Fellow Shareholders,
Headlined by strong growth in revenue and profitability, we had one of our best years ever in 2015,
executing across each of our major focus areas and positioning our company for continued growth into the future.
We achieved another year of record revenue, growing by nearly 30 percent compared to 2014. In fact, our
revenue in 2015 was more than three times higher than just four years prior — driven by growth in both our
addressable market and market share. Over the last five years, we have transformed from a company solely focused
on the high-end of the supercomputing market — where we are now the clear market leader — to a company with
multiple product lines serving multiple markets. We provide our customers with powerful computing, storage and
analytics solutions that give them the tools to advance their businesses in ways never before possible.
During 2015, we installed supercomputing and storage solutions at a number of customers around the
world. In the U.S., we completed the first phase of the massive new “Trinity” system at Los Alamos National
Laboratory. This Cray XC40 supercomputer with Sonexion storage serves as the National Nuclear Security
Administration’s flagship supercomputer, supporting all three of the NNSA’s national laboratories. We installed the
first petaflop supercomputer in India at the Indian Institute of Science. In Europe, we installed numerous XC and
storage solutions, including a significant expansion of the existing XC40 supercomputer at the University of
Stuttgart in Germany. This new system nearly doubles their computing capacity and is currently the fastest
supercomputer in Germany.
Following a record year in 2014, our momentum continued in 2015 across each of our major geographies
around the world. In the United States, we had a major win at Argonne National Laboratory, which selected a Cray
XC40 supercomputer and our next-generation Shasta system for the Department of Energy’s CORAL project. At the
U.K.’s Meteorological Office, we installed two XC40 systems and Sonexion storage — with more planned in 2016.
In Australia, we were selected by the Bureau of Meteorology to provide a new flagship supercomputer and storage
to run its weather models. In fact, in the weather market today, more than 60 percent of global weather forecasting
centers run their daily weather models on Cray supercomputers.
A big driver of our growth over the last few years has come from our work with commercial customers
looking to leverage our technology in their businesses. In fact, three of the top ten Fortune 500 companies are now
Cray customers, and our commercial revenue grew to more than 15 percent of our total revenue for 2015, a
significant increase over 2014. This is a solid step toward our goal of delivering more than a third of our business
from commercial customers — something we hope to achieve in the next few years. Commercial customers
typically run their engineering and analytics models on commodity clusters, especially in recent years. Due to the
explosion of new data available, those commodity solutions have begun to hit performance and capability
limitations and more and more customers are turning to highly scalable, tightly integrated supercomputers in order
to deliver better results in shorter time frames, generating a better ROI for their company. This is a great opportunity
for us to add considerable value to a commercial business, which is important to our future growth as the
commercial market roughly doubles our previously addressable market, providing significant new room to continue
growing our business.
A good example of how commercial customers are using our systems in production is in the energy market,
specifically in the analysis of oil and gas deposits and extraction strategies. In 2015, Petroleum Geo-Services (PGS),
a global leader in marine geophysical exploration based in Norway, put an XC40 system with Sonexion storage into
production. This system enables PGS to run some of the largest and most complex seismic imaging models in the
world, faster and at higher resolution than they could with commodity clusters or on cloud-based environments.
Our international presence also continues to grow. We established a new headquarters for our European,
Middle-East and Africa region in Bristol, U.K., last year, which will serve as a regional base for our EMEA sales,
service, training and operations. We also launched a new research laboratory in Bristol to foster the development of
deep technical collaborations with key customers and partners, and to serve as the focal point for our technical
engagements with the European HPC ecosystem.
We recently added several great leaders to our team, including Brian Turner, who joined our Board of
Directors, Fred Kohout, our new chief marketing officer, and Nick Gorga, who leads our sales efforts for the Asia
Pacific region. Brian provides a wealth of expertise in finance and strategy, having served in leadership roles with
several high-growth technology companies. Fred brings more than 25 years of marketing experience, having held
executive-level positions at Fortune 500 companies including EMC and Sun Microsystems. Nick joins us with more
than 20 years of experience in the high performance computing market. We are honored and pleased to welcome
each of them, and all of our new employees, to the Cray team.
On a sad note, one of our board members, Steve Richards, passed away in 2015. Steve had served on our
board since 2004, and had a profoundly positive impact on our entire company, as well as on me personally. Steve
was a steadying influence throughout his time at Cray and I’ll always remember him for his exceptional leadership
qualities. We are proud to have worked with him and our condolences go out to his family.
Finally, as we think about the continuing evolution of our industry, we’re excited by the trends towards
higher and higher data volumes and increasing computational complexity. These are creating new and greater
opportunities to bring together our unique technologies in powerful and efficient ways. Of particular importance, we
see customers shifting their focus beyond the management of the explosion of data around their businesses, to how
they can unlock the value of that data to drive rapid, informed decisions. We believe this drive to extract insights
from big data will continue to accelerate, and will create several new demands on computing infrastructure: (1)
system performance bottlenecks will shift from the speed of the processor to the fast and efficient movement of data;
(2) memory and storage hierarchy will become more important, as will tools to help manage data within that
deepening hierarchy; and (3) data analytics problems will look increasingly like traditional high performance
computing problems, providing opportunities to apply supercomputing technology to analyze massive amounts of
data, faster than ever before, in order to discover connections and insights hidden in that data. We believe these
demands play to Cray’s established strengths, closely align with the areas in which we continue to invest,
and leverage our 40 years of demonstrated expertise in designing, manufacturing and implementing large-scale, high
performance systems for mission critical applications. In short, we’re definitely excited about the future!
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
(cid:59)
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
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
Common Stock, $.01 par value
Name of Each Exchange on Which Registered
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 (cid:59) No (cid:133)
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 (cid:133) No (cid:59)
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 (cid:59)(cid:3)No (cid:133)
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
the preceding 12 months (or for such shorter period
to submit and post such
that
files). Yes (cid:59) No (cid:133)
the registrant was required
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. (cid:133)
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 (cid:59)
Smaller reporting company (cid:133)
Non-accelerated filer (cid:133)
Accelerated filer (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:59)
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2015, was approximately
$1,167,319,515 based upon the closing price of $29.51 per share reported on June 30, 2015, on the Nasdaq Global Market.
As of February 8, 2016, there were 40,688,282 shares of Common Stock issued and outstanding.
(Do not check if a smaller reporting company)
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 8, 2016, are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
CRAY INC.
FORM 10-K
For Fiscal Year Ended December 31, 2015
INDEX
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Selected Consolidated Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
_________________
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25
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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.
_________________
1
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 our management; 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, or the Exchange Act. 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.
2
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 data 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 big data storage and analytics market. We provide customer-focused solutions based on three models: (1) tightly
integrated supercomputing and/or 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)
integrated data analytics solutions that combine industry standard tools for large-scale analytics with our innovative graph analysis
tools. 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
and differentiation, maintain our focus on execution and profitability and grow by continuing to expand our share and 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 also meet diverse customer requirements by
combining supercomputing, cluster supercomputing, storage and analytics technologies described above, into unique solutions
offerings that work in a workflow-driven datacenter 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. 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.
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 and their requirements.
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 supercomputing 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 enable HPC users to focus on their primary objectives, including advancing
scientific discovery, increasing industrial capabilities, providing predictive analyses and improving national security.
Our supercomputer systems are designed to offer several additional benefits, including:
•
superior price-performance compared to other supercomputer systems as well as compared to enterprise computing
solutions and cloud computing solutions;
production, quality, reliability and resiliency;
•
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•
•
•
•
•
•
support for open standards, including Linux-based operating systems, open file systems (e.g., Lustre™), open
programming models (e.g., MPI, OpenMP and OpenACC) and popular programming languages such as Python, Scala
and R in addition to traditional HPC language such as Fortran and C++;
upgrade paths that enable 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, including energy aware features;
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-LC Supercomputer. The Cray XC40-LC supercomputer is our recent highly integrated supercomputing system.
The Cray XC40-LC system delivers on our commitment to our Adaptive Supercomputing architecture providing extreme scale
and sustained performance. The Cray XC40-LC system provides the HPC user community the advantage of the computational
resources of our 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 graphics processor units, or GPUs.
The Cray XC40-LC 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-LC supercomputer to run both a highly
scalable custom workload as well as an industry-standard, independent software vendor workload. The Cray XC40-LC system
includes our powerful compiler, runtime and related software that allows users to transparently leverage the underlying hardware
components. The Cray XC40-LC system supports a variety of applications, from carefully optimized Fortran and C++ applications,
to modern applications written in languages like Python and Scala, to applications written in Cray’s Chapel parallel programming
language designed to make parallel programming more productive and more generally accessible. Applications can run natively
in the Cray Linux Environment or can leverage Docker virtualization technologies familiar to cloud and enterprise application
developers.
Cray XC40-AC Supercomputer. The Cray XC40-AC supercomputer offers customers the full Cray XC40-LC experience
in an enterprise optimized footprint and scale. The system utilizes the exact same interconnect, blade options and software stack
as its larger liquid-cooled sibling, but is available in smaller starting configurations with a variety of input power options designed
to work in virtually any data center.
Cray CS400-AC Supercomputer. The Cray CS400-AC cluster supercomputing 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 Cray CS400-LC cluster supercomputing 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.
4
Cray CS-Storm Supercomputer. The CS-Storm supercomputer is a purpose-built solution employing GPUs in a high density
architecture to deliver industry leading performance, density and energy efficiency for highly data-parallel computations. The
Cray CS-Storm combines an innovative architecture design that supports up to 8 GPUs per compute node running at full power,
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 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
building some of the largest supercomputers in the world enables us to bring high performance, data-intensive, memory-centric
architectures to the big data market through 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 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. Urika-XA customers are able to optimize their analytics
pipelines and data movement activities while reducing 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 designed for
supercomputing and big data workloads. Our solutions leverage years of experience delivering high performance parallel storage
and file systems to our leading edge customers. Our customers are able to rapidly deploy highly scalable and extremely fast file
systems that integrate with computing solutions ranging from third-party clusters and Cray cluster supercomputers to highly
integrated 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 time while increasing reliability, capacity and performance.
Cray Sonexion offers an optimal combination of modular scaling capacity from terabytes to petabytes and sustained IO performance
from several gigabytes per second 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 XC40 and CS400 systems, as well as industry-standard Linux clusters.
Cray DataWarp Applications I/O Accelerator. Our DataWarp technology addresses a key problem experienced by
supercomputing customers: Disk based storage IO has not kept up with Moore’s Law and delivering sustainable performance on
a spectrum of applications with varying IO-intensive workloads has become costly and impractical. DataWarp provides a new tier
of storage featuring SSD and in-memory flash that is tightly integrated with Cray XC40 supercomputing resources. DataWarp
supports high application IO requirements while reducing overall application computing time. Production customers have seen
almost 2 terabytes per second of IO capacity with DataWarp while having the ability to make scientific discoveries faster.
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
5
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. 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 2015, maintenance and support revenue accounted for roughly thirteen 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 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 breadth 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 products.
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,
6
cooling and packaging infrastructures. The majority of our hardware research and development investments are in the following
areas:
•
•
Compute and storage architectures, high-speed interconnect and board integration and design. Integration of a variety
of processor, volatile and nonvolatile memory hierarchies 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.
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.
