety of shareholder-related services,
including:

CRAY ANNUAL MEETING
JUNE 10, 2015 – 3:00 P.M.
901 Fifth Avenue
Fifth Avenue Conference Room
Seattle, WA 98164

CORPORATE HEADQUARTERS
Cray Inc.
901 Fifth Avenue, Suite 1000
Seattle, WA 98164
206-701-2000
206-701-2500 fax

OTHER PRINCIPAL OFFICES
1050 Lowater Road
Chippewa Falls, WI 54729

380 Jackson Street, Suite 210
St. Paul, MN 55101

INTERNET
E-Mail:
ir@cray.com

WEBSITE:
www.cray.com

LEGAL COUNSEL
Fenwick & West LLP
Seattle, WA

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Peterson Sullivan LLP
Seattle, WA

STOCK MARKET INFORMATION
Cray Inc. common stock is traded on the
Nasdaq Global Market under the
Symbol CRAY.

EQUAL OPPORTUNITY
Cray is an equal opportunity employer.

• Change of address
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services
• Account consolidation

Computershare Inc.
Shareholder Relations
P. O. Box 30170
College Station, TX 77842-3170
or

211 Quality Circle, Suite 210
College Station, TX 77845
www.computershare.com/investor

Shareholder online inquiries
https://www-us.computershare.com/investor/Contact

Telephone: 877-522-7762
TDD for Hearing Impaired: 800-490-1493
International Shareholders: 201-680-6578
TDD International Shareholders: 781-575-4592

AVAILABLE INFORMATION

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Safe Harbor Statement
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933, including, but not limited to, statements related to Cray’s financial guidance and expected future operating results and its product
development, sales and delivery plans. These statements involve current expectations, forecasts of future events and other statements that are not historical facts.
Inaccurate assumptions as well as known and unknown risks and uncertainties can affect the accuracy of forward-looking statements and cause actual results to
differ materially from those anticipated by these forward-looking statements. Factors that could affect actual future events or results include, but are not limited to,
the risk that Cray does not achieve the operational or financial results that it expects, the risk that the systems ordered by customers are not delivered when expected,
do not perform as expected once delivered or have technical issues that must be corrected before acceptance, the risk that the acceptance process for delivered
systems is not completed, or customer acceptances are not received, when expected or at all, the risk that Cray will not be able to secure orders for Cray systems to
be delivered and accepted in 2015 when or at the levels expected, the risk that Cray’s big data products, including storage, are not as successful as expected, the risk
that Cray is not able to successfully complete its planned product development efforts in a timely fashion or at all including the risk that Cray is not able to deliver
Shasta systems or technology within the planned timeframes or at all, the risk that the Shasta system will not have the features, performance or components currently
planned, the risk that processors and interconnect technology planned for the Shasta system are not available when expected or with the performance expected, the
risk that planned future third-party processors are not available with the performance expected or when expected or are made available in a way that encourages
customers to delay purchases of our products because they decide to wait for successor systems or upgrades they believe will be available in the future or to
purchase products with the future processors from our competitors who are willing to take greater risk on delivery, the risk that Cray is not able to achieve
anticipated gross margin or expense levels, and such other risks as identified in Cray’s annual report on Form 10-K for the period ended December 31, 2014, and
from time to time in other reports filed by Cray with the U.S. Securities and Exchange Commission. You should not rely unduly on these forward-looking
statements, which apply only as of the date of this Annual Report. Cray undertakes no duty to publicly announce or report revisions to these statements as new
information becomes available that may change Cray’s expectations.
CRAY, and the stylized CRAY mark, SONEXION and URIKA are registered trademarks of Cray Inc. in the United States and other countries, and the CS, XE, XK
and XC families of supercomputers are all trademarks of Cray Inc. Other trademarks used in this report are the property of their respective owners.