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 and Spark 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 18 - 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
checkout of our systems. Our manufacturing personnel are located in Chippewa Falls, Wisconsin. We work closely with a supplier
to provide integrated and tested Cray Sonexion storage products.
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. We have a license for
the Aries interconnect chip from Intel which we purchase through Avago who contracts to have Taiwan Semiconductor
Manufacturing Company 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 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.
7
Our Markets
Our key target markets are (i) the supercomputing portion of the HPC market and (ii) 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 demonstrated capabilities of our supercomputing solutions. Bringing these
technologies to the big data market is core to Cray 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. 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.
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 our 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 systems from the molecular level
to the whole cell, next-generation genomic sequencing and healthcare 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
these ranges 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.
8
Sales to the U.S. government and system acquisitions primarily funded by the U.S. government, or U.S. Government,
accounted for approximately 47% of our revenue in 2015, 48% of our revenue in 2014 and 51% of our revenue in 2013. Significant
customers with over 10% of our annual revenue were the U.S. Government in 2015 and 2014; and the U.S. Government and Exxon
Mobil in 2013. International customers accounted for 36% of our total revenue in 2015, 42% of our total revenue in 2014 and
32% of our total revenue in 2013.
We have four operating segments that are reportable for financial reporting purposes. Segment information and related
disclosures are set forth in Note 17 — 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, or HP, Lenovo, Dell, NEC, Hitachi, Fujitsu,
Silicon Graphics International, or SGI, and Atos SE, or Atos. 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 and 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 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 Lenovo, 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 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 Cray 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, or 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
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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.
Employees
As of December 31, 2015, we had 1,282 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 Exchange Act, 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.
10
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 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 receiving anticipated
customer orders, 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 as occurred in the fourth quarter of 2014. 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. For example, over the next twelve months, we anticipate significant capital and other expenditures in connection
with the expansion of our manufacturing facilities and offices. Due to the inherent difficulty in estimating costs associated with
projects of this scale and nature, certain of the costs associated with these potential projects may be higher than estimated and it
may take longer than expected to complete.
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:
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our ability to secure sufficient orders for our Cray XC and Cray CS systems as well as upgrades and successor
systems, such as our next generation “Shasta” system;
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;
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
orders and 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 procure 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;
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• 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.
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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:
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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 have 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;
competitor pricing strategies;
currency fluctuations, international conflicts or economic crises, 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;
the introduction or announcement of competitive or key industry supplier products;
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;
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 third-party component availability, product development,
receipt of orders, 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 2016 and in future years.
If we are unable to successfully develop, sell and deliver our Cray XC systems and successor systems, such as our
next generation Shasta system, 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 systems
and successor systems, such as our next generation Shasta system, including systems integrating future processors and accelerators.
The 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 or changes to 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:
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the level of product differentiation in our Cray XC systems and successor systems, such as our next generation Shasta
system. 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
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us or our suppliers completing development of new products and when we must estimate future system performance,
such as has been required with our Cray XC systems and our Sonexion storage systems, and will be frequently
required for subsequent systems, such as our next generation Shasta system; 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.
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Failure to successfully develop and sell our Cray XC systems and successor systems, such as our next generation Shasta
system, 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 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.
Our reliance on third-party suppliers poses significant risks to our operating results, business and prospects. We rely
upon third-party vendors, particularly Intel, to supply processors, including accelerators, for most of the products we sell and use
service providers to co-develop key technologies. We subcontract the manufacturing 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, particularly Intel, 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:
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if a supplier does not provide components or systems that meet our or their specifications in sufficient quantities and
with acceptable performance or 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 our relationship with a key supplier, such as Intel, is adversely affected, for example, due to competitive pressures
(or conflicting interests), our ability to obtain components on advantageous financial terms could be adversely
affected;
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, suffers damage to its manufacturing facilities, 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
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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
if a key supplier is acquired or has a significant business change, such as occurred with the acquisition of the third-
party original equipment manufacturer 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.
Delays in the availability of components with acceptable performance, features and reliability, or our inability to obtain such
acceptable components in the quantities we need or at all, and increases in order lead times for certain components, have occurred
in the past, and we are currently experiencing delays in the projected delivery timelines of certain key components. These types
of issues have adversely affected our revenue and operating results in multiple prior periods, in some cases significantly, and could
adversely affect future results.
The continuing commoditization of HPC hardware and software has resulted in increased 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 increased 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 the U.S. government and other governments purchase, or fund the purchase of, fewer 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 2013, 2014 and 2015, approximately 51%, 48% and 47%, 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, 2014 and 2015;
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
14
of supercomputers, our revenue and operating results would be adversely affected.
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 litigation 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 market share and revenue. Many of our competitors are
established companies well known in the HPC market, including IBM, HP, Lenovo, Dell, NEC, Hitachi, Fujitsu, SGI and Atos.
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. Also, to
the extent any component supplier successfully adds differentiating capabilities to their HPC products that compete with what we
provide, we may experience greater competitive pressures.
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.
15
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 technical 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, we have lost
key personnel to other high technology companies, and many larger companies with significantly greater resources than us 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
increase 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.
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, and in the past have occurred, as a result of third-party action, including computer hackers, employee error,
malfeasance or otherwise. Security breaches can result in someone obtaining unauthorized access to our data or our customers’
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. A 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.
We may infringe or be subject to claims that we infringe the intellectual property rights of others. Third parties have
in the past asserted and are currently asserting intellectual property infringement claims against us, and other third parties may
assert such claims against us in the future. 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, and any of these consequences of an infringement claim could adversely affect our results.
16
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 2013, 2014 and 2015, approximately 51%, 48% and 47%, 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.
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.
Our U.S. government business is also subject to specific procurement 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.
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.
17
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 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 minimize the possible risks of the sale of certain interconnect hardware assets to Intel, which could alter
the revenue, costs and nature of our business. In connection with our sale of certain interconnect hardware assets to Intel in
2012, 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 fully 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 in 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 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,
18
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.
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 that 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:
•
•
•
•
•
•
•
•
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, takeover or other business transaction between us and a
third party that is not approved by our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
19
Item 2. Properties
Our principal properties are as follows:
Location of Property
Uses of Facility
Chippewa Falls, WI
St. Paul, MN
Seattle, WA
San Jose, CA
Austin, TX
Manufacturing, hardware development, central
service and warehouse
Software development, sales and marketing
Executive offices, hardware and software
development, sales and marketing
Hardware and software development
Hardware development
Approximate
Square Footage
213,600
72,059
51,643
21,733
20,916
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 5,600 square feet of office space, primarily for software development, in Pleasanton, California. We also
lease a total of approximately 11,000 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 27,000 square feet of office space. We
believe our facilities are adequate to meet our needs at least through 2016.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
20
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 8, 2016, we had
40,688,282 shares of common stock outstanding that were held by 440 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, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
35.58
32.62
29.64
35.93
42.09
38.69
31.85
35.81
$
$
$
$
$
$
$
$
27.80
27.44
18.00
19.35
26.64
24.63
24.94
24.23
$
$
$
$
$
$
$
$
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, 2015, 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
Equity compensation plans approved by
shareholders(1)
Equity compensation plans not approved by
shareholders(2)
Total
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)
1,909,819
38,656
1,948,475
$
$
15.02
5.14
1,791,731
—
1,791,731
(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, restricted stock units, performance shares and performance
units to employees, directors, consultants, independent contractors and advisors. As of December 31, 2015, under the 2013
equity incentive plan, an aggregate of 1,791,731 shares remained available for grant as stock options or stock appreciation
21
rights and an aggregate of 1,155,955 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, 2015, under the 2000 non-executive employee stock
plan, we had options for 38,656 shares outstanding.
Unregistered Sales of Securities
We had no unregistered sales of our securities in 2015 not previously reported.
Issuer Repurchases
We did not repurchase any of our common stock in 2015, other than in connection with the forfeiture of common stock by
holders of restricted stock 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.
22
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, 2010, 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, 2015
s
r
a
l
l
o
D
600
500
400
300
200
100
0
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Cray Inc.
Nasdaq US Benchmark TR Index
ICB: 9572 Computer Hardware
Cray Inc.
Nasdaq US Benchmark TR Index
ICB: 9572 Computer Hardware Index
12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
452.6
383.0
222.5
100.0
480.9
90.2
100.0
100.0
100.3
104.8
116.8
125.7
155.9
147.9
175.3
200.4
176.2
182.5
23
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:
Years Ended December 31,
2015
2014
2013
2012
2011
(In thousands, except for per share data)
Operating Data:
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Research and development, net
Sales and marketing
General and administrative
Restructuring
Operating expenses
Net gain on sale of interconnect hardware
development program
Income from operations
Other income (expense), net
Interest income (expense), net
Income before income taxes
Benefit (provision) for income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted average outstanding shares:
Basic
Diluted
Cash Flow Data:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Depreciation and amortization
Purchases of property and equipment
Balance Sheet Data:
Cash, cash equivalents, restricted cash and
investments
Working capital
Total assets
Shareholders’ equity
$
$
$
$
460,748
100,858
561,606
321,554
55,638
377,192
184,414
94,048
57,785
23,381
—
175,214
—
9,200
(9)
506
9,697
52,626
62,323
1.61
1.54
38,634
40,435
$
$
$
$
436,330
89,419
525,749
298,244
43,179
341,423
184,326
87,728
51,345
23,603
—
162,676
—
21,650
(1,378)
757
21,029
11,194
32,223
0.85
0.81
37,832
39,776
353,767
67,291
421,058
231,237
38,643
269,880
151,178
64,303
37,180
20,707
—
122,190
139,068
168,056
472
204
168,732
(7,491)
161,241
4.42
4.27
36,509
37,789
(58,109) $
(22,755)
(70)
16,324
17,193
(87,350) $
27,211
(93)
14,242
13,136
156,892
37,694
7,827
8,652
10,843
$
$
145,796
361,614
651,434
453,854
220,449
334,928
603,366
375,587
323,205
283,352
510,314
340,546
$
$
$
$
$
$
155,561
80,485
236,046
101,000
40,680
141,680
94,366
49,452
26,134
15,840
1,783
93,209
—
1,157
(989)
(33)
135
14,194
14,329
0.41
0.40
35,122
36,072
(3,823)
(4,779)
1,462
8,601
4,916
54,187
137,733
283,099
166,814
$
$
$
$
$
$
$
$
$
$
$
$
601,294
123,395
724,689
426,821
72,185
499,006
225,683
96,563
60,150
27,966
—
184,679
—
41,004
365
1,408
42,777
(15,240)
27,537
0.70
0.68
39,257
40,691
147,756
7,216
(1,373)
17,017
7,467
284,891
415,187
694,175
492,510
24
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 Exchange Act. 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 data 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 big data storage and analytics market. We provide customer-focused solutions based on three models: (1) tightly
integrated supercomputing and/or 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)
integrated data analytics solutions that combine industry standard tools for large-scale data analytics with our innovative graph
analysis tools. 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 and differentiation, maintain our focus on execution and profitability and grow by continuing to expand our share and
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 also meet diverse customer
requirements by combining supercomputing, cluster supercomputing, storage and analytics technologies described above, into
unique solutions offerings that work in a workflow-driven datacenter environment.
Summary of 2015 Results
Total revenue increased by $163.1 million in 2015 compared to 2014, from $561.6 million to $724.7 million. Product revenue
increased by $140.5 million and service revenue increased by $22.5 million over the same period. The increase in product revenue
was attributable, in part, to customer acceptance of large Cray systems in Saudi Arabia, South Korea and the United States, increased
sales to commercial customers, higher revenue from our Cray CS products, and customer acceptances of two large systems,
accounting for approximately $40 million in revenue, in the first quarter of 2015 for which we had previously anticipated acceptance
to occur in the fourth quarter of 2014. The year over year increase in service revenue was driven by significant increases in both
engineering services and maintenance revenue, which has continued to benefit from our larger installed system base.
Product gross profit margin decreased from 30% in 2014 to 29% in 2015. Product gross profit margin was impacted by
changes in cost and performance estimates between the time of bid and acceptance of the system on a few select customer contracts.
Gross profit margin from services decreased from 45% in 2014 to 42% in 2015 primarily due to higher headcount and compensation
expense, including incentive compensation expense, and lower margins on certain engineering services contracts due to a high
percentage of sub-contractor costs in those contracts.
We recorded income from operations of $41.0 million in 2015 compared to income from operations of $9.2 million in 2014.
The increase in income from operations was primarily attributable to higher 2015 revenues, partially offset by the impact of a
lower gross profit margin percentage in 2015 compared to 2014 and a $9.5 million increase in operating expenses as a result of
increased headcount and incentive based compensation.
Net income decreased from $62.3 million in 2014 to $27.5 million in 2015, primarily driven by a $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 increase in
operating income discussed above and an increase in income tax expense as a result of higher income in 2015 compared to 2014.
Net cash provided by operations during 2015 was $147.8 million, as compared to net cash used in operations of $58.1 million
in 2014. Net cash provided by operations during 2015 was primarily driven by net income of $27.5 million, and the positive impact
of adding back non-cash operating items of $42.4 million, customer acceptances of our systems that resulted in a decrease of $21.3
25
million in inventory and collections from customers that resulted in a decrease of $36.7 million in accounts and other receivables.
Working capital increased by $53.6 million from $361.6 million at December 31, 2014 to $415.2 million at December 31, 2015.
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
increases in per-core performance slows;
data IO and capacity 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 concentration of very large suppliers of key computing and storage components in the industry;
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 as a solution for 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 and resulting margin 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 and system software capability. With the arrival of increasing processor core counts due to
new many-core processors, these unbalanced systems will typically have lower productivity, especially in larger systems running
more complex applications. We and others 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 system software and 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 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.
Our 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
protocols such as Lustre and we 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 support open source technologies such as Hadoop and Spark
and partner with UC Berkeley’s AMPLab and Berkeley Lab’s National Energy Research Scientific Computing Center to design
large-scale data analytics stacks that simplify analyses of scientific and commercial applications.
26
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 customer proposals, customer contracts, product shipments, installations and acceptances in order to
forecast revenue and cash receipts. In the 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 Cray XC and Cray
CS products, along with our longer-term product roadmap are efforts to increase product revenue. We have been increasing our
business and product development efforts in storage and data management along with big data analytics. We have also been
increasing the size of our sales force. Service revenue related to our maintenance offerings 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. Gross profit margin is impacted by revenue and our cost to build and deliver our products and services.
Our services tend to carry higher gross profit margins than our products. We monitor the cost of components, manufacturing, and
installation of our products. In assessing our service gross profit margin, we monitor headcount levels and third-party costs.
Operating expenses. Our operating expenses are driven primarily by headcount, contracted third-party research and
development services, and incentive compensation expense. As part of our ongoing expense management efforts, we continue to
monitor headcount levels in specific geographic and operational areas.
Liquidity and cash flows. Due to the variability in product revenue, new contracts, acceptance 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 customer
acceptances and, longer-term, in product development. Cash receipts generally lag customer acceptances.
27
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):
Product revenue
Less: Cost of product revenue
Product gross profit
Product gross profit percentage
Service revenue
Less: Cost of service revenue
Service gross profit
Service gross profit percentage
Total revenue
Less: Total cost of revenue
Total gross profit
Total gross profit percentage
Product Revenue
Year Ended December 31,
2015
601,294
426,821
174,473
29%
123,395
72,185
51,210
42%
724,689
499,006
225,683
31%
$
$
$
$
$
$
2014
460,748
321,554
139,194
30%
100,858
55,638
45,220
45%
561,606
377,192
184,414
33%
$
$
$
$
$
$
2013
436,330
298,244
138,086
32%
89,419
43,179
46,240
52%
525,749
341,423
184,326
35%
$
$
$
$
$
$
Product revenue in 2015 increased by $140.5 million, or 31%, over 2014 in part due to customer acceptance of large Cray
systems in Saudi Arabia, South Korea, and the United States, increased sales to commercial customers, higher revenue from our
Cray CS products, and customer acceptances of two large systems, accounting for approximately $40 million in revenue, in the
first quarter of 2015 for which we had previously anticipated acceptance to occur in the fourth quarter of 2014.
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.
Service Revenue
Service revenue for 2015 increased by $22.5 million from 2014, or 22%. The year over year increase in service revenue was
driven by significant increases in both engineering services and maintenance revenue, which has continued to benefit from our
larger installed system base.
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.
Cost of Product Revenue and Product Gross Profit
Cost of product revenue for 2015 increased by $105.3 million compared to 2014, driven primarily by higher product revenue.
Product gross profit percentage was 29% in 2015 and 30% in 2014. The 2015 product gross profit margin was impacted by changes
in cost and performance estimates between the time of bid and acceptance of the system on a few select customer contracts.
Cost of product revenue for 2014 increased by $23.3 million compared to 2013, driven 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 Service Revenue and Service Gross Profit
Cost of service revenue increased by $16.5 million in 2015, driven primarily by higher service revenue. Service gross profit
margin decreased by three percentage points to 42% in 2015 compared to 2014. The service gross profit margin decreased primarily
due to higher headcount and compensation expense, including significantly higher incentive compensation expense, higher third
party costs, as well as lower margins on certain engineering services contracts due to a high percentage of sub-contractor costs in
those contracts.
28
Cost of service revenue increased by $12.5 million and 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.
Operating Expenses
Research and Development
Research and development expenses for the indicated years ended December 31 were as follows (in thousands, except for
percentages):
Gross research and development expenses
Less: Amounts included in cost of revenue
Less: Reimbursed research and development (excludes amounts in revenue)
Net research and development expenses
Percentage of total revenue
Year Ended December 31,
2015
$ 126,060
(16,515)
2014
$ 104,797
(7,713)
(12,982)
96,563
$
$
(3,036)
94,048
2013
92,469
(3,741)
(1,000)
87,728
$
$
13%
17%
17%
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 certain overhead expenses, software, prototype
materials and outside contracted engineering expenses.
In 2015, gross research and development expenses increased by $21.3 million from 2014 levels primarily due to increased
investments in the development of new products and higher costs related to our engineering services contracts, which include
pass-through costs to third parties. Total compensation costs for research and development increased by $17.4 million compared
to 2014. We increased our average headcount which resulted in higher base salaries of $8.8 million. The higher total compensation
costs also included the impact of an increase of $5.2 million in incentive compensation expense as well as an increase of $1.0
million in share-based compensation expense.
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.
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):
Sales and marketing
Percentage of total revenue
General and administrative
Percentage of total revenue
Year Ended December 31,
$
$
2015
60,150
2014
$ 57,785
8%
10%
27,966
$ 23,381
4%
4%
$
$
2013
51,345
10%
23,603
4%
Sales and Marketing. Sales and marketing expense increased by $2.4 million in 2015 compared to 2014. Compensation
expense for sales and marketing increased by $1.5 million primarily due to increased incentive compensation expense.
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.
General and Administrative. General and administrative expense increased by $4.6 million in 2015 compared to 2014
primarily due to increased headcount, increased incentive compensation expense and increased outside services. Headcount
increased compared to the same prior year period to support the growth in the business and resulted in an increase in base salaries
29
of $0.8 million. Incentive compensation expense increased by $1.5 million and outside services increased by $1.9 million compared
to the same prior year period.
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.
Other Income (Expense), Net
We recorded $0.4 million of net other income and $9,000 and $1.4 million of net other expense for the years ended December
31, 2015, 2014 and 2013, 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
Net interest income
Year Ended December 31,
2015
2014
2013
$
$
1,465
(57)
1,408
$
$
643
(137)
506
$
$
894
(137)
757
Interest income, net in 2015 increased as compared to 2014 due to amortization of unearned income on the sales-type lease
that we entered into with a customer in the second half of 2014. Interest income, net 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.
Taxes
We recorded income tax benefit (expense) for the years ended December 31 as follows (in thousands):
Net income before income taxes
Tax benefit (expense)
Net income
Effective tax rate
Year Ended December 31,
2015
42,777
(15,240)
27,537
$
$
$
2014
9,697
52,626
$ 62,323
2013
$ 21,029
11,194
$ 32,223
36%
(543)%
(53)%
The difference between the income tax provision at the federal statutory rate of 35% and our income tax expense at the
effective rate of 36% for the year ended December 31, 2015 was the result of state taxes, non-deductible expenses and other
permanent items, partially offset by research and development tax credits. 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.
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 than other more subjective indicators, 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 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.
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
30
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 valuation allowance,
is reviewed quarterly and could change in future periods depending on our future 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, 2015, we had U.S. federal net operating loss carryforwards of approximately $76.2 million, of which
approximately $47.4 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 $23.0 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 2035 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 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. Adoption of ASU 2014-09 was initially required for 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.
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers - Deferral
of the Effective Date: Topic 606 (ASU 2015-14) that deferred the effective date of ASU 2014-09 by one year. Application of the
new revenue standard is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required for
fiscal and interim reporting periods beginning after December 15, 2017. We are currently evaluating the potential impact of the
pending adoption of ASU 2014-09 on our consolidated financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory: Topic
330 (ASU 2015-11) to amend Topic 330, Inventory. Topic 330 currently requires an entity to measure inventory at the lower of
cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit
margin. ASU 2015-11 requires that inventory measured using either the first-in, first-out (FIFO) or average cost method be measured
at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal and transportation. Adoption of ASU 2015-11 is required for fiscal
reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. We do not
expect adoption of ASU 2015-11 to have a material impact on our consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes:
Topic 740 (ASU 2015-17). Current GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset
or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of
the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based
on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro
rata basis, by jurisdiction, between current and noncurrent deferred tax assets. The new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction. Adoption of ASU 2015-17 is required for fiscal reporting periods
beginning after December 15, 2016, including interim reporting periods within those fiscal years, and either prospective or
retrospective application is permitted. Early adoption of ASU 2015-17 is permitted. At the time of adoption, all of our deferred
tax assets and liabilities, along with any related valuation allowance, will be classified as noncurrent on our Consolidated Balance
Sheet. We do not currently plan to early adopt ASU 2015-17.
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets
and Financial Liabilities: Topic 825 (ASU 2016-01). The updated guidance enhances the reporting model for financial instruments,
31
which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Adoption of ASU 2016-01
is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal
years. We are currently evaluating the potential impact of the pending adoption of ASU 2016-01 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 have also entered into a sales-type
lease agreement with a customer, under which we will receive quarterly payments over a four-year period. Material changes in
certain of our balance sheet accounts were due to the timing of product deliveries and customer acceptances, contractually
determined billings, timing and level of inventory purchased for future deliveries, timing and level of incentive compensation and
cash collections. Working capital requirements, including inventory purchases and normal capital expenditures, are generally
funded with cash from operations.
We are currently evaluating options for expanding our manufacturing facility in Chippewa Falls, Wisconsin in order to
increase capacity. We estimate that such a project would require total capital expenditures in the range of $25.0 million. Our current
expectation is that the project would begin in 2016 and conclude in 2017. We may choose to externally finance these activities.
Total cash and investments increased from $145.8 million at December 31, 2014 to $284.9 million at December 31, 2015.
As of December 31, 2015, we had $3.3 million in restricted cash associated with certain letters of credit outstanding to secure
customer prepayments. As of December 31, 2015, we had working capital of $415.2 million compared to $361.6 million as of
December 31, 2014.
Cash flow information for the years ended December 31 included the following (in thousands):
Cash provided by (used in):
Operating Activities
Investing Activities
Financing Activities
2015
2014
2013
$
$
147,756
7,216
(1,373)
(58,109) $
(22,755)
(70)
(87,350)
27,211
(93)
Operating Activities. For the year ended December 31, 2015, cash provided by operating activities was primarily driven
by net income of $27.5 million and the positive impact of adding back non-cash operating items of $42.4 million, customer
acceptances of our systems that resulted in a decrease of $21.3 million in inventory, and collections from customers that resulted
in a decrease of $36.7 million in accounts and other receivables. 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 were accepted 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.
Investing Activities. For the year ended December 31, 2015, cash provided by investing activities was principally due to
sales and maturities of debt securities of $16.2 million and a release of $13.4 million in restricted cash related to a prepayment on
a system from a customer that was released at the time of delivery, partially offset by purchases of debt securities of $15.0 million
and purchases of property and equipment of $7.5 million. For the year ended December 31, 2014, net 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.
Financing Activities. Net cash used in financing activities in 2015, 2014 and 2013 resulted primarily from statutory tax
withholding amounts made in exchange for the forfeiture of common stock by holders of vesting restricted stock, offset by cash
received from the issuance of common stock from the exercise of options and from the issuance of stock through our employee
stock purchase plan.
Over the next twelve months, we expect our significant cash requirements will relate to operational expenses and anticipated
capital expansion. Operational expenses consist 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.
32
The following table summarizes our contractual cash obligations as of December 31, 2015 (in thousands):
Contractual Obligations
Development agreements
Operating leases
Total contractual cash obligations
Total
1 Year
Years 2-3
Years 4-5
Thereafter
$
$
15,975
36,150
52,125
$
$
15,567
5,484
21,051
$
$
383
10,088
10,471
$
$
25
8,059
8,084
$
$
—
12,519
12,519
Amounts Committed by Year
As of December 31, 2015, we had a $10.0 million unsecured line of credit with Wells Fargo Bank, National Association,
designed to support the issuance of letters of credit and foreign exchange hedging transactions. We made no draws and had no
outstanding cash borrowings on the line of credit as of December 31, 2015. Subsequent to December 31, 2015, we amended our
existing credit agreement and entered into a new $50.0 million two-year line of credit agreement, effective January 7, 2016. Refer
to Note 21 - Subsequent Events in the Notes to Consolidated Financial Statements in Item 15. Exhibits, Financial Statement
Schedules in Part IV of this annual report for further discussion on the amended agreement. In December 2015, we terminated the
$11.0 million letter of credit facility we had with Silicon Valley Bank.
As of December 31, 2015, we had $5.8 million in USD equivalent value in outstanding letters of credit and $3.3 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, 2015, we incurred $14.3 million for such
arrangements.
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 financial
statements, which have been prepared in accordance with GAAP. The preparation of these consolidated 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, accounting for 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, determination of inventory at the lower of cost or market, the value
of used equipment returned or to be returned associated with customer contracts, 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, evaluation of probability of performance-based restricted stock
and stock units vesting, 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,
the outcome of any legal proceedings 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.
33
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 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
34
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.
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.
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
35
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
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. We have significant difficulty projecting future results due to the
nature of the business and the industry in which we operate.
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, 2015, we had approximately $74.0 million of net deferred tax assets before application of a valuation
allowance. As of December 31, 2015, net deferred tax assets after reduction by the valuation allowance of $9.5 million were $64.5
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 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 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 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.
36
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 and restricted stock units 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 stock and performance vesting restricted stock units 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".
Awards are evaluated for probability of vesting each reporting period.
37
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, 2015, we had entered into foreign currency exchange contracts that were designated as cash flow hedges
that hedge approximately $107.3 million of anticipated cash receipts on specific foreign currency denominated sales contracts.
These foreign currency exchange 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, 2015, we had entered into
foreign currency exchange contracts that had been dedesignated for the purposes of hedge accounting treatment totaling $55.6
million. Unrealized gains or losses recorded in the Consolidated Statement of Operations related to these contracts are generally
offset by foreign currency adjustments on related receivables. These foreign currency exchange contracts are considered to be
economic hedges.
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, 2015, a hypothetical 10% unfavorable change in foreign currency exchange rates would impact our annual operating
results and cash flows by approximately $0.5 million.
38
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS*
Consolidated Balance Sheets at December 31, 2015 and December 31, 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
F-2
F-3
F-4
F-5
F-6
F-31
________________________________
* The Financial Statements are located following page F-1.
The selected quarterly financial data required by this item is set forth in Note 20 of the Notes to Consolidated Financial
Statements.
39
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 2015 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, 2015.
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, 2015.
40
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, 2015,
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, 2015, 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, 2015 and 2014, 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, 2015, and our report dated February 11, 2016, expressed an unqualified opinion.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
February 11, 2016
41
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 8, 2016, 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 8, 2016, 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 8, 2016, 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 8, 2016, 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 8, 2016, and such information is incorporated herein by reference.
42
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)(1)
Financial Statements
Consolidated Balance Sheets at December 31, 2015 and December 31, 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014
and 2013
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
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,
2015, 2014 and 2013 should be read in conjunction with the consolidated financial statements of Cray Inc. filed as part of this
annual report on Form 10-K.
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.
43
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 11, 2016.
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 11, 2016.
Signature
Title
By /s/ PETER J. UNGARO
Chief Executive Officer, President and Director
Peter J. Ungaro
(Principal Executive Officer)
By /s/ BRIAN C. HENRY
Brian C. Henry
Chief Financial Officer and Executive Vice President
(Principal Financial Officer)
By /s/ CHARLES D. FAIRCHILD
Chief Accounting Officer, Controller and Vice President
Charles D. Fairchild
(Principal Accounting Officer)
By /s/ PRITHVIRAJ BANERJEE
Prithviraj Banerjee
By /s/ MARTIN J. HOMLISH
Martin J. Homlish
By /s/ STEPHEN C. KIELY
Stephen C. Kiely
By /s/ SALLY G. NARODICK
Sally G. Narodick
By /s/ DANIEL C. REGIS
Daniel C. Regis
By /s/ MAX L. SCHIRESON
Max L. Schireson
44
Director
Director
Director
Director
Director
Director
EXHIBIT INDEX
Exhibit Description
Incorporated by Reference
Exhibit
Number
2.1
2.2
3.1
3.2
3.3
10.0*
10.1*
10.2*
Asset Purchase Agreement between Intel
Corporation and the Company, dated April 24,
2012
Agreement and Plan of Merger by and among
Astro Acquisition Corp., Appro International,
Inc., the Shareholders’ Agent and the Company,
dated November 8, 2012
Restated Articles of Incorporation
Amended and Restated Bylaws
First Amendment to Amended and Restated
Bylaws
1999 Stock Option Plan
2000 Non-Executive Employee Stock Option
Plan
Amended and Restated 2001 Employee Stock
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
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
Form of Officer Non-Qualified Stock Option
Agreement
Form of Officer Incentive Stock Option
Agreement
Form of Employee Restricted Stock Agreement
Form of Director Restricted Stock Agreement
Form of 2013 Equity Incentive Plan Notice of
Stock Option Grant and Stock Option Award
Agreement
Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Award and Restricted Stock
Purchase Agreement
Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Award and Restricted Stock
Purchase Agreement
Form of 2013 Equity Incentive Plan Notice of
Stock Option Grant and Stock Option Award
Agreement
Form of 2013 Equity Incentive Plan Notice of
Restricted Stock Unit Award and Restricted
Stock Unit Award Agreement
Form of 2013 Equity Incentive Plan Notice of
Stock Appreciation Right Award Grant and
Stock Appreciation Right Award Agreement
Form
8-K
File No.
000-26820
Filing
Date
04/25/12
Exhibit/
Annex
2.1
Filed
Herewith
8-K
000-26820
11/09/12
2.1
8-K
8-K
8-K
S-8
S-8
000-26820
000-26820
000-26820
333-57970
333-57970
06/08/06
02/12/07
04/19/12
03/30/01
03/30/01
3.3
3.1
3.1
4.1
4.2
10-K
000-26820
03/04/11
10.28
DEF
14A
DEF
14A
DEF
14A
DEF
14A
DEF
14A
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
A
B
B
A
A
10-K
000-26820
04/01/05
10.32
10-K
000-26820
04/01/05
10.33
10-K
8-K
8-K
000-26820
000-26820
000-26820
03/09/07
06/08/06
07/03/13
10.11
10.1
99.1
8-K
000-26820
07/03/13
99.2
8-K
000-26820
12/17/14
10.1
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
45
Exhibit
Number
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Exhibit Description
Incorporated by Reference
Letter Agreement between the Company and
Peter J. Ungaro, dated March 4, 2005
Offer Letter between the Company and Brian C.
Henry, dated May 16, 2005
Offer Letter between the Company and Steve
Scott, dated August 30, 2014
Offer Letter between the Company and Ryan W.
J. Waite, dated October 27, 2014
Offer Letter between the Company and
Margaret A. Williams, dated April 14, 2005
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)
Form of Management Retention Agreement
entered into with executive officers from
September 27, 2011 forward
Executive Severance Policy, as adopted on
December 13, 2010
Amended and Restated Non-Employee Director
Compensation Policy
2015 Executive Bonus Plan
Form of Indemnification Agreement
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
Fourth Amendment to Lease between NEA
Galtier, LLC and the Company, dated as of
April 1, 2012
Fifth Amendment to Lease between NEA
Galtier, LLC and the Company, dated as of
March 31, 2014
Intellectual Property Agreement between Intel
Corporation and the Company, dated May 2,
2012
Amended and Restated Credit Agreement
between Wells Fargo Bank, National
Association and the Company, dated January 7,
2016
Revolving Line of Credit Note between Wells
Fargo Bank, National Association and the
Company, dated January 7, 2016
Form
8-K
File No.
000-26820
Filing
Date
03/08/05
Exhibit/
Annex
10.1
Filed
Herewith
10-Q
000-26820
11/09/05
10.1
10-Q
000-26820
10/28/14
10.1
10-Q
000-26820
05/05/15
10.1
8-K
000-26820
05/09/05
10.1
8-K
000-26820
12/22/08
10.1
10-K
000-26820
02/13/14
10.20
8-K
000-26820
12/17/10
10.1
10-Q
000-26820
04/29/14
10.3
10-Q
8-K
8-K
000-26820
000-26820
000-26820
05/05/15
02/08/11
07/16/09
10.3
10.1
10.1
10-K
000-26820
02/19/15
10.28
10-K
000-26820
02/19/15
10.29
10-K
000-26820
02/19/15
10.30
10-K
000-26820
02/19/15
10.31
10-K
000-26820
02/19/15
10.32
8-K
000-26820
05/03/12
10.1
8-K
000-26820
01/11/16
10.1
8-K
000-26820
01/11/16
10.2
46
Exhibit Description
Incorporated by Reference
Exhibit
Number
21.1
23.1
24.1
31.1
31.2
32.1
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)
Rule 13a-14(a)/15d-14(a) Certification of
Mr. Ungaro, Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of
Mr. Henry, Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350
by the Chief Executive Officer and the Chief
Financial Officer
101.INS
101.SCH
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
101.CAL
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Label Linkbase
Document
XBRL Taxonomy Extension Presentation
Linkbase Document
________________________________
*
Management contract or compensatory plan or arrangement.
Form
File No.
Filing
Date
Exhibit/
Annex
Filed
Herewith
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.
47
[THIS PAGE INTENTIONALLY LEFT BLANK]
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31,
2015
December 31,
2014
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts and other receivables, net
Inventory
Deferred tax assets, net
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
Deferred tax assets, net
Other non-current assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued payroll and related expenses
Other accrued liabilities
Deferred revenue
Total current liabilities
Long-term deferred revenue
Other non-current liabilities
TOTAL LIABILITIES
Commitments and contingencies (Note 12)
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 40,693,707 and 40,822,377 shares,
respectively
Accumulated other comprehensive income
Accumulated deficit
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes
F-1
$
$
$
$
$
$
$
266,660
1,651
14,925
124,719
113,655
38,628
21,048
581,286
1,655
18,317
31,079
3,090
14,182
2,525
26,016
16,025
694,175
27,837
27,452
24,079
86,731
166,099
33,306
2,260
201,665
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
651,434
48,699
16,054
16,285
65,910
146,948
47,588
3,044
197,580
—
—
610,279
7,642
(125,411)
492,510
694,175
$
598,390
6,503
(151,039)
453,854
651,434
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue:
Product
Service
Total revenue
Cost of revenue:
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Total operating expenses
Income from operations
Other income (expense), net
Interest income, net
Income before income taxes
Income tax benefit (expense)
Net income
Basic net income per common share
Diluted net income per common share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Years Ended December 31,
2015
2014
2013
$
$
601,294
123,395
724,689
$
460,748
100,858
561,606
426,821
72,185
499,006
225,683
96,563
60,150
27,966
184,679
41,004
365
1,408
42,777
(15,240)
27,537
0.70
0.68
39,257
40,691
$
$
$
321,554
55,638
377,192
184,414
94,048
57,785
23,381
175,214
9,200
(9)
506
9,697
52,626
62,323
1.61
1.54
38,634
40,435
$
$
$
$
$
$
436,330
89,419
525,749
298,244
43,179
341,423
184,326
87,728
51,345
23,603
162,676
21,650
(1,378)
757
21,029
11,194
32,223
0.85
0.81
37,832
39,776
See accompanying notes
F-2
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
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
Other comprehensive income (loss)
Comprehensive income
Years Ended December 31,
2015
2014
2013
$
27,537
$
62,323
$
32,223
(20)
(394)
5,251
(3,698)
1,139
12
(1,188)
8,475
(1,649)
5,650
$
28,676
$
67,973
$
46
(1,044)
(4,292)
962
(4,328)
27,895
See accompanying notes
F-3
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common Stock
and Additional
Paid In Capital
Number
of Shares
Amount
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
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)
(1,159)
32,223
517
3,161
(3,771)
7,239
(4,328)
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
21
411
(80)
—
611
3,086
(1,914)
10,364
5,650
(1,853)
62,323
611
3,086
(3,767)
10,364
5,650
62,323
Other comprehensive income
Net income
BALANCE, December 31, 2014
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
BALANCE, December 31, 2015
40,822
$
598,390
$
6,503
$
(151,039) $
453,854
27
229
(384)
—
711
2,289
(2,464)
11,353
1,139
(1,909)
27,537
711
2,289
(4,373)
11,353
1,139
27,537
40,694
$
610,279
$
7,642
$
(125,411) $
492,510
See accompanying notes
F-4
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization
Share-based compensation expense
Deferred income taxes
Other
Cash provided (used) 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
Deferred revenue
Net cash provided by (used in) operating activities
Investing activities:
Sales and maturities of available-for-sale investments
Purchases of available-for-sale investments
Decrease (increase) in restricted cash
Purchases of property and equipment
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of common stock through employee stock purchase plan
Purchase of employee restricted shares to fund related statutory tax withholding
Proceeds from exercise of options
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities:
Years Ended December 31,
2015
2014
2013
$ 27,537
$ 62,323
$ 32,223
17,017
11,353
12,103
1,945
36,665
11,510
21,292
(3,972)
(19,849)
23,841
8,314
147,756
16,229
(14,991)
13,445
(7,467)
7,216
711
(4,373)
2,289
(1,373)
428
154,027
16,324
10,364
(53,204)
4,159
17,450
(32,889)
(54,147)
(9,349)
14,504
(5,237)
(28,407)
(58,109)
53,608
(56,064)
(3,106)
(17,193)
(22,755)
611
(3,767)
3,086
(70)
934
(80,000)
14,242
7,239
(13,175)
2,936
(169,753)
—
(10,780)
(2,670)
(509)
8,422
44,475
(87,350)
139,277
(85,162)
(13,768)
(13,136)
27,211
517
(3,771)
3,161
(93)
(200)
(60,432)
112,633
$ 266,660
192,633
$ 112,633
253,065
$ 192,633
$
$
4
3,890
$
5
2,935
3
2,611
Inventory transfers to property and equipment and service spares
$
8,177
$
3,313
$
4,530
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 data analytics solutions. The Company also provides software, system maintenance and support services and
engineering services related to supercomputer systems and storage and data analytics solutions. Cray’s supercomputer systems
address challenging scientific, engineering, commercial and national security computing problems. The Company’s customers
include foreign and domestic governments and 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. All material
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, 2015 and 2014, the Company had $1.7 million and $16.9
million, respectively, in short-term restricted cash. As of December 31, 2015, the Company had $1.7 million in long-term restricted
cash. The restricted cash is 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).
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 foreign currency exchange contracts to hedge certain foreign currency exposures. Foreign currency
exchange 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. Most of the Company’s foreign currency exchange contracts are designated as cash flow hedges for
F-6
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the purposes of hedge accounting treatment and any gains or losses on the effective portion of the foreign currency exchange
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 foreign currency exchange 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 foreign currency exchange contract and expected cash flows based on
changes in the spot prices of the underlying currencies. Cash flows from foreign currency exchange contracts accounted for as
cash flow hedges are classified in the same category as the cash flows from the items being hedged. Unrealized gains or losses
related to foreign currency exchange contracts that are not designated as cash flow hedges for the purposes of hedge accounting
treatment are recorded in the Consolidated Statement of Operations and are generally offset by foreign currency adjustments on
related receivables. 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 foreign
currency exchange contracts.
The Company maintains cash and cash equivalents, available-for-sale securities and foreign currency exchange 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 foreign currency exchange 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 the U.S. Government.
See Note 17 — 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 7 —
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 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 3 — 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 (FIFO). 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.
F-7
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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 2015 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.
F-8
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
F-9
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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. 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 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
F-10
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 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 $1.6
million and $2.1 million for 2015 and 2014, respectively, and net transaction losses were $1.3 million for 2013.
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.
Amounts to be received under co-funding arrangements with the U.S. government or others 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.
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,
F-11
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2015, the Company had approximately $74.0 million of net deferred tax assets before application of a
valuation allowance. As of December 31, 2015, net deferred tax assets after reduction by the valuation allowance of $9.5
million were $64.5 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 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.
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 stock and performance vesting restricted stock units 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".
Awards are evaluated for probability of vesting each reporting period.
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 included advertising expenses
of $2.3 million, $2.9 million, and $2.2 million in 2015, 2014, and 2013, 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
unvested restricted stock units as computed under the treasury stock method. For the years ended December 31, 2015, 2014 and
2013, the added shares from these items included in the calculation of diluted shares and EPS totaled approximately 1.4 million,
F-12
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1.8 million, and 1.9 million, respectively. Potentially dilutive shares of 0.9 million, 0.6 million, and 0.5 million, respectively, have
been excluded from the denominator in the computation of diluted EPS for the years ended December 31, 2015, 2014 and 2013,
respectively, because they were antidilutive. An additional 1.2 million, 0.8 million and 1.1 million performance vesting restricted
stock and performance vesting restricted stock units were excluded from the computation of diluted EPS for the years ended
December 31, 2015, 2014 and 2013, respectively, because the conditions for vesting had not been met as of the balance sheet date.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income, a component of Shareholders’ equity, consisted of the following at December
31 (in thousands):
Accumulated unrealized net gain (loss) on available-for-sale investments
Accumulated currency translation adjustments
Accumulated unrealized net gain (loss) on cash flow hedges
Accumulated other comprehensive income
Recent Accounting Pronouncements
2015
2014
$
$
(8) $
1,675
5,975
7,642
$
12
2,069
4,422
6,503
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 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. Adoption of ASU 2014-09 was initially required for 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.
In August 2015, FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers - Deferral
of the Effective Date: Topic 606 (ASU 2015-14) that deferred the effective date of ASU 2014-09 by one year. Application of the
new revenue standard is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required for
fiscal and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the potential impact
of the pending adoption of ASU 2014-09 on its consolidated financial statements.
In July 2015, FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory: Topic
330 (ASU 2015-11). Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be
replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 requires
that inventory measured using either the FIFO or average cost method be measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal and transportation. Adoption of ASU 2015-11 is required for fiscal reporting periods beginning after December 15, 2016,
including interim reporting periods within those fiscal years. The Company does not expect adoption of ASU 2015-11 to have a
material impact on its consolidated financial statements.
In November 2015, FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes:
Topic 740 (ASU 2015-17). Current GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset
or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of
the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based
on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro
rata basis, by jurisdiction, between current and noncurrent deferred tax assets. The new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction. Adoption of ASU 2015-17 is required for fiscal reporting periods
beginning after December 15, 2016, including interim reporting periods within those fiscal years, and either prospective or
retrospective application is permitted. Early adoption of ASU 2015-17 is permitted. At the time of adoption, all of the Company’s
deferred tax assets and liabilities, along with any related valuation allowance, will be classified as noncurrent on its Consolidated
Balance Sheet. The Company does not plan to early adopt ASU 2015-17.
F-13
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In January 2016, FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets
and Financial Liabilities: Topic 825 (ASU 2016-01). The updated guidance enhances the reporting model for financial instruments,
which includes amendments to address aspects of recognition, measurement, presentation and disclosure. Adoption of ASU 2016-01
is required for fiscal reporting periods beginning after December 15, 2017, including interim reporting periods within those fiscal
years. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-01 on its consolidated
financial statements.
NOTE 3 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.
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, 2015 and 2014, and indicates the fair value hierarchy of the valuation
inputs utilized to determine such fair value (in thousands):
Description
Assets:
Cash and cash equivalents and restricted cash
Available-for-sale investments (1)
Foreign currency exchange contracts (2)
Assets measured at fair value at December 31, 2015
Liabilities:
Foreign currency exchange contracts (3)
Liabilities measured at fair value at December 31, 2015
Description
Assets:
Cash and cash equivalents and restricted cash
Available-for-sale investments (1)
Foreign currency exchange contracts (2)
Assets measured at fair value at December 31, 2014
Liabilities:
Foreign currency exchange contracts (3)
Liabilities measured at fair value at December 31, 2014
_______________________________
Fair Value
as of
December 31,
2015
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
$
$
269,966
14,925
11,602
296,493
3
3
Fair Value
as of
December 31,
2014
$
$
$
129,507
16,289
11,079
156,875
2,139
2,139
$
$
$
$
$
$
269,966
14,925
—
284,891
$
$
—
— $
—
—
11,602
11,602
3
3
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
129,507
16,289
—
145,796
$
$
—
— $
—
—
11,079
11,079
2,139
2,139
(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.
F-14
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
As of December 31, 2015 and 2014, the Company had outstanding foreign currency exchange contracts that were designated
and accounted for as cash flow hedges of anticipated future cash receipts on sales contracts payable in foreign currencies. The
outstanding notional amounts were approximately (in millions):
British Pounds (GBP)
Euros (EUR)
Swiss Francs (CHF)
Singapore Dollars (SGD)
Swedish Krona (SEK)
December 31,
2015
December 31,
2014
39.2
6.0
33.0
—
—
77.9
40.7
0.9
0.1
84.8
The Company had hedged foreign currency exposure related to these designated cash flow hedges of approximately $107.3
million and $192.5 million as of December 31, 2015 and December 31, 2014, respectively.
As of December 31, 2015, the Company had outstanding foreign currency exchange contracts that had been dedesignated
for the purposes of hedge accounting treatment. The outstanding notional amounts were approximately (in millions):
British Pounds (GBP)
Euros (EUR)
Swiss Francs (CHF)
Japanese Yen (JPY)
December 31,
2015
December 31,
2014
31.5
3.8
0.3
274.0
28.3
—
—
—
The foreign currency exposure related to these contracts was approximately $55.6 million as of December 31, 2015 and
$43.4 million as of December 31, 2014. Unrealized gains or losses related to these dedesignated contracts are recorded in the
Consolidated Statements of Operations and are generally offset by foreign currency adjustments on related receivables. These
foreign currency exchange contracts are considered to be economic hedges.
Cash receipts associated with the hedged contracts are expected to be received from 2016 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 in the case of receivables denominated in a foreign currency, each period during which hedged receivables
denominated in a foreign currency are outstanding.
F-15
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2015 and 2014, the fair value of outstanding foreign currency exchange contracts totaled a net gain of
$11.6 million and $8.9 million, respectively.
Fair values of derivative instruments designated as cash flow hedges (in thousands):
Hedge Classification
Balance Sheet Location
Fair Value
as of
December 31,
2015
Fair Value
as of
December 31,
2014
Foreign currency exchange contracts
Prepaid expenses and other current assets
$
3,956
$
Foreign currency exchange contracts
Foreign currency exchange contracts
Other non-current assets
Other accrued liabilities
Foreign currency exchange contracts
Other non-current liabilities
5,183
—
(2)
5,360
5,717
(1,219)
(152)
Total fair value of derivative instruments
designated as cash flow hedges
$
9,137
$
9,706
As of December 31, 2015 and 2014, unrecognized gains, net of tax, of $6.0 million and $4.4 million, respectively, were
included in “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets.
Fair values of derivative instruments not designated as cash flow hedges (in thousands):
Hedge Classification
Balance Sheet Location
Fair Value
as of
December 31,
2015
Fair Value
as of
December 31,
2014
Foreign currency exchange contracts
Prepaid expenses and other current assets
$
1,807
$
Foreign currency exchange contracts
Foreign currency exchange contracts
Other non-current assets
Other accrued liabilities
Foreign currency exchange contracts
Other non-current liabilities
Total fair value of derivative instruments not
designated as cash flow hedges
NOTE 4 ACCUMULATED OTHER COMPREHENSIVE INCOME
656
(1)
—
2
—
(235)
(533)
$
2,462
$
(766)
The following table shows the impact on product revenue of reclassification adjustments from accumulated other
comprehensive income resulting from hedged foreign currency transactions recorded by the Company for the years ended December
31, 2015, 2014 and 2013 (in thousands). The gross reclassification adjustments increased product revenue for the years ended
the year ended December 31, 2013.
December 31, 2015 and 2014 and decreased product
revenue
for
Gross of Tax Reclassifications
Net of Tax Reclassifications
Year Ended
December 31,
2014
2013
2015
$
$
6,163
3,698
$
$
2,748
1,649
$
$
(1,604)
(962)
F-16
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables show the changes in Accumulated Other Comprehensive Income by component for the years ended
December 31, 2015 and 2014 (in thousands):
Twelve Months Ended December 31, 2015
Unrealized Gain
(Loss) on
Investments
Foreign Currency
Translation
Adjustments
Unrealized Gain on
Cash Flow Hedges
Accumulated Other
Comprehensive
Income
Beginning balance
Current-period change, net of tax
Ending balance
Income tax expense (benefit) associated with
current-period change
$
$
$
$
12
(20)
(8) $
2,069
(394)
1,675
$
$
(13) $
(335) $
4,422
1,553
5,975
1,005
$
$
$
6,503
1,139
7,642
657
Twelve Months 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
Income tax expense (benefit) associated with
current-period change
$
$
$
— $
12
12
8
$
$
3,257
(1,188)
2,069
$
$
(229) $
(2,404) $
6,826
4,422
4,593
$
$
853
5,650
6,503
4,372
NOTE 5 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, 2015 and December 31, 2014 are shown in the table below (in
thousands):
Short-term available-for-sale securities cost
Short-term available-for-sale securities unrealized gain (loss)
Short-term available-for-sale securities fair value
December 31,
2015
December 31,
2014
$
$
14,939
(14)
14,925
$
$
16,269
20
16,289
As of December 31, 2015, the Company’s debt securities were investment grade and carried a long-term rating of A2/A or
higher.
F-17
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6 ACCOUNTS AND OTHER RECEIVABLES, NET
A summary of net accounts and other receivables follows (in thousands):
Trade accounts receivable
Unbilled receivables
Advance billings
Short-term investment in sales-type lease
Other receivables
Allowance for doubtful accounts
Accounts and other receivables, net
December 31,
2015
2014
$
$
83,750
7,685
11,637
10,004
11,662
124,738
(19)
124,719
$
$
126,874
20,788
4,960
10,187
2,401
165,210
(97)
165,113
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 revenue has not been recognized.
As of December 31, 2015 and 2014, accounts receivable included $44.2 million and $87.0 million, respectively, due from
the U.S. Government. Of these amounts, $2.2 million and $2.1 million were unbilled as of December 31, 2015 and 2014,
respectively, based upon contractual billing arrangements with these customers. As of December 31, 2015, one non-
U.S. Government customer accounted for 18% of total accounts and other receivables. As of December 31, 2014, no non-U.S.
Government customers accounted for more than 10% of total accounts and other receivables.
NOTE 7 SALES-TYPE LEASE
As of December 31, 2015 and 2014, the Company had 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 lease is designated in British Pounds and the Company has
entered into certain foreign currency exchange contracts that act as an economic hedge for the foreign currency exposure
associated with this arrangement.
The following table shows the components of the net investment in the sales-type lease as of December 31, 2015 and
2014 (in thousands):
Total minimum lease payments to be received
Less: executory costs
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
Investment in sales-type lease included in accounts and other receivables
December 31
2015
2014
36,863
(7,434)
29,429
—
(1,108)
28,321
(18,317)
10,004
$
$
53,134
(10,717)
42,417
1,253
(2,394)
41,276
(31,089)
10,187
$
$
As of December 31, 2015, minimum lease payments for each of the succeeding three fiscal years were as follows (in
thousands):
2016
2017
2018
Total minimum lease payments to be received
F-18
$
$
13,405
13,405
10,053
36,863
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 INVENTORY
A summary of inventory follows (in thousands):
Components and subassemblies
Work in process
Finished goods
December 31
2015
2014
$
$
20,806
43,071
49,778
113,655
$
$
60,851
46,954
35,827
143,632
As of December 31, 2015 and 2014, $49.5 million and $35.3 million, respectively, of finished goods inventory was located
at customer sites pending acceptance. At December 31, 2015, three customers accounted for $41.7 million of finished goods
inventory and at December 31, 2014, two customers accounted for $31.2 million of finished goods inventory.
During 2015, 2014 and 2013, the Company wrote-off $0.5 million, $2.3 million and $0.9 million, respectively, of inventory.
NOTE 9 PROPERTY AND EQUIPMENT, NET
A summary of property and equipment follows (in thousands):
Land
Buildings
Furniture and equipment
Computer equipment
Leasehold improvements
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2015
2014
$
$
275
20,612
14,190
65,957
1,098
102,132
(71,053)
31,079
$
$
275
20,409
13,198
59,785
446
94,113
(59,320)
34,793
Depreciation expense on property and equipment for 2015, 2014 and 2013 was $13.3 million, $12.8 million and $10.9
million, respectively.
NOTE 10 SERVICE SPARES, NET
A summary of service spares follows (in thousands):
Service spares
Accumulated depreciation
Service spares, net
December 31,
2015
2014
$
$
15,082
(11,992)
3,090
$
$
13,114
(11,246)
1,868
Depreciation expense on service spares for 2015, 2014 and 2013 was $1.1 million, $1.0 million and $0.9 million, respectively.
NOTE 11 DEFERRED REVENUE
A summary of deferred revenue follows (in thousands):
Deferred product revenue
Deferred service revenue
Total deferred revenue
Less long-term deferred revenue
Deferred revenue in current liabilities
F-19
December 31
2015
2014
$
$
22,215
97,822
120,037
(33,306)
86,731
$
$
21,152
92,346
113,498
(47,588)
65,910
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2015 and 2014 the U.S. Government accounted for $57.7 million and $63.8 million, respectively, of
total deferred revenue. As of December 31, 2015 and 2014, no non-U.S. Government customers accounted for more than 10% of
total deferred revenue.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company has recorded rent expense under leases for buildings or office space, which were accounted for as operating
leases, in 2015, 2014 and 2013 of $5.9 million, $5.2 million, and $5.3 million, respectively.
Minimum contractual commitments as of December 31, 2015, were as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Minimum contractual commitments
Operating
Leases
Development
Agreements
$
$
5,484
5,149
4,939
4,668
3,391
12,519
36,150
$
$
15,567
233
150
25
—
—
15,975
In its normal course of operations, the Company engages in development arrangements under which it hires outside
engineering resources to augment its existing internal staff in order to complete research and development projects, or parts thereof.
For the years ended December 31, 2015, 2014 and 2013, the Company incurred $14.3 million, $12.2 million and $9.3 million,
respectively, for such arrangements.
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 deemed to be material to the Company’s business.
NOTE 13 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 tax
credits. As of December 31, 2015, the Company had U.S. federal net operating loss carryforwards of approximately $76.2 million,
of which approximately $47.4 million was related to stock-based 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, 2015, the Company had federal research and development tax credit carryforwards of approximately $23.0 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 2035 if not utilized. Utilization of $25.6 million of the Company’s federal net operating loss
carryforwards generated prior to May 10, 2001 is limited under Section 382 of the Internal Revenue Code to $4.3 million per year.
As of December 31, 2015, the Company had approximately $6.1 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 2025.
Income before income taxes consisted of the following (in thousands):
United States
International
Total
Year Ended December 31,
2015
2014
2013
$
$
38,362
4,415
42,777
$
$
5,710
3,987
9,697
$
$
17,467
3,562
21,029
F-20
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax provision (benefit) for income taxes related to operations consisted of the following (in thousands):
Current provision:
Federal
State
Foreign
Total current provision
Deferred provision (benefit):
Federal
State
Foreign
Total deferred provision (benefit)
Total provision (benefit) for income taxes
Year Ended December 31,
2015
2014
2013
$
$
725
1,389
1,023
3,137
12,198
(52)
(43)
12,103
15,240
$
$
$
230
(392)
740
578
484
696
801
1,981
(53,242)
(885)
923
(53,204)
(52,626) $
(13,160)
(327)
312
(13,175)
(11,194)
The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate as follows
(in thousands):
Income tax provision at statutory rate
State taxes, net of federal benefit
Foreign income taxes
Share-based compensation adjustment
Deemed dividends for U.S. income tax purposes
Nondeductible expenses
Disallowed compensation
Research and development tax credit
Effect of change in valuation allowance on deferred tax assets
Effective income tax provision (benefit)
Year Ended December 31,
2015
2014
2013
14,972
897
(12)
—
407
283
455
(1,733)
(29)
15,240
$
$
$
3,394
(217)
284
—
492
337
(116)
(1,140)
(55,660)
(52,626) $
7,360
369
(749)
(8,419)
477
208
19
(5,736)
(4,723)
(11,194)
$
$
F-21
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):
Current:
Deferred Income Tax Assets
Inventory
Accrued compensation
Deferred revenue
Net operating loss carryforwards
Research and experimentation credit carryforwards
Other
Gross current deferred tax assets
Valuation allowance
Current deferred tax assets
Deferred Income Tax Liabilities
Other
Current deferred tax liabilities
Net current deferred tax assets
Long-Term:
Deferred Income Tax Assets
Property and equipment
Research and experimentation credit carryforwards
Net operating loss carryforwards
Goodwill
Share-based compensation
Other
Gross long-term deferred tax assets
Valuation allowance
Long-term deferred tax assets
Deferred Income Tax Liabilities
Investment in sales-type lease, net
Intangible assets
Other
Long-term deferred tax liabilities
Net long-term deferred tax asset
December 31,
2015
2014
3,930
1,213
18,372
2,636
16,264
4,303
46,718
(2,995)
43,723
(5,095)
(5,095)
38,628
7,510
9,528
14,523
125
5,976
4,084
41,746
(6,492)
35,254
(7,611)
(512)
(1,277)
(9,400)
25,854
$
$
$
$
5,840
681
18,186
12,981
—
1,261
38,949
(2,039)
36,910
(837)
(837)
36,073
11,555
24,596
21,511
203
5,000
4,967
67,832
(8,099)
59,733
(14,321)
(1,215)
(2,783)
(18,319)
41,414
$
$
$
$
For the year ended December 31, 2015, long-term deferred income tax liabilities in the amount of $0.2 million have been
included in other non-current liabilities on the Company’s Consolidated Balance Sheet.
The Company recorded income tax expense of $15.2 million for the year ended December 31, 2015 and an income tax
benefit of $52.6 million and $11.2 million, respectively, during the years ended December 31, 2014 and 2013. 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, 2015 was the result of state taxes, non-deductible expenses and other permanent items, partially offset
by research and development tax credits. 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 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 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
F-22
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
establish or reduce a valuation allowance on deferred tax assets and believes that its ability to forecast results significantly into
the future is 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.
The Company’s conclusion about the realizability of 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 $0.7 million, $67.7 million and $4.7 million in 2015, 2014 and
2013, 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
share-based compensation related adjustment of $8.4 million.
Undistributed earnings, in the approximate amount of $9.2 million, 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, 2015, the Company’s foreign subsidiaries held cash in the amount of $12.9
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, 2015, 2014 and 2013 (in thousands):
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
Balance at December 31, 2014
Increase related to prior year income tax positions
Increase related to current year income tax positions
Balance at December 31, 2015
$
$
$
$
470
(268)
202
5,059
369
5,630
151
433
6,214
The balance of unrecognized tax benefits as of December 31, 2015 was $6.2 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 2010 and for
periods before 2014 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 2012, 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.
F-23
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively. Such
amounts were not material for 2015, 2014 and 2013.
NOTE 14 CREDIT FACILITIES
As of December 31, 2015, the Company had a $10.0 million unsecured line of credit with Wells Fargo Bank, National
Association, designed to support the issuance of letters of credit and foreign currency exchange hedging transactions. The Company
made no draws and had no outstanding cash borrowings on the credit facility as of December 31, 2015. Subsequent to December 31,
2015, the Company amended its existing credit agreement and entered into a new $50.0 million two-year line of credit agreement,
effective January 7, 2016. Refer to Note 21 - Subsequent Events for further discussion on the amended agreement. In December
2015, the Company terminated its $11.0 million letter of credit facility with Silicon Valley Bank.
As of December 31, 2015, the Company had $5.8 million in USD equivalent value in outstanding letters of credit and $3.3
million in restricted cash associated with certain letters of credit to secure customer prepayments and other customer related
obligations.
NOTE 15 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.
Stock Plans: As of December 31, 2015, the Company had one active equity incentive plan that provides shares available
for option, restricted stock and restricted stock unit grants to employees, directors, executives and others.
Stock Options: In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model.
The following key weighted average assumptions were employed in the calculation for the years ended December 31:
Risk-free interest rate
Expected dividend yield
Volatility
Expected life (in years)
Weighted average Black-Scholes value of options granted
2015
2014
2013
1.31%
—%
50.55%
4.0
1.22%
—%
52.43%
4.0
$
11.23
$
11.16
$
0.98%
—%
50.45%
4.0
8.22
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 is
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 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 to the Company’s stock option grants for the years ended December 31, 2015, 2014 and
2013 were 8.0%, 8.3%, and 10.0%, 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, which impact the fair
value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the
vesting period or requisite service period of the option. The Company typically issues stock options with a four-year vesting period
(the requisite service period) and amortizes the fair value of stock options (share-based compensation cost) ratably over the requisite
service period. Options to purchase shares expire no later than ten years after the date of grant.
F-24
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, 2013
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2013
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2014
Granted
Exercised
Canceled and forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Available for grant at December 31, 2015
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Term (Years)
7.31
20.65
6.38
21.97
9.29
26.92
7.50
18.45
12.34
27.86
9.99
20.00
14.83
10.40
6.3
5.3
$
Options
2,293,505
346,360
(495,221)
(66,575)
2,078,069
323,900
(411,352)
(59,627)
1,930,990
307,450
(229,118)
(60,847)
1,948,475
1,357,512
1,791,731
Outstanding and exercisable options by price range as of December 31, 2015, were as follows:
Range of Exercise
Prices per Share
$ 0.00 - $ 10.00
$ 10.01 - $ 20.00
$ 20.01 - $ 27.00
$ 27.01 - $ 34.52
$ 0.00 - $ 34.52
Outstanding Options
Exercisable Options
Number
Outstanding
879,263
412,016
367,794
289,402
1,948,475
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
4.2
6.9
8.5
9.0
6.3
$
$
$
$
$
5.67
15.21
25.44
28.60
14.83
Number
Exercisable
879,179
293,735
115,590
69,008
1,357,512
$
$
$
$
$
Weighted
Average
Exercise
Price
5.67
14.51
24.87
28.96
10.40
As of December 31, 2015, there was $34.4 million of aggregate intrinsic value of outstanding stock options, including $29.9
million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents 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 2015 and the
exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received
by the option holders if all option holders had exercised their options on December 31, 2015. This amount changes, based on the
fair market value of the Company’s stock. Total intrinsic value of options exercised was $5.0 million, $10.2 million, and $7.9
million for the years ended December 31, 2015, 2014 and 2013, respectively.
Restricted Stock: During 2015, 2014 and 2013, the Company issued an aggregate of 45,175, 463,734, and 755,979 shares
of restricted stock, respectively, to certain directors, executives and other employees. The grant date fair value of these grants was
approximately $1.4 million, $13.3 million, and $15.8 million for 2015, 2014 and 2013, respectively. Share-based compensation
expense is recorded over the vesting period, which is generally one year for non-employee directors and four years for officers
and employees of the Company.
F-25
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the Company’s unvested restricted stock grants and changes during the years ended December 31 is as follows:
Service Vesting Restricted
Shares
Performance Vesting Restricted
Shares
Total Restricted Shares
Weighted
Average
Grant Date
Fair Value
7.44
20.83
5.92
6.22
12.05
28.74
15.39
11.14
19.48
30.44
24.00
15.34
24.12
$
Shares
1,465,738
326,979
(3,437)
(661,580)
1,127,700
463,734
(134,653)
(423,179)
1,033,602
45,175
(48,998)
(513,336)
516,443
Weighted
Average
Grant Date
Fair Value
12.90
21.00
14.88
—
15.94
—
17.49
—
15.41
—
15.60
28.20
15.07
$
Shares
737,000
429,000
(72,000)
—
1,094,000
—
(277,000)
—
817,000
—
(219,000)
(12,500)
585,500
Weighted
Average
Grant Date
Fair Value
9.27
20.93
14.48
6.22
13.97
28.74
16.80
11.14
17.68
30.44
17.14
15.64
19.31
$
Shares
2,202,738
755,979
(75,437)
(661,580)
2,221,700
463,734
(411,653)
(423,179)
1,850,602
45,175
(267,998)
(525,836)
1,101,943
Outstanding at January 1, 2013
Granted
Forfeited
Vested
Outstanding at December 31, 2013
Granted
Forfeited
Vested
Outstanding at December 31, 2014
Granted
Forfeited
Vested
Outstanding at December 31, 2015
The estimated forfeiture rate applied to the Company’s service vesting restricted stock grants during the years ended
December 31, 2015 and 2014 were 8.0% and 6.3%, respectively. The aggregate fair value of restricted shares vested during 2015,
2014 and 2013 was $14.2 million, $11.9 million, and $14.0 million, respectively. The performance vesting restricted shares that
remain outstanding are subject to performance measures that are currently not considered "probable" of attainment and as such,
no compensation cost has been recorded for these grants. The performance vesting restricted shares are eligible to vest between
2016 and 2017.
Restricted Stock Units: During 2015, the Company issued an aggregate of 984,850 restricted stock and performance
restricted stock units with a grant date fair value of approximately $29.5 million. There were no restricted stock units issued or
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 share-based compensation expense
over the vesting period. At the time of vesting, a share of common stock representing each restricted stock unit vested will be
issued by the Company.
A summary of the Company’s unvested restricted stock unit grants and changes during the year ended December 31, 2015
is as follows:
Outstanding at December 31, 2014
Granted
Forfeited
Vested
Service Vesting Restricted
Stock Units
Performance Vesting
Restricted Stock Units
Total Restricted Stock Units
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Units
Weighted
Average
Grant Date
Fair Value
— $
285,550
$
(12,500) $
— $
—
29.78
30.48
—
— $
699,300
$
(66,600) $
— $
—
30.04
30.04
—
— $
984,850
$
(79,100) $
— $
—
29.97
30.11
—
Outstanding at December 31, 2015
273,050
$
29.75
632,700
$
30.04
905,750
$
29.95
The estimated forfeiture rate applied to the Company’s service vesting restricted stock unit grants during the year ended
December 31, 2015 was 8.0%. The performance vesting restricted stock units are subject to performance measures that are currently
not considered "probable" of attainment and as such, no compensation cost has been recorded for these units. The performance
vesting restricted stock units are eligible to vest between 2017 and 2020.
Share-based Compensation Expense: Including performance-based equity awards, the Company had $44.8 million of
total unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock
units as of December 31, 2015. Excluding the $27.8 million of unrecognized compensation cost related to unvested restricted
F-26
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
stock and unvested restricted stock units that are subject to performance measures that are currently not considered "probable" of
attainment, unrecognized compensation cost is $17.0 million. No compensation expense is recognized for unvested restricted
stock or unvested restricted stock units subject to performance measures that are not considered "probable" of attainment.
Unrecognized compensation cost related to unvested stock options, unvested non-performance-based restricted stock and unvested
non-performance-based restricted stock units is expected to be recognized over a weighted average period of 2.7 years.
The following table sets forth the gross share-based compensation cost resulting from stock options, unvested restricted
stock and unvested restricted stock units that were recorded in the Company’s Consolidated Statements of Operations for the years
ended December 31 (in thousands):
Cost of product revenue
Cost of service revenue
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
2015
2014
2013
$
$
254
276
3,770
3,047
4,006
11,353
$
$
229
255
2,721
3,152
4,007
10,364
$
$
135
229
1,480
2,230
3,165
7,239
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, 2015, 2014 and 2013, an aggregate of 1,070,343, 1,043,228 and 1,022,610
shares, respectively, had been issued under the ESPP.
NOTE 16 BENEFIT PLANS
401(k) Plan
For the three years ended December 31, 2015, 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 2015, 2014 and 2013 Company match
expense was $2.6 million, $1.6 million and $1.2 million, respectively.
Pension Plan
The Company’s German subsidiary maintains a defined benefit pension plan. At December 31, 2015, the excess of plan
assets over the projected benefit obligation of $2.1 million was $0.2 million. At December 31, 2014, the excess of plan assets over
the projected benefit obligation of $2.3 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.
NOTE 17 SEGMENT INFORMATION
The Company has the following reportable segments: Supercomputing, Storage and Data Management, Maintenance and
Support, and Engineering Services and Other. 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, tightly integrated and cluster supercomputer systems which are used
by 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.
F-27
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The following table presents revenues and gross margin for the Company’s operating segments for the years ended December
31 (in thousands):
Revenue:
Supercomputing
Storage and Data Management
Maintenance and Support
Engineering Services and Other
Elimination of inter-segment revenue
Total revenue
Gross Profit:
Supercomputing
Storage and Data Management
Maintenance and Support
Engineering Services and Other
Elimination of inter-segment gross profit
Total gross profit
2015
2014
2013
$
$
$
$
581,733
112,862
97,091
30,094
(97,091)
724,689
177,048
37,181
41,487
11,454
(41,487)
225,683
$
$
$
$
459,729
84,412
86,573
17,465
(86,573)
561,606
146,565
31,572
38,819
6,277
(38,819)
184,414
$
$
$
$
434,133
76,955
77,817
14,661
(77,817)
525,749
143,440
31,403
38,476
9,483
(38,476)
184,326
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.
F-28
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s geographic operations outside the United States include sales and service offices in Europe and the Middle
East, South America, Asia Pacific and Canada. The following data represents the Company’s revenue and long-lived assets for
the United States and all other countries (in thousands):
For the year ended December 31, 2015:
Product revenue
Service revenue
Long-lived assets
For the year ended December 31, 2014:
Product revenue
Service revenue
Long-lived assets
For the year ended December 31, 2013:
Product revenue
Service revenue
Long-lived assets
United
States
All
Other
Countries
Total
$
$
$
$
$
$
$
$
$
373,494
88,956
55,227
253,930
72,434
58,868
297,583
62,072
58,910
$
$
$
$
$
$
$
$
$
227,800
34,439
23,731
206,818
28,424
36,792
138,747
27,347
6,146
$
$
$
$
$
$
$
$
$
601,294
123,395
78,958
460,748
100,858
95,660
436,330
89,419
65,056
Long-lived assets as of December 31, 2015 and 2014, included the $18.3 million and $31.1 million, respectively, long-
term investment in sales-type lease which was held by the Company’s United Kingdom 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 $338.5 million, $272.0 million and $266.1 million in 2015, 2014 and
2013, respectively. In 2015 and 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 general,
concentrations of revenue by customer encompass all segments. In 2015 and 2013, no foreign country accounted for more than
10% of total revenue. In 2014, the United Kingdom and Germany accounted for a combined 23% of total revenue.
NOTE 18 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 in revenue)
Net research and development expenses
2015
126,060
(16,515)
(12,982)
96,563
$
$
2014
104,797
(7,713)
(3,036)
94,048
$
$
2013
92,469
(3,741)
(1,000)
87,728
$
$
NOTE 19 INTEREST INCOME (EXPENSE)
The detail of interest income (expense) for the years ended December 31 follows (in thousands):
Interest income
Interest expense
Net interest income
2015
2014
2013
$
$
1,465
(57)
1,408
$
$
643
(137)
506
$
$
894
(137)
757
Interest income is earned by the Company on cash and cash equivalents, investment balances and the investment in sales-
type lease.
F-29
CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20 QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly financial information for the two years ended December 31, 2015. In the
opinion of management, this information contains all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation thereof.
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
Revenue
Cost of revenue
Gross profit
Research and
development, net
Sales and marketing
General and administrative
Net income (loss) (1)
Net income (loss) per
common share, basic
Net income (loss) per
common share, diluted
2015
2014
3/31
$ 79,644
55,608
24,036
6/30
$186,161
136,576
49,585
9/30
$191,413
125,531
65,882
12/31
$ 267,471
181,291
86,180
3/31
$ 55,110
37,173
17,937
6/30
$ 85,147
56,143
29,004
9/30
$159,406
110,876
48,530
12/31
$ 261,943
173,000
88,943
22,187
12,552
6,140
(9,394)
20,106
13,412
6,435
5,781
24,989
16,132
6,729
10,855
29,281
18,054
8,662
20,295
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
$
$
(0.24) $
0.15
(0.24) $
0.14
$
$
0.28
0.27
$
$
0.51
0.50
$
$
(0.34) $
(0.18) $
0.19
(0.34) $
(0.18) $
0.18
$
$
1.92
1.84
(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.
NOTE 21 SUBSEQUENT EVENTS
On January 7, 2016, the Company entered into an Amended and Restated Credit Agreement, or Amended Credit
Agreement, with Wells Fargo Bank, National Association which provides a revolving line of credit, or Credit Facility, through
December 1, 2017, for up to $50.0 million to be used for general corporate purposes, including working capital requirements
and capital expenditures. The Credit Facility will also support the issuance of letters of credit. The Credit Facility is secured by
a first priority lien in all of the Company’s accounts receivable and other rights to payment, general intangibles, inventory and
equipment.
Borrowings under the Credit Facility bear interest at either a fluctuating rate equal to the daily one month LIBOR rate plus
a margin of 1.25% or a fixed interest rate for one, three or six months equal to the LIBOR rate for the applicable period plus a
margin of 1.25%. The Company is also required to pay the lender customary letter of credit fees, and a commitment fee of
0.18% per annum in respect of the unutilized commitment amount under the Credit Facility. The Credit Facility requires that
the Company maintain certain financial ratios.
The Amended Credit Agreement restates and replaces the Restated Credit Agreement with Wells Fargo Bank, National
Association dated as of October 1, 2012, as amended, which provided a $10.0 million line of credit to secure letters of credit
and foreign currency exchange hedging transactions.
F-30
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, 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 11, 2016, expressed an unqualified opinion.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
February 11, 2016
F-31
Schedule II — Valuation and Qualifying Accounts(1)
December 31, 2015
(In Thousands)
Balance at
Beginning
of Period
Charge/
(Benefit)
to Expense
Deductions (2)
Balance at
End of
Period
$
$
$
5
157
97
$
$
$
179
22
$
$
(27) $
157
(82) $
— $
(78) $
97
19
Description
Year ended December 31, 2013:
Allowance for doubtful accounts
Year ended December 31, 2014:
Allowance for doubtful accounts
Year ended December 31, 2015:
Allowance for doubtful accounts
(1) The Company does not have any warranty liabilities.
(2) Deductions represent uncollectible accounts written off, net of recoveries.
F-32
INVESTOR INFORMATION
BOARD OF DIRECTORS
Stephen C. Kiely, Chairman
Retired Chief Executive Officer
Prithviraj Banerjee
Executive Vice President
and Chief Technology Officer
Schneider Electric
Martin J. Homlish
Chief Executive Officer
AMP
Sally G. Narodick
Retired Chief Executive Officer
Daniel C. Regis
General Partner
Regis Investments, LP
Max L. Schireson
Retired Chief Executive Officer
Brian V. Turner
Retired Chief Financial Officer
Peter J. Ungaro
President and Chief Executive Officer
Cray Inc.
KEY COMPANY EXECUTIVES
Peter J. Ungaro
President and Chief Executive Officer
Brian C. Henry
Executive Vice President and Chief Financial Officer
Barry C. Bolding
Senior Vice President and Chief Strategy Officer
Charles D. Fairchild
Vice President, Corporate Controller
and Chief Accounting Officer
Frederick A. Kohout
Senior Vice President and Chief Marketing Officer
Charles A. Morreale
Senior Vice President, Field Operations
Michael C. Piraino
Senior 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, Products
Margaret A. Williams
Senior Vice President, 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:
• Change of address
(cid:129) Lost stock certificates
(cid:129) Transfer of stock to another person
(cid:129) Additional administrative services
(cid:129) 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: 781-575-2694
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, our other SEC reports and
filings, our Code of Business Conduct, Corporate Governance
Guidelines, the charters of our Board committees and other
governance documents and information are available on our
website, www.cray.com, under “Company”
You may also obtain a copy of our Form 10-K filed with the
SEC and other Company information without charge, by
writing or calling:
Cray Inc.
Investor Relations
901 Fifth Avenue
Suite 1000
Seattle, WA 98164
Telephone: 866-729-2729
Shareholders who own Cray Inc. stock through a brokerage
account and receive multiple copies of this annual report can
contact their broker to request consolidation of their accounts
CRAY ANNUAL MEETING
June 8, 2016 – 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 (telephone)
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
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 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
Cray will not be able to secure orders for Cray products to be accepted in 2016 when or at the levels expected, the risk that planned future third-party processors and other
components are not available with the performance expected or when expected, 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’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, 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, 2015, 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 and SONEXION are registered trademarks of Cray Inc. in the United States and other countries, and the XC, CS, XE and XK families of
supercomputers are trademarks of Cray Inc. Other trademarks used in this report are the property of their respective owners